Cyclical capitalization: basic models

Abstract

The relevance of market cycles is known in the financial markets and in the context of real estate valuations it manifests itself in the estimate of the “exit value” of the Discounted Cash Flow Analysis. The hypothesis that the market cycle has a behaviour very similar to what happened in the past introduces some risks and uncertainty in the estimated value. To allow a more extensive use of cyclical capitalization in formulating value judgments, this paper proposes two methodological adaptations to the original model: the first, based on the presence of a regular market trend; the second based on the hypothesis of irregular market cycles and therefore more representative of the dynamics to which a specific real estate segment is exposed. In the perspective of a more extensive availability of information, data and extra-data, other application areas are also identified on which further investigations need to be developed.