A study into the use of probability analysis to address the valuation uncertainty caused by break clauses

Gregory, Ian (2010) A study into the use of probability analysis to address the valuation uncertainty caused by break clauses. MSc dissertation, University of Portsmouth.

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    Abstract

    This dissertation advances the understanding of probability-based methods of analysis as ways to incorporate the uncertainty caused by tenant-operated break clauses into the valuation process, with particular emphasis on a potential alternative method referred to as probability tree analysis. Although such uncertainty is now central to the valuation process, valuers are often criticised for arbitrarily reflecting it in the valuation and for reporting the valuation with limited reference to uncertainty underpinning it. This research is particularly timely given the recent proliferation of commercial leases which include break clauses. The study is based on a review of relevant literature and the collection and analysis of empirical data. The latter is achieved through a survey of London-based commercial property valuers that was conducted using postal questionnaires and supplemented by two interviews. The main findings of the research indicated an overriding presumption amongst valuers that tenant-operated break clauses would be exercised, despite recently published data indicating actual break clause operation is much lower than typically assumed. Traditional valuation methods still dominate valuation practice. Of the probability-based methods, scenario analysis is currently the preferred approach amongst valuers, with computerised simulation being little used due to concerns regarding its perceived complexity. Probability tree analysis is shown to overcome the shortcomings of the aforementioned approaches but valuers are largely unfamiliar with the method. There is widespread support for the qualitative expression of uncertainty, although the most valuers would also welcome an opportunity to express it quantitatively. The research concludes that there is a need for the development of an alternative probability-based method of analysis and for the quantitative expression of uncertainty. The recommendations are that the RICS should promote the use of probability tree analysis and endorse the quantitative expression of uncertainty.

    Item Type: Dissertation
    Departments/Research Groups: ?? EDAM ??
    Depositing User: Jane Polwin
    Date Deposited: 01 Feb 2011 12:22
    Last Modified: 28 Jan 2015 11:17
    URI: http://eprints.port.ac.uk/id/eprint/1115

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