The transactional asset pricing approach. Its general framework and applications for property markets
| Date | 10 April 2019 |
| Pages | 255-288 |
| Published date | 10 April 2019 |
| DOI | https://doi.org/10.1108/JPIF-10-2018-0078 |
| Author | Vladimir Michaletz,Andrey I. Artemenkov |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
The transactional asset
pricing approach
Its general framework and applications
for property markets
Vladimir Michaletz
The Directorate of State Scientific and Technical Programmes,
Moscow, Russian Federation, and
Andrey I. Artemenkov
Department of Economic Policy and Economic Measurements,
The State University of Management (GYY), Moscow, Russia and
The International Valuation Centre, Haifa, Israel
Abstract
Purpose –The purpose of this paper is to present a methodology based on the transactional asset pricing
approach (TAPA) and to illustrate the application of TAPA within the context of professional property valuation.
Design/methodology/approach –The TAPA is a novel analytical valuation methodology recasting the
traditional derivations of the income approach techniques, including DCF, from a transactional perspective
based on the principle of inter-temporal transactional equity, instead of the conventional investor-specific
view originating from I. Fisher (1907, 1930).
Findings –The authors present DCF analysis as a specific case of a more general TAPA approach to
valuation under the income method. This also leads to novel analytical derivations of the Direct income
capitalization, Gordon, Inwood, Hoskold and Ring models. Based on the TAPA framework, the authors also
research the value-enhancing effects of benchmark market volatility on the subject property value and
conclude that such effects can be statistically significant depending on the DCF analysis period.
Research limitations/implications –The research has a direct bearing on time-variable discount rate
forecasting capabilities, as it uses a time-variant structure for the discount rates.
Practical implications –Using the US Case-Shiller and BLS rental indices as a valuation benchmark, the
paper contains an example of applying the general TAPA framework to value a notional property under a
TAPA’sDCF version. Such property valuationscan be easily replicatedin practice –especiallyin the context of
equitable/fairvalue determination under the International Valuation Standards Council valuation standards.
Social implications –TAPA is a deductive principles-based theory of asset valuation especially fit for the
transactional and illiquid asset valuation contexts –thus enabling a more efficient pricing for such assets in a
sense of reflecting the transactional interests of the parties more closely than achievable under the
conventional valuation methods.
Originality/value –TAPA is an original filiation of research with roots going as far back as Aristotelian
Catallactics. It contains analytical formalizations of certain transactional equity principles.
Keywords DCF analysis, Direct income capitalization, Gordon model, Property valuation methods,
Time-variable discount rates, Transactional asset pricing approach
Paper type Conceptual paper
1. Introduction: professional valuation (PV) in search of its unified
methodological vision
The paper reviews the transactional asset pricing approach (TAPA) developed through the
contribution of various authors over the past decade (Michaletz, 2005; Michaletz et al., 2007;
Journal of Property Investment &
Finance
Vol. 37 No. 3, 2019
pp. 255-288
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-10-2018-0078
Received 8 October 2018
Revised 11 January 2019
Accepted 7 February 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
JEL Classification —G12, D46
The work was performed under the sponsorship of the RNF Grant 18-18-00488 “Research into
opportunities for long-term forecasting of economic and technological development under the
conditions of technological shifts and crises”. The authors are also grateful to JSC “The International
Valuation centre”and Igor Artemenkov for supporting this research.
255
The
transactional
asset pricing
approach
Galasuyk, 2018; Andrews, 2011; Michaletz and Artemenkov, 2018) for the field of PV, and
specifically addresses its property valuation context developing an example of property
valuation under the TAPA’s Basic Pricing Equation (BPE).
PV is a field within the broader continuum of Economic measurements, which is an
interdisciplinary research area providing an overarching study of the existing micro-economic
measurement practices, some of which are now considered to be stand-alone professionally
recognized occupations (see Artemenkov et al., 2008). In particular, we concentrate on the analysis
of the distinguishing features for the following Economic measurement sub-fields: investment-
financial valuation (IFV), PV and the assessment of efficiency of investment projects (AEIP).
The succinct perspective on these fields is presented in Table I, where the three fields of
Economic measurements being analyzed, as seen, can be arranged from left to right in the
general order of the diminishing liquidity of subject assets being dealt with (IFV deals with
most liquid assets traded on generally efficient markets, while the AEIP deals with
non-tradeable operations, with PV being notionally in the middle of the continuum).
As can be seen, the PV[1] is a field which is still evolving to establish itself internationally
as a recognized stand-alone professional occupation in many countries and clearly articulate
its body-of-knowledge vision. The International Valuation Standards Council, an
international body representing the experts and professionals in the PV field, is making
laudable efforts to consolidate the field in many directions, especially as far as holding out
for the scope of the field to include not just the real estate assets under its umbrella, but also
all other asset types, such as business as well as plant and equipment valuations.
As far as the vision for the PV field is concerned, right now, there is a propensity to
mix-and-mingle foundational visions borrowed from the contiguous areas of Economic
measurements ( from the right and, especially, left of Table I) as evidenced by a recent spate
of vision-for-valuation papers intended for PV (Black et al., 2000; Gilbertson and Preston,
2005; RICS, 2017). The approach to stand back and think explicitly about the differentiating
features of the PV field within EMs in terms of its sui generis underlying methodological
vision, public objectives, etc., is less prominent. But, we contend, it is a fruitful approach.
It may so happen that when the nature of PV within the continuum of EMs fields is more
fully grasped there will be a renewed drive to put its analytical methodology on a more
sound unified footing; thus, the path blazed in this direction by a rich filiation of research
from F. Babcock in 1930s, through R. Ratcliff and P. Wendt in 1960s, to W. Kinnard and
T. Grissom in later dayswill be continued with reference to the broaderscope of the PV field.
As we perceive it, at its most abstract, the starting point of methodological vision for PV,
its “unit of analysis,”is a (historic or planned) transaction. From the applicable set of historic
transactions (and offers), the PV valuer gleans the observed prices and asset’s economic
features. Via some methodology and techniques in common use through the field (say, the
three approaches), she/he uses them to assist in consulting on prices in prospective
transactions (“price drafting”)–as when hired by the interested parties (either or both of the
transacting agents) and with the explicit consideration of the public interest (howsoever
defined[2]) entering into the picture.
Therefore, a comprehensive valuation theory originating from this transactional nexus and
clearly annunciating its transactional principles, apart from possessing a certain neatness of
proceeding from the very methodological get-go, will likely have a set of appealing properties,
without requiring much by way of a “protective belt”(Lakatos, 1980) for its assumptions.
By contrast, most of the current advancements in the PV field of property and business
valuations often result from mostly borrowing from the left and right of center in terms of Table I,
and thus require a lot of hedging of assumptions and by-analogy thinking vis-à-vis the public
reference market[3]. Examples of such by-analogy borrowings in the PV context of property
valuation would include the theory of “real options”as applied to real estate (it borrows from the
IFV field) (Lucius, 2001) and the increasing adoption of the “investment valuations”in the
256
JPIF
37,3
Areas of
Economic
measurements
Investment-financial
valuation (IFV) Professional valuation (PV)
Assessment of efficiency of
investment projects (AEIP)
Description of
specialism
A specialism within
Economic measurements
dealing with the issue of
long-term fundamental
values of liquid
(publicly-tradeable) assets
The markets may have
spot efficiency (i.e.
no-arbitrage), but their
inter-temporal efficiency
is called into question
(i.e. bubbles due to
performativity and other
“irrationalities”)
A distinct, professionally
recognized and regulated field
of EM associated with the
development of valuation
estimates primarily in respect
of (rather heterogeneous) asset
classes with low-to-medium
liquidity that are traded on
less-than-efficient markets,
where the economic “law of
one price”is not fully
operational
An area of Economic
measurements associated
with the efficiency
assessments of existing or
projected operations (which
are, by definition,
subject-specific and
non-tradeable/illiquid))
(*Investment project
documentation can be
tradeable, though, but not
the project itself)
When the
specialism was
formalized?
After 1930s, especially
following the emergence
of the Modern Portfolio
theory (MPT) in 1960s
IVSC has been making
concerted efforts since 2007 to
embrace various disparate PV-
related asset-specific
measurement practices under
one umbrella on assumption of
a unified valuation
methodology being available
The field emerged in late
nineteenth century, but since
the 1960s the international
development institutions
(ADB, WB) have been
instrumental in rigorously
consolidating its
methodology
Subject assets
dealt with
Liquid primary (stocks and
fixed-income instruments)
and derivative ( futures,
options, swaps, indexed,
collateralized securities,
etc.) instruments available
for trading onthe public
and OTC markets
Often their current
exchange price or an
available quotation is not
in question
All asset types covered in the
IVSC (2017)
Property and its derivative
interests, interests in closely
held companies, machinery
and equipment, intangibles –
i.e. assets with less than
perfect liquidity often priced
OTC in a bilateral
(transactional) way
Their current exchange value
is often unknown and PV
experts are called to estimate it
Investment projects, as a
category of planned
activities (by specified or
generic participants)
involving the unification
and use of diverse assets
Investment projects are a
non-tradeable asset category
(the change of project
participants often changes
the identity of the project)
Methodological
building blocks
Modern Portfolio theory
(MPT), incl. CAPM,
M&M-based corporate
finance, options pricing;
lately, experimental
economics and behavioral
finance
General principles of
micro-economics
For the most part, the idea is to
borrow the existing vision
from within IFV and tweak it
for illiquidities, specificities,
legalities etc. “By-analogy”
thinking pervasive. But the
field is expectant of its own sui
generis methodological basis
Early twentieth-century
railway economists, Irving
Fisher (1907) popularized
the field in academic
economics, ushering in
capital budgeting theories
J. Hicks, L. Savage, J.
Robinson, etc., further
developed the field
Capital budgeting,
operations research
Typical research
product
Investment prospectuses,
stock market analyst’sbuy/
hold/sell recommendations
Valuation report, certification
of value
A public or commercial
feasibility study
Prominent
authors currently
A. Damodaran, T.
Copeland, etc.
No current thought leaders exist
for the entire sweep of the field.
In respect of the real estate
Lots of institutional work,
including guidelines by
ADB, IMF
(continued)
Table I.
Continuum of
some major types
of Economic
measurements
(EMs) analyzed
257
The
transactional
asset pricing
approach
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