Property risk premia and deferment rates

Abstract

Purpose

All property valuation is based on comparative analysis to determine the relevant discount rates. However, this implicit approach fails to recognise the difference in risk between the early term income and the riskier reversion. It uses the same rate throughout. As such, it ignores the risk of a highly illiquid reversionary property interest and uses a deferment rate that is much too low. This paper aims to address this issue.

Design/methodology approach

The paper analyses the required risk premia for liquidity in relation to the risk free rate. Historic evidence is used to determine an appropriate deferment rate.

Findings

It would seem sensible that the long‐term deferment rate is set at a level that is similar to the long‐term return on equities with dividends reinvested.

Practical implications

The continued use of low deferment rates over‐values the reversionary interest of the property asset.

Originality/value

The paper seeks to stimulate debate on the current use of low deferment rates.

Citation

Wyatt, J. (2011), "Property risk premia and deferment rates", Journal of Property Investment & Finance, Vol. 29 No. 3, pp. 323-330. https://doi.org/10.1108/14635781111138127