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A previous paper (Vol. 16 No. 3) examined the potential contribution of derivative products to the mitigation of some of the problems and risks associated with direct property investment. This paper analyses the property‐related derivative products that have been developed. Particular attention is paid to the products developed by Barclay de Zoete Wedd ‐ property index certificates (PIC), property index forwards (PIF) and property index notes (PIN) ‐ and property basket warrants issued by Goldman Sachs and SBC Warburg. It is argued that institutional attitudes to derivatives are key to their success. Previous research on this issue is reviewed. It is concluded that the development of PICs has “broken the ice” with investors and should generate increased interest in and use of derivative products in the property sector by UK and overseas institutional investors.

Index by subjects, compiled by K.G.B. Bakewell covering the following journals: Facilities Volumes 8‐17; Journal of Property Investment & Finance Volumes 8‐17; Property Management Volumes 8‐17; Structural Survey Volumes 8‐17.

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Index by subjects, compiled by K.G.B. Bakewell covering the following journals: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐17; Journal of Property Investment & Finance Volumes 8‐17; Property Management Volumes 8‐17; Structural Survey Volumes 8‐17.

This paper critically assesses the relative merits of indirect and direct methods of international property investment. Despite similarities in the underlying asset base, each offers different qualities in terms of information costs, diversification, management and transaction costs, liquidity, volatility and quality of performance measurement. It is argued that direct investment will only be justifiable where investors are confident that they have the ability to identify underpriced assets, can manage these assets as effectively as local companies and can handle the investment risks associated with such lumpy, illiquid assets. It is concluded that for many investment funds, indirect investment in specialist property investment companies would seem to offer a more suitable method of gaining exposure to international property markets. In general indirect markets are more transparent, information costs are lower, liquidity is higher (with consequent implications for portfolio asset allocation decisions) and performance measurement is less problematic.

This paper aims to analyse the appraisal of a specialised form of real estate – data centres – that has a unique blend of locational, physical and technological characteristics that differentiate it from conventional real estate assets. Market immaturity, limited trading and a lack of pricing signals enhance levels of appraisal uncertainty and disagreement relative to conventional real estate assets.

Given the problems of applying standard discounted cash flow, an approach to appraisal is proposed that uses pricing signals from traded cash flows that are similar to the cash flows generated from data centres. Based on “the law of one price”, it is assumed that two assets that are expected to generate identical cash flows in the future must have the same value now. It is suggested that the expected cash flow of assets should be analysed over the life cycle of the building. Corporate bond yields are used to provide a proxy for the appropriate discount rates for lease income. Since liabilities are quite diverse, a number of proxies are suggested as discount and capitalisation rates including indexed‐linked, fixed interest and zero‐coupon bonds.

The application of conventional discounted cash flow approaches to the appraisal of data centres requires information about a wide range of inputs that is difficult to derive from market signals or estimate analytically. In practice, discounted cash flow appraisals of data centre facilities are forced to incorporate non‐market assumptions that are inevitably subjective. Cash flows from data centres tend to be more complicated because of the high levels of current and capital expenditure compared with conventional assets. This requires an understanding of the appraisal of liabilities as well as income. Whilst the use of price information from similar cash flows such as corporate bonds is helpful, there are rarely assets and liabilities that have identical cash flows and risks and some approximation is necessary.

The digitalisation of business and society has produced a different form of real estate asset that is specialised, physically complex and whose operation, maintenance and management require specialist staffing and high levels of current and capital expenditure. The complexity of the cash flows and the lack of active trading create significant appraisal problems. This paper proposes an alternative approach to appraisal that utilises external pricing signals to appraise the various incomes and costs.