Rental Valuation Research Articles

Utilizing Model Residuals to Identify Rental Properties of Interest: The Price Anomaly Score (PAS) and Its Application to Real-time Data in Manhattan

Understanding whether a property is priced fairly hinders buyers and sellers since they usually do not have an objective viewpoint of the price distribution for the overall market of their interest. Drawing from data collected of all possible available properties for rent in Manhattan as of September 2023, this paper aims to strengthen our understanding of model residuals; specifically on machine learning models which generalize for a majority of the distribution of a well-proportioned dataset. Most models generally perceive deviations from predicted values as mere inaccuracies, however this paper proposes a different vantage point: when generalizing to at least 75% of the dataset, the remaining deviations reveal significant insights. To harness these insights, we introduce the Price Anomaly Score (PAS), a metric capable of capturing boundaries between irregularly predicted prices. By combining relative pricing discrepancies with statistical significance, the Price Anomaly Score (PAS) offers a multifaceted view of rental valuations. This metric allows experts to identify overpriced or underpriced properties within a dataset by aggregating PAS values, then fine-tuning upper and lower boundaries to any threshold to set indicators of choice.

INFLUENCE FEATURES OF OFFICE BUILDING RENTAL: A SYSTEMATIC LITERATURE REVIEW

In reviewing rental trends, investors are unable to rely on market data from real estate transactions due to inaccurate property rental valuations by valuers. Hence the objective of this research which is to identify the influencing features of office building rentals. This study performs a systematic review on the influencing features of office building rentals based on the PRISMA systematic review and meta-analysis. The results obtained indicate that office rent determinants such as green labels, vacancy levels, and location-specifics, have significant impact on office rents. This paper provides new insights for investors and valuers in determining office rental values in the real estate market.

Real Estate Market Performance in Nigeria: Longitudinal Evidence from Residential and Commercial Property Sectors in Port Harcourt

The low transparency characterization of the real estate market in Africa presents an antithesis to the promising potentials of the market to global real estate investors and mutual funds. In spite of this, there appears an asymmetric synchronicity between increasing global attention towards investment potentials of the Sub-Saharan African real estate industry and an almost 50% market opacity. In addressing this anomaly, the study examines residential and commercial real estate returns from a Nigeria, using Port Harcourt city as test market. It has objectives of determining the rental value trend of residential and commercial properties in Port Harcourt, Nigeria, and the longitudinal rental growth rate of residential and commercial properties in the study area. The study employed qualitative technique to collect, peruse and analyze data from valuation reports obtained from Estate Surveying and Valuation firms in the study area. The resulting data were subjected to content analysis, Analysis of Variance and Correlation. The population of the study was all residential and commercial properties which have been subjected to rental valuation by designated professionals over the periodic scope of the study. Therefore, the unit of analysis was all rental valuation reports on residential and commercial properties in the study area. Given the infinite nature of the population, Godden (2004) formula was used for sample size determination of 384. It was found that rents from residential and commercial property investments in Port Harcourt, Nigeria recorded a steady increase within 2009 to 2018, with mean rental growth rates of 10.8% and 17.8% for residential and commercial properties respectively. It was concluded that the real estate market in Port Harcourt is a high performing market, with the commercial sector offering high return on investment potentials for investors.

NET BENEFITS OF URBAN SLUMS REDEVELOPMENT POLICIES ON THE VALUE OF ADJACENT RESIDENTIAL PROPERTY

Over time, the government of Pakistan introduced several strategies to deal with the issue of slums in its capital city, Islamabad. Contrary to the traditional strategies that primarily focus on the tenure security of occupants, the strategy of slum redevelopment is more composite. It involves the up-gradation of slums in their existing sites as well as the demolition of slums from the posh areas. The present study is first to empirically investigates the outcomes of the slums redevelopment policies on the value of adjacent residential properties. Using a rental valuation based hedonic price model, the study examined the spillover effects of an urban slum up-gradation and eviction projects on the nearby housing values. The results show that the redevelopment of slums reduces the adverse effects on residential value. It is essential for the urban planners to cautiously include the slum redevelopment projects spillover effects on the adjacent property value in different geographical locations, to maximize the net positive effects of improvements on the neighborhood.

The Value of Design in Real Estate Asset Pricing

Does design contribute to real estate value? Practicing architects require evidence to justify both functional and aesthetic building needs within the financial ecosystem. Some buildings that become real estate assets are valued using models that consider some proxies for understanding value, but these features are abstract and may misidentify the sub-optimal differentiation that design brings. The lack of feedback between real estate valuation and building design often leads to poor design and economic outcomes. To address this miscommunication, we investigate the transaction price performance of four external architectural form features—diagonality, curvature, setbacks and podiums. Whilst controlling for drivers that are known to explain transaction price variation, we find that diagonality and podiums have a positive pricing differential of 12.4 and 9.7% more than rectilinear control buildings, respectively. Buildings with setbacks have a negative pricing differential of 10%. Furthermore, these results are also consistent for rental valuation. Results suggest that there is a significant economic impact of some architectural form interventions that differentiate commercial buildings and contribute to the role of form in design, planning and commercial real estate.

Location, location and professionalization: a multilevel hedonic analysis of Airbnb listing prices and revenue

ABSTRACTHedonic modelling techniques have frequently been used to examine real estate valuation, and they have recently started to be applied to short-term rental valuation. Relying on a web-scraped data set of all Airbnb transactions in New York City (NYC) between August 2014 and September 2016, this paper presents the first hedonic regression model of Airbnb to take into account neighbourhood effects and to predict both average price per night and revenue generated by each listing. The model demonstrates that locational factors – above all, transit accessibility to jobs – and neighbourhood variation have a large impact on both price per night and monthly revenue, and further reveals how professionalization of the short-term rental market is driving more revenue to a narrower segment of hosts. Further, the findings suggest that Airbnb hosts earn a significant premium by converting long-term housing in accessible residential neighbourhoods into de facto Airbnb hotels. This premium incentivizes landlords and hosts with properties in accessible neighbourhoods to replace long-term tenants with short-term guests, forcing those in search of housing to less accessible neighbourhoods.

The valuation of licensed premises

PurposeThe purpose of this paper is to explain the rationale and methodology applied to the rental valuation of wet led (i.e. pub or bar) retail leisure outlets. The paper does not cover the valuation of other leisure property (e.g. restaurants, hotels).Design/methodology/approachThe paper opens with a brief outline of the factors and legislative changes which have shaped the public house market over the past 15 years. This is followed by a explanation of the rental valuation methods in use in the pub and bar sector and examination of the impact of some current issues – in particular the impact of the full implementation of the Licensing Act 2003 along with other legislative and regulatory changes. Finally the paper comments on some of the issues relevant to freehold investment purchases of public houses and bars.FindingsAs a consequence of the nature of the industry, profits based valuations continue to dominate the market and this raises difficult questions of method and interpretation particularly, as the market is further complicated by legislative and regulatory changes introducing greater uncertainty. With regard to public house and bar freehold investment changes in the structure of the market have had a significant impact on perceptions of the investment quality of the leisure sector with consequences both for flows of capital and the structure of yields in the market place.Practical implicationsValuers need to be aware that freehold investment values in this sector have potentially peaked and that investment decisions in the sector should be based upon sustainable rent.Originality/valueThe paper is of use to all valuers in this niche market and provides a practical understanding of the profits test method of valuation from which a sustainable rent may be derived.

Profit-maximizing operation and valuation of hydroelectric plant: A new solution to the Koopmans problem

Koopmans's approach to hydroelectric storage is reformulated for competitive profit maximization, with electricity priced by time of use. Duality methods of linear programming are applied to the problems of operation and rental valuation of a hydro plant and its river. Both problems are approached by using time-dependent shadow pricing of water, and if the given market price for electricity ( p) is a continuous function of time, then the shadow price function for water ( ψ ) is shown to be unique. The two prices ( ψ and p) determine not only the optimal water storage policy but also the marginal values of the plant's capacities, defined as derivatives of the operating profit. In particular, the unit reservoir rent equals the total positive variation of the water value ( ψ ) over the cycle. Profit-imputed values of the river flow and of the hydro capacities (reservoir and turbine) are therefore definite – unlike Koopmans's cost-imputed values, derived from fuel savings in a mixed hydrothermal system. The marginal capacity values can be used to determine the optimum investment. The model applies also to other natural flows, e.g., water supply and geothermal or tidal energy.

Profits method valuation succeeds following further challenge

This paper deals with the assessment of the rental value of shell condition pub restaurants where located on either retail or leisure parks. Should rental valuation be by reference to either direct floor area comparison or by the profits method? In the virtual absence of market lettings of such properties how is the limited comparable evidence from rent reviews to be compared and contrasted? Two disputed rent review cases in the northwest resulted in independent expert valuer determinations. What were the respective Landlord's and Tenant's arguments? How did the experts determine these cases and what reasons were given? What conclusions may be drawn from the outcome of these cases?

Efficiency rents of pumped-storage plants and their uses for operation and investment decisions

We apply duality methods of linear and convex programming to the problems of operation and rental valuation of facilities for conversion and storage of cyclically priced goods, e.g., energy. Both problems are approached by shadow-pricing the stock (which is a purely intermediate commodity); and if the given market price p for the final good is a continuous function of time, then the stock's shadow price function ψ is shown to be unique (and continuous). Therefore, despite being perfect Allen–Hicks complements, the plant's capacities have definite and separate marginal values, which are expressed in terms of ψ (and p). In particular, the unit reservoir rent equals the total positive variation of ψ over the cycle. The optimal storage policy is also given in terms of ψ and p. The marginal capacity values are used to determine the optimum investment. The framework can accommodate related storage problems (such as hydroelectric generation).

Uncertainty in property valuation: The pricing of flexible leases

It can be argued that the property valuation profession has historically relied upon uniformity as the basis of all capital and rental valuations. Within each property sector, differences in location and design were secondary to the underlying fundamental that the lease contracts for the properties were the same. During the 1980s most leases, in all sectors, were of 25‐year duration with the tenant being responsible for all outgoings. In the early 1990s the lease length reduced but most other terms remained constant. Rental valuation could therefore be made by direct comparison on a pro‐rata basis. Similarly, capital valuation would be made either by direct capital comparison, or by reference to a comparable rent and yield to determine the capital value by the investment method. Comparison was still the principal tool of analysis and this relied upon uniformity of leases within the market. In the late 1990s, the business environment experienced substantial structural change and tenants began to demand bespoke leases to suit their particular requirements. This has led to a plethora of different lease contracts, as tenants require shorter leases, the ability to expand and contract, break clauses and upwards/downwards rent reviews. The market is now as diverse as it was uniform in the 1980s. However, as pricing models relied upon comparison, valuers were reluctant to accept tenants’ new demands for flexibility as it was difficult to price these new contracts. This paper reviews the change in market conditions and equates the new requirements of the tenants with an increase in the uncertainty in the market. It argues that this uncertainty can be built into pricing models using probability‐based models and provides a scenario analysis to price a flexible lease contract.

Basis of rental value for performance measurement systems

This paper examines the use of the UK Red Book definition of open market rental value in the context of the provision of rental values for performance measurement purposes; specifically the bases and interpretations used in the construction of actual property-based commercial rental value indices such as the Investment Property Databank (IPD). Previous research has identified a number of possible interpretations of rental value based upon effective or headline rents, rents obtained upon new letting or provable at rent review and rents reflecting assumed or actual lease terms; it is this work that provides a basis for a questionnaire survey undertaken for this paper. The survey is of owners, managers and valuers/appraisers and is designed to identify the basis of rental value reported to IPD. Although IPD request that all valuations are based upon the Red Book definitions, the survey reveals that this is being ignored. There is significant inconsistency with owners and appraisers reporting a mixed bag of effective new letting rents, headline rents on new lettings and provable rents at review. The rental value index is therefore being formed from inconsistent data with no one basis appearing to dominate. Solutions to the problem include the provision of a more consistent set of data to IPD; but this has major cost implications since it would often require the supply of two rental valuations for the majority of properties in the database. Accordingly, the preferred solution would be the identification of the particular interpretation used in the data provided; this would allow the development of a variety of rental value indices which would increase significantly the ability of analysts to examine the impact of different rental values on property performance.

The influence of procedure on rent determination in the commercial property market of England and Wales

This paper examines the effect which the rent assessment process has on the level of rents and rental values in the commercial property market in England and Wales, by asking: is there an accepted definition of open market rental value which is consistently adhered to, irrespective of the context in which the rent is assessed? How, in theory, do the procedures by which an assessment of open market rental value is arrived at differ as between a new letting, a lease renewal, and a rent review? Is there any evidence to suggest that any theoretical differences in the operation of the various rent assessment procedures are borne out in practice? In particular, is there any evidence that in new lettings and lease renewals lease terms are changed after the rent has been finalised? Is there any evidence to demonstrate that there are different levels of rent which are sufficiently consistent to be referable to the context in which the rent was assessed? If so, does this produce difficulties in the valuation process which may not be presently fully appreciated? In addition to a review of the relevant literature, the primary research undertaken for the study was a survey of surveyors and solicitors involved in commercial lettings and rent reviews and the compilation of a database of rental valuations and transactions.

Pricing lease clauses – The prospect of an art becoming science

This paper reviews the literature which models lease covenants using option‐pricing techniques, probabilistic measures of risk and the contractual misalignment of incentives. These quantitative models, in conjunction with conventional discounting mathematics, offer ways to gauge the effects on rent of changes to many lease clauses. With the exception of discounted cash flow analysis to adjust rents for leasing incentives, none appears to be used in practice yet. The program has been designed to bridge the gap between academic developments in this field and current practices in rental valuation. The program works from rental values set on benchmark or standard lease conditions in that market and adjusts for different clauses. The program displays all the stages in calculating the effects of each changed clause and operates entirely from parameters set by the user. Trials of this program are described.

Comparing net with gross rents

In some circumstances, property valuers (appraisers) must compare net and gross rents. Suggests a number of ways in which this can be done and describes the difficulties of adjusting rents to reflect the liability for property operating costs. Outlines several reasons why the equivalent gross rent is often not the sum of the net rent and the operating costs (the principal reason being the unwillingness of either the landlord or the tenant to bear the uncertainty of these costs). There may also be difficulties in estimating expected operating costs over the period of the lease. Contends that the evidence of recent lettings will rarely enable the valuer to isolate the effect of the basis of leasing on the rents. The views of landlords and tenants on switching from gross to net rents are often unclear. Outlines a single‐period theoretical model of the expected adjustment between gross and net rents (based on compensation for bearing the risks of the running costs). However, there are grave dangers in the valuer adopting such a model which may not reflect market practice. It is no more reliable than resorting to an arbitrary rule of thumb. As well as rental valuations, counselling and advice on lease negotiations may require that the difference between gross and net tenancies is considered. With international comparisons of rental levels becoming more important to footloose businesses, there is a growing need for methods of adjusting rents to reflect the lease conditions that prevail in different countries. Appendices illustrate a theoretical model of rental adjustment and show adjustment methods in practice.

Rental Valuations with Inducements: An Update

Over the past two years, the use of rental inducements has increased in response to a softening leasing market for office space. The methods to employ for analysing the induced rentals have been uncertain. However, owing to a number of recently contested arbitrations, methodologies are now being applied which are gaining general acceptance. Despite this, not all of the issues have gained total unanimity and require further analysis. These include: (1) the treatment of tax; (2) the treatment of the benefit arising from an unratched lease; and (3) the quanitifying of indirect inducements. The resolution of these issues is essential to achieve a fully equitable rental assessment. These issues are discussed and methodologies suggested to address them. In future the need to deal with such issues may subside as a result of the growing trend towards lower stated rentals and away from the use of inducements.

THE VALUATION OF RETAIL STORES

The paper describes the various types of retail stores found in shopping centres and states that rental valuations are made by reference to rents paid for comparable premises. The paper describes the alternative methods of rental valuation which may be employed. The ‘zoning’ method and the ‘overall’ method are described and commented upon with references to relevant case law and examples of each method of valuation. The alternative methods are compared and it is concluded that one or other method may be preferred in particular circumstances. It is concluded that either method may be employed but that the preferred method will be that which best facilitates comparison between rents of stores which differ in location and other relevant characteristics. The paper also deals with capital valuations on an ‘existing use’ basis and concludes that that method of valuation should be by way of capitalisation of actual rents or estimated net rental values.