Farrell, M L (1997) Illiquidity, uncertainty and the impact of the term structure of interest rates on the valuation of real estate in a context of Knight-Keynes uncertainty. Journal of Financial Management of Property and Construction, 2(3), pp. 5-30. ISSN 1366-4387
Abstract
The practice of estimating the value of a real estate asset using Discounted Cash Flow, DCF, models, which match discount rate maturity with the investment horizon, does not account for the real opportunity cost of funds, and may produce erroneous estimates of value. When the yield curve is upward sloping the DCF model will tend to overstate the value of the subject property rights. When the long term interest rate structure is downward sloping, the estimate of value will be biased in the opposite direction. The results presented in this paper suggest that this effect may be most significant when the yield curve intersects the real estate asset's Internal Rate of return, IRR.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | discounted cash flow, models, internal rate of return |
| Index terms: | estimate, discounted cash flow, real estate, estimating, interest rate, property rights |
| Subjects: | economic analysis, real estate economics, financial analysis, financial and cost management |
| Topics: | Cost Management, Business Strategy, Urban Studies |
| Descriptive scope: | 2 PC |
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