Lease terms, option pricing and the financial characteristics of property

A.T. Adams, P.M. Booth, B.D. MacGregor

    Research output: Contribution to journalArticle

    Abstract

    Traditional and standard discounted cash flow valuation techniques are unable to deal with a variety of options contained in lease contracts. In the United Kingdom the most important embedded option is the upward-only rent review. This becomes more valuable to the landlord in an era of low demand and low inflation, as nominal market rents are more likely to fall. Lease contracts are freely negotiated between landlord and tenant, and alternative forms of rent review clause would fundamentally change the investment characteristics of property. Many other less common options also exist in lease contracts and these create further valuation difficulties. It is essential that property valuation techniques be developed that explicitly value the options in lease contracts.
    Original languageEnglish
    Pages (from-to)619-635
    JournalBritish Actuarial Journal
    Volume9
    Issue number3
    DOIs
    Publication statusPublished - 2003

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