Contemporary UK Market Valuation Methods for Over-Rented Investment Properties : A Framework for Risk Adjustment

This paper develops the recent series of papers published in the Journal of Property Research on the market valuation of investment properties by contemporary approaches. In the previous papers, an arbitrage model has been developed and compared with the real value and short cut or modified DCF alternatives to the valuation of fully let and reversionary properties. This paper investigates the application of these models to over-rented properties where the existing contract rent is in excess of the current rental value. This examination reveals some interesting insights into the applications of the various models concerning the need to be explicit regarding future rental growth and concludes that models which do not reveal their rental growth assumptions can still be successfully applied to the over-rented situation. The paper examines the discount rate choice within contemporary approaches and maintains that the low- risk discount rate, based upon the risk-free fixed interest rate adjusted for risks based upon covenant strength and property illiquidity, is a more appropriate input than a discount rate based upon other property risks such as cash flow change uncertainty and obsolescence (equated yields). It also highlights areas for future research to improve the information base for the discount rate choice