Cyclical Assets and Exit Value

Abstract

The introduction in International Valuation Standards of Cyclical Assets raises several questions to the community of real estate professionals and academician (IVS 105 Valuation Approaches and Methods para 50.09 lett d). Cyclical Assets can be defined as property whose value is “influenced by upturn and downturn of the market in a significant way” (d’Amato et al.,2019). Ordinary direct capitalization is normally considered pro cyclical in its present form (De Lisle Grissom,2011), for this reason alternative approach to direct capitalization may be useful in the determination of robust opinion of value. The valuation standards propose an alternative determination of terminal value in the Discounted Cash Flow Analysis, recommending that for cyclical assets, the terminal value should consider...” the cyclical nature of the asset and should not be performed in a way that assumes “peak” or “trough” levels of cash flows in perpetuity” (IVS 105 Valuation Approaches and Methods para 50.21 lett e). The paper propose different solutions to the problem.