Dealing with cyclical assets

Upturns and downturns of economic cycles may influence real estate market. The importance of real estate market cycle has been stressed in several contributions (Born and Pyhrr, 1990; Grover & Grover, 2013a, b). Although the great importance of the property market cycle for real estate market analysis, a gap between property valuation and property market cycle has been observed (Born and Pyhrr, 1990). Recently, the International Valua\tion Standards raised the problem of valuation of cyclical assets as terminal value of discounted cash flow analysis (IVS, 2017, General Standards IVS 105 Valuation Approaches and Methods, para 50.21 letter e). The recommendation of the International Standard is to replace traditional direct capitalization with valuation methods considering “…the cyclical nature of the asset…”. This chapter shows the limits of the present valuation practice in the context of property market cycle. It will be stressed how property market cycle influences property valuation. As a consequence, it is more and more relevant providing solutions to include property market cycle in the valuation process enhancing present valuation methods