Start Date
23-11-1988 4:30 PM
End Date
23-11-1988 6:30 PM
Description
The valuation of centrally located land is a difficult task. In all high-density urban settings, the market evidence tends to be weak. The few transactions that are identified often give biased price information due to concurrent business agreements that are not recognizable in the contract between seller and buyer. This situation provides a reality which ruins the sales comparison method for valuation as well as for assessment The weak market evidence stresses the need for a theoretically sound valuation method based upon modern investment theory. The method should also be consistent with the market behavior of the dominant investors. Estimation of value for a particular investor can be the first step in a simulation process, the aim of which is to predict the market price for the land. In Western countries, institutional investors are dominating the real estate markets in central cities. They tend to be non-leveraged and tax exempt and, thereby, try to optimize the long-range net operating income with respect to risk. Their special leverage positions and tax status give rise to important questions such as the value of capital structure effects and the importance of tax-driven investment motivations. Thus, for this submarket, the expected holding period can be shown to be related to the life cycle of the buildings. For the calculations of net present values, estimates of net operating income and the time preference rate must be derived. In addition, this analysis must be done in a manner which is consistent with the motivations of portfolio selection models and the theory of modern portfolio analysis. Since institutional investors dominate the market for commercial land in most countries and the use of life cycle economics and portfolio theory are becoming increasingly popular among these participants, it is important to evaluate the effects of these methods on the market price potential for land . The objective of the paper is fivefold: 1. Discuss the concept of land as a function of its development rights. 2. Present a valuation model for income-producing property with finite life cycles and time-dependent factors . 3. Place land investment into a portfolio context and determine the proper discount rate within this analysis. 4. Provide empirical evidence on the risk-return experience for the commercial real estate in Sweden. 5. Simulate the results using the model with an actual case study of commercial real estate in downtown Stockholm.
Publication Date
November 1988
Recommended Citation
Jaffe, Austin J. and Lundström, Stellan, "Life cycle and portfolio approaches for the estimation of land values: Theory, and a Swedish case study" (1988). International Research Symposium. 7.
https://researchexchange.iaao.org/irs/irs88/sessions/7
Life cycle and portfolio approaches for the estimation of land values: Theory, and a Swedish case study
The valuation of centrally located land is a difficult task. In all high-density urban settings, the market evidence tends to be weak. The few transactions that are identified often give biased price information due to concurrent business agreements that are not recognizable in the contract between seller and buyer. This situation provides a reality which ruins the sales comparison method for valuation as well as for assessment The weak market evidence stresses the need for a theoretically sound valuation method based upon modern investment theory. The method should also be consistent with the market behavior of the dominant investors. Estimation of value for a particular investor can be the first step in a simulation process, the aim of which is to predict the market price for the land. In Western countries, institutional investors are dominating the real estate markets in central cities. They tend to be non-leveraged and tax exempt and, thereby, try to optimize the long-range net operating income with respect to risk. Their special leverage positions and tax status give rise to important questions such as the value of capital structure effects and the importance of tax-driven investment motivations. Thus, for this submarket, the expected holding period can be shown to be related to the life cycle of the buildings. For the calculations of net present values, estimates of net operating income and the time preference rate must be derived. In addition, this analysis must be done in a manner which is consistent with the motivations of portfolio selection models and the theory of modern portfolio analysis. Since institutional investors dominate the market for commercial land in most countries and the use of life cycle economics and portfolio theory are becoming increasingly popular among these participants, it is important to evaluate the effects of these methods on the market price potential for land . The objective of the paper is fivefold: 1. Discuss the concept of land as a function of its development rights. 2. Present a valuation model for income-producing property with finite life cycles and time-dependent factors . 3. Place land investment into a portfolio context and determine the proper discount rate within this analysis. 4. Provide empirical evidence on the risk-return experience for the commercial real estate in Sweden. 5. Simulate the results using the model with an actual case study of commercial real estate in downtown Stockholm.