Applications of the arbitrage method of valuation

Abstract

The introduction of formal portfolio management techniques by financial institutions creates a challenge for property valuers and investors who have traditionally used methods of valuation. The property models of valuation are well developed technically but carry little intuition for investors exposed to the analysis of non-property investment assets. The arbitrage approach to valuation seeks to bridge the gap between those who take a rigorous financial approach to valuation and those who understand only those principles of property valuation represented in modern professional practice. In this paper, the authors review the arbitrage approach and apply it to a term and reversion property distinguishing between the different risk profiles of the various cash flows. This is then contrasted with other models of property valuation including the conventional approach and the discounted cash flow model.