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This is the first of a pair of articles which attempt to clarify and compare the concepts and applications of the two so‐called positive or real value valuation methods. For these purposes these are the methods which use either the Equated Yield (EY) or the Inflation Risk Free Yield (IRFY) as their principal criterion rather than an all‐risks yield (ARY). This paper looks at the origins of these methods and discusses the principles on which valuation methods for investment purposes should be evaluated.

The first of these two articles gave an insight into the basis on which the suitability of valuation methods to perform their functions should be judged. In this article attention turns to specific principles in the Equated Yield (EY) and Inflation Risk Free Yield (IRFY) approaches.

IN spite of the advantages of the sleeve valve engine the poppet valve engine is still produced in large numbers, and this position seems likely to be maintained for some time. Consequently a critical discussion of poppet‐valve problems and considerations from the metallurgical aspect will not be considered untimely, especially as the discussion is based on a fairly extensive first‐hand experience of high output engines.

IT has recently been said by a member of a firm of justly‐famous wire makers (1) that there is probably no finer grade of wire than that designed for aero‐engine valve springs to Air Ministry Specification D.T.D.5A, and despite the fact that this article will deal principally with defects in that wire, the author, from an experience gained from the handling of some hundreds of miles of it, must state at the outset that he can endorse this opinion.

Property returns are normally measured against the target rate for similar investments with comparable risks and liquidity. However, this analysis is normally undertaken in nominal terms and thus the risk of inflation, as it affects different investments, is not fully quantified. This paper seeks to analyse the effect of inflation on property investments.

This article examines the impact of inflation on gilt returns and relates this to property risk.

Investors may take a more pessimistic view of future inflation as an investment risk than the current official indices would indicate. In this context it may be that retail price index (RPI) and index adjusted for mortgage payments (RPIX) are not reliable indicators of inflation risk. It has been suggested that the difference between the two species of gilts as “a calculation of inflation expectations should be regarded with suspicion because of the volume of index linked bonds is so small that individual trades can move the market”.

Economists and financial advisers and commentators have long recognised that inflation, in the sense of the tendency of the value of a currency to decline in purchasing power, distorts the picture of the worth, not only of individual assets but also of the whole economy. In this respect investment advisers often, in presenting their arguments, use yields that are net of the rate of experienced inflation taken from the performance of the RPI or the RPIX. Unless there is an understanding of the risk of inflation on property investments, such net rates may be misleading.

This study adds to the literature exploring the effect of inflation on property returns.

Some twenty years ago, however, the realisation came that the economy of the animal body calls for the activities of substances with functions apparently akin, in many respects at least, to those of the hormones, which the body itself is nevertheless unable to produce, and therefore must receive them in its food. The indispensable functions of these, like those of the hormones, are adequately fulfilled by extraordinarily small amounts of each one. These food constituents yield therefore no appreciable supply of energy, nor do they serve in any ordinary sense as structural materials. Their presence like that of the hormones is necessary rather for the normal progress of active events. They have dynamic functions. I am alluding, of course, to the vitamins.

This paper introduces the real value approach. A second paper, to be published in the next issue of Journal of Valuation, considers specific applications of this approach.

Ordinary direct capitalization is normally considered procyclical in its present form (De Lisle Grissom, 2011); for this reason, an alternative approach to direct capitalization may be useful in the determination of a robust opinion of value. The valuation standards propose an alternative determination of terminal value in the discounted cash flow analysis, recommending that for cyclical assets, the terminal value should consider … “the cyclical nature of the asset and should not be performed in a way that assumes “peak” or “trough” levels of cash flows in perpetuity” (IVS 105 Valuation Approaches and Methods para 50.21 lett e).

The introduction in International Valuation Standards (IVS) of Cyclical Assets raises several questions for the community of real estate professionals and academicians (IVS, 2022, 105 Valuation Approaches and Methods para 50.09 lett d). Cyclical assets can be defined as property whose value is “influenced by upturn and downturn of the market in a significant way” (d’Amato et al., 2019).

The paper proposes different solutions to the problem. The determination of the exit value using cyclical capitalization allows for a prudent assessment of the value and may be used either as a valuation procedure or a risk analysis method.

The valuation comparison with the traditional valuation techniques will be based on an iteration of exit value in order to determine the effects of the valuation procedure on the opinion of value.

The implication of the valuation procedure is the introduction of a countercyclical valuation method to determine the exit value in order to reach stable and reliable valuations for income-producing properties.

These models may have a social implication, providing valuation for income-producing properties that may deal with the property market cycle in a more efficient way, providing efficient valuation for banks and institutions.

The paper is the first application of such a valuation procedure to the determination of exit value.

In his article ‘The Valuation of Reversionary Freeholds: A Review’ Andrew Baum drew a comprehensive picture of conventional and modern valuation approaches to this topic. His conclusions were well founded, but appeared to be a bit harsh on the basic Discounted Cash Flow Approach which, in his article, seemed to emerge as the Rational Model of Sykes. This article hopes to show that the basic Discounted Cash Flow Approach can deal adequately with complex reversions without being cumbersome or without requiring major adjustments, as Baum's article implies, and that it has the benefit of being more explicit than the Real Value approach which still hides rental growth in ‘i’, the inflation‐proof discount rate.