Cyclical Capitalization

The paper provides the methodological foundations of a property valuation method based on income approach called cyclical capitalization. The model is proposed for the valuation of income producing properties and was originally introduced by d’Amato (2001) and relies on the assumption of more than a single capitalization rate it integrates direct capitalization with the analysis of an entire market cycle. Such integration has been required in literature (Kazdin,1944; Pyhrr et al.,1990). The procedure has recently and indirectly been recalled by international valuation standards (IVS 2017; IVS 2020; IVS 2022; IVS 105 item 50.21 letter (e)), as it will be discussed in the paper. International Valuation Standards since 2017 required a different approach to the determination of terminal value (going out value, scrap value, exit value, terminal value, exit value) in Discounted Cash Flow Analysis. The models proposed in the paper are the basic ones systematized in the first contributions that took up and reorganized this line of research from its original systematic introduction (d’Amato, 2013; d’Amato, 2015; d’Amato, 2017a; d’Amato, 2017b). The initial applications were based on the office market in London. The first application to the Italian market will be made in this contribution referring to the office real estate market in Milan offered by the then REAG Study Office (currently Kroll). Evidence from the application shows that the proposed model is capable of reaching a prudent value judgments than the income-capitalization estimate normally used. Prudent opinion of value can help in determining the security value and the most likely market value under specific market conditions.