The present value model with time-varying discount rates: Implications for commercial property valuation and investment decisions |
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Authors: | David Geltner Jianping Mei |
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Institution: | (1) Department of Finance, College of Business Administration, University of Cincinnati, Lindner Hall, 45221-0195 Cincinnati, OH;(2) Department of Finance, Leonard N. Stern School of Business, Management Education Center, New York University, 44 West 4th Street, Suite 9-190, 10012-1126 New York, New York |
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Abstract: | A vector autoregressive model is developed for predicting cash flow and returns in the private (unsecuritized) commercial property markets. The model predicts both of these variables quite well during the sample period. The forecasting model is then used to develop a simple buy/sell rule for identifying property market value peaks and troughs. An improved present value model, taking account of the predictability of property returns, is described and found to track historical market values much more closely than does either the appraisal-based index or the traditional present value model with constant expected returns. Analysis in this paper suggests that most of the change in commercial property market values has been due to changes in expected returns, rather than to changes in expected future operating cash flows. |
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Keywords: | valuation investment present value model timing cycles discount rates |
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