CHICAGO (Aug. 6, 2008) – The Summer 2008 issue of The Appraisal Journal continues to provide real estate professionals with advice and insights to the ever changing industry. Included in the Summer issue are two articles related to the valuation of properties located near lakes, two articles on investment-related valuations and an article on predicting the impact of contamination on home values.
The cover article in the Summer issue, “Viewshed Analyses to Measure the Impact of Lake Views on Urban Residential Properties,” by Steven Shultz, PhD, and Nick Schmitz, looks at how views of two flood-control reservoirs built by the U.S. Army Corps of Engineers increase the value of homes. The impact on value of these man-made lakes is of interest because the lakes have limited recreational value and homeowners do not actually have lake-frontage homes or direct access to the lakes. The authors find that a view of an urban reservoir increased the sale prices of homes 8.3 percent at one lake and 7.5 percent at a second lake. They further discover that $19 million in economic value had been added at one location and between $1.2 and $32 million at a second lake.
In “The Lake Tahoe Basin; Appraising in a Heavily Regulated Market,” by Steven J. Herzog, MAI, the author looks at how intense regulation of land development effects the valuation process. This article describes various types of federal, state and local regulations, which have nonmarket motivations but may impact the market value of properties by restricting their uses and development potential. These regulations go beyond typical zoning restrictions and regulate the amount of surface that may be covered as well as the type of materials that may cover the land surface, with a multi-year permitting process.
Another article in the Summer issue of the Journal, “Risk Premiums in Cap Rates of Investment Property,” by Martine Van Wouwe, Tom M. Berkhout, and Pol R. Tansens, looks at the components of yields for prime office and retail properties. The authors’ research shows, based on data from Western European markets, that although it is often assumed that risk premium accounts for 2 percent of the initial yield on investment, this is not the case in fact. The study results showed that between 1990 and 2004 the risk premium accounted for about 7 percent of the initial yield. The results also show that interest rates are important factors that have an influence on net initial yields. The authors characterize the relationship between interest rates and risk premiums of being akin to communicating vessels, and as real interest rates fall, the risk premium rises and vice versa.
In “A Note for Appraisers on Option Valuation,” by J. Howard Finch, PhD, Travis L. Jones, PhD, and H. Shelton Weeks, PhD, the authors demonstrate how to value an option to buy land using a method based on the principle of substitution. The authors demonstrate that the value of an option to buy may be deduced by creating an alternative portfolio of investments that provides identical expected payoffs.
Rounding out the articles in the Summer issue is “Under the Microscope: Dissection of a Contingent Valuation Survey,” by Kristy E. Mathews, which examines the survey-based method called contingent valuation as an approach for estimating property value losses related to environmental hazards. A contingent valuation (CV) survey asks members of the public about how much they would pay for a home near or on contaminated property. Mathews’ analysis shows that the reliability of CV survey results is questionable because the questionnaires do not conform with the usual standards of survey research, including isolating the unique effect of contamination and providing sufficient information for the respondent to make an informed decision typical of buyers in the market. The author also points out that CV surveys report the average of purchase prices mentioned by survey respondents, while in the real home-buying market only the highest price offered by a buyer represents the value of a property.
The Appraisal Journal, published quarterly by the Appraisal Institute, serves as a forum for advancing appraisal theories and practices. Containing articles, columns and letters written by experienced appraisers and educators. The Appraisal Journal presents ideas, concepts and analytical techniques to be considered. Each issue offers alternative valuation methods for serious thinkers seeking creative solutions to appraisal problems, appealing to appraisers, educators, and other real estate professionals.
For more information about The Appraisal Journal or for review copies, please contact Nancy K. Bannon at 312-335-4445.