The impact of the time value of money on valuation practice
Tipping, Malvern
Real estate valuers rely upon standard valuation tables without giving too much thought to their construction. Valuers of previous generations have also relied upon tables based upon the prevailing assumptions of their age. These assumptions have often been in conflict with market reality. Originally, only very limited regard was paid to the time value of money. Annuity tables have in the main been calculated on an annual basis. At first, these were always calculated in arrears. Sometimes the discount rate was based upon compounded interest, but very early practice often favoured simple interest. Moreover, early writers ignored the time value of money. By the early nineteenth century, some writers had become more aware of the time value of money. Nonetheless, this still did not become fully reflected in professional practice. Eventually, during the twentieth century the frequency of rental income did become reflected in the tables. Generally, these still treated income as receivable in arrears, whereas most rent was receivable in advance. However, the greater use of the True Equivalent Yield does help to compensate for this. At the beginning of the twenty-first century, United Kingdom valuers have access to True Equivalent Yield tables based upon the assumption of rental income being receivable quarterly in advance. Increasing numbers of United Kingdom commercial tenants have recently been seeking monthly in advance payment patterns. Other countries already have a tradition of such monthly payments. Real estate valuers should be equipped adequately in order to be able to apply professional practice to market reality. The tables and their application continue to evolve in order to equip valuers to offer best professional practice and to reflect changing circumstances. This paper will seek to illustrate how professional practice has had to adapt to keep pace with theory and how it might change in the future.
Event: XXIII International FIG Congress : Shaping the change
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