Cash flows or cap rates?
| DOI | https://doi.org/10.1108/JPIF-12-2021-0111 |
| Published date | 23 March 2022 |
| Date | 23 March 2022 |
| Pages | 320-323 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Andrew Baum |
Cash flows or cap rates?
Andrew Baum
Saı€d Business School, University of Oxford, Oxford, UK
Keywords Property investment,Property valuation, Cash flows, Cap rates, Capitalisation rate, Worth vs price
Paper type Viewpoint
It is over 10 years since we produced the third edition of Property Investment Appraisal, over
30 years since the first edition was published in 1988, and now (apparently!) 40 years since I
edited the first edition of the Journal of Property Investment and Finance (then called the
Journal of Valuation) in 1981. Hopefully, there is some coherence in the editorial stance of the
journal and the book.
All of the book editions seem to have coincided with peaks and troughs in the UK property
market; this may be no accident, as we learn a lot through these market extremes. The first
edition was in the late 1980s during a booming occupier market, and the third edition was
written at the end of a booming capital market in 2008. The second edition benefitted
enormously from the lessons learnt from the crash in the occupier markets and subsequent
recovery in the 1990s. This time we were writing in the middle of the COVID-19 pandemic,
and since the last edition, we have observed the aftermath of the Global Financial Crisis (GFC)
and Brexit.
The most significant of these events for the subject of the book is probably the GFC. It
added to our understanding of markets, as it was a very different event to the crash of
1990. In 1990, rental markets collapsed followinganeconomicboomwhichprecipitateda
development boom, with new development coming on stream as economic growth
declined. In 2007, rental markets were relatively stable, and the boom in commercial real
estate prices was caused by sustained demand for investment assets leading to
capitalisation rates falling to historic low levels –with the GFC precipitated by the
inevitable correction in prices. In 1990–1993 capitalisation rate corrections followed the
rent corrections, adding to the falls in capital value. In 2007–2009, however, rent falls
followed the asset price corrections. In both of these peaks and troughs, a common factor
was the increased amount of lending secured on commercial real estate during the up-cycle
and a significant brake on lending in the trough, with resulting, albeit different, pressures
on property valuations.
The subject of the book is the appraisal of property, or real estate, investments. In
choosing the term “appraisal”, we have two distinct applications in mind.
The first of these is market valuation; by this, we mean to fix a price for an asset or to
predict the most likely selling price of an asset.
The second is investment appraisal. By this, we mean to estimate the worth or value of
an asset.
The book is concerned with the difference between these two terms. While a market
valuation will tell us what a property asset is likely to sell for, an investment appraisal will tell
us what the asset is worth to us. In a scenario where we wish to acquire a property,
comparison of these appraisals can help us answer the following question: should we pay the
market price –or not?
There is now widespread acceptance of the international definition of market value set out
in the valuation standards of the International Valuation Standards Council (IVSC). This
definition is:
JPIF
40,3
320
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 28 December 2021
Revised 28 December 2021
Accepted 28 December 2021
Journal of Property Investment &
Finance
Vol. 40 No. 3, 2022
pp. 320-323
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-12-2021-0111
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