Vol. 85 (2024)
Original Articles - Urban, Land, Environmental Appraisal and Economics

Integrating the Capital Asset Pricing Model with the Analytic Hierarchy Process and the Delphi Method: a proposed method for estimating the discount rate in constrained real estate development initiatives

PDF
  • Fabrizio Battisti,
  • Giovanna Acampa,
  • Mariolina Grasso
Fabrizio Battisti
Department of Architecture DIDA, University of Florence, Italy
Giovanna Acampa
Department of Architecture DIDA, University of Florence, Italy
Mariolina Grasso
Department of Engineering and Architecture, University of Enna “Kore”, Italy
DOI: https://doi.org/10.36253/aestim-16262

Published 2025-02-14

Keywords

  • landscape,
  • environmenta,
  • constraints,
  • real estate finance,
  • multi-criteria analysis,
  • capital asset pricing model
    • ...More
    Less

Copyright (c) 2024 Fabrizio Battisti, Giovanna Acampa, Mariolina Grasso

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Crossref
Scopus
Google Scholar
Europe PMC

Abstract

The legislative framework on territorial and urban planning has become increasingly rich and complex in the European Union, particularly Italy. The structured – and often hindering – system of division of responsibilities between the central State, Regions, local institutions, and organisms generates different levels of administrative verification. The environmental and landscape constraints by which each Public Administration with jurisdiction over the territory exercises its powers strongly impact territorial management and negatively affect investments. Over the years, this has been one of the main reasons behind the significant dilation of the risk and the time required to obtain the necessary authorizations to start construction, producing “business risk.” Based on this premise, this work presents a methodological investigation of the relationships between environmental and landscape constraints, the regulatory framework involving the building, and its Market Value. This is finally aimed at finding suitable methods and procedures to formulate a reasonable discount rate considering the constraints and the related regulations that operate on an asset. A multi-step method integrating the Capital Asset Pricing Model, Analytic Hierarchy Process, and Delphi Method is proposed to assess the discount rate component related to urban risk.

PDF

References

  1. Acampa, G., Grasso, M., & Ticali, D. (2021). MCDA to evaluate alternative paths for urban electric micromobility. In International Conference Of Computational Methods In Sciences And Engineering ICCMSE 2020, 29 April-3 May 2020, Crete, Greece. AIP Conference Proceedings, 2343(1), 090009. https://doi.org/10.1063/5.0047778
  2. Alves, P. (2013). The Fama French Model or the capital asset pricing model: International evidence. The International Journal of Business and Finance Research, 7, 79–89.
  3. An, X., & Deng, Y. (2009). A structural model for capitalization rate. Real Estate Research Institute (RERI) Working Paper.
  4. Bartholdy, J., & Peare, P. (2005). Estimation of expected return: CAPM vs. Fama and French. International Review of Financial Analysis, 14(4), 407–427.
  5. Battisti, F., Campo, O., & Forte, F. (2020). A methodological approach for the assessment of potentially buildable land for tax purposes: the Italian case study. Land, 9(1), 8.
  6. Battisti, F., & Campo, O. (2021). The assessment of density bonus in building renovation interventions. The case of the city of Florence in Italy. Land, 10(12), 1391. doi:10.3390/land1012139111.
  7. Battisti, F., & Campo, O. (2021). A model for determining a discount rate in market value assessment of buildable areas subject to restrictions. In Morano, P., Oppio, A., Rosato, P., Sdino, L., & Tajani, F. (Eds.). Appraisal and Valuation: Contemporary Issues and New Frontiers. Cham, Springer Nature. https://doi.org/10.1007/978-3-030-49579-4_20.
  8. Baum, A. (2020). Tokenisation—The Future of Real Estate Investment? The University of Oxford Research. Available at: https://www.sbs.ox.ac.uk/sites/default/files/2020-01/tokenisation.pdf (accessed 3 November 2024).
  9. Brueggeman, W., Chen, A., & Thibodeau, T. (1984). Real estate investment funds: performance and portfolio considerations. Real Estate Economics, 12, 333–354.
  10. Cannon, S., Miller, N., & Pandher, G. (2006). Risk and return in the U.S. housing market: a cross-sectional asset-pricing approach. Real Estate Economics, 34, 519–552.
  11. Case, K., Cotter, J., & Stuart, G. (2011). Housing risk and return: evidence from a housing asset-pricing model. Journal of Portfolio Management, 37, 89–109.
  12. Chambers, D., Spaenjers, C., & Steiner, E. (2019). The rate of return on real estate: long-run micro-level evidence. HEC Paris Research Paper, No. FIN-2019-1342.
  13. Chong, J., Miffre, J., & Stevenson, S. (2009). Conditional correlations and real estate investment trusts. Journal of Real Estate Portfolio Management, 15, 173–184.
  14. Chun, G., Sa-Aadu, J., & Shilling, J. (2004). The role of real estate in an institutional investor’s portfolio revisited. The Journal of Real Estate Finance and Economics, 29, 295–320.
  15. Colavitti, A. N., & Serra, S. (2021). Regional landscape planning and local planning. Insights from the Italian context. Journal of Settlements and Spatial Planning, 7, 81–91.
  16. Conner, P., & Liang, Y. (2005). The complex interaction between real estate cap rates and interest rates. Briefings in Real Estate Finance: An International Journal, 4(3), 185–197.
  17. Council of Europe (2020). European Landscape Convention. Available at: https://www.coe.int/en/web/landscape (accessed 3 November 2024).
  18. Domian, D., Wolf, R., & Hsiao, F. Y. (2015). An assessment of the risk and return of residential real estate. Managerial Finance, 41, 591–99.
  19. European Commission (2005). Natural Resources. Available at: https://ec.europa.eu/environment/archives/natres/index.htm (accessed 3 November 2024).
  20. European Commission (2020). Natura 2000 in Italia – Scheda informativa. Available at: https://ec.europa.eu/environment/nature/info/pubs/docs/nat2000/factsheet_it.pdf (accessed 3 November 2024).
  21. Faiteh, A., & Aasri, M. R. (2022). Accounting beta as an indicator of risk measurement: the case of the Casablanca stock exchange. Risks, 10, 149. https://doi.org/10.3390/risks10080149
  22. Forte, C., & De Rossi, B. (1974). Principi di Economia ed Estimo. Milano, Etas Libri.
  23. Gordon, T. J. (1994). The Delphi method. Futures Research Methodology, 2(3), 1–30.
  24. Ibbotson, R. G., & Siegel, L. B. (1984). Real estate returns: a comparison with other investments. Real Estate Economics, 12(3), 219–242.
  25. Jagannathan, R., & McGrattan, E. R. (1995). The CAPM debate. Federal Reserve Bank of Minneapolis Quarterly Review, 19(4), 2–17.
  26. Jordà, Ò., Knoll, K., Kuvshinov, D., Schularick, M., & Taylor, A. (2019). The rate of return on everything, 1870–2015. The Quarterly Journal of Economics, 134, 1225–1298.
  27. Larriva, M., & Linneman, P. (2022). The determinants of capitalisation rates: evidence from the US real estate markets. Journal of Property Investment & Finance, 40(2), 119–169.
  28. Linstone, H. A., & Turoff, M. (1975). The Delphi method. Reading, MA, Addison-Wesley.
  29. Martinelli, N., & Mininni, M. (2021). Città Sostenibilità Resilienza: L’urbanistica italiana di fronte all’Agenda 2030. Roma, Donzelli Editore.
  30. Mattia, S. (2008). Costruzione e Valutazione Della Sostenibilità dei Progetti. Volume 1. Milano, Franco Angeli.
  31. McDonald, J. (2015). Capitalisation rates for commercial real estate investment decisions. Journal of Property Investment & Finance, 33(3), 242–255.
  32. Napoli, G., Giuffrida, S., Trovato, M. R., & Valenti, A. (2017). Cap rate as the interpretative variable of the urban real estate capital asset: a comparison of different sub-market definitions in Palermo, Italy. Buildings, 7(3), 80.
  33. Oppio, A., Torrieri, F., & Dell’Oca, E. (2020). Urban Rent at risk: the point of view of private investors. Valori e Valutazioni, 27, 5–18.
  34. Peng, L. (2016). The risk and return of commercial real estate: a property level analysis. Real Estate Economics, 44, 555–583.
  35. Pretty, J., & Hine, R. (1999). Participatory Appraisal for Community Assessment: Principles and Methods. Centre for Environment and Society, University of Essex, Colchester, UK.
  36. Ribeiro, M. I., Ferreira, F. A., Jalali, M. S., & Meidutė-Kavaliauskienė, I. (2017). A fuzzy knowledge-based framework for risk assessment of residential real estate investments. Technological and Economic Development of Economy, 23(1), 140–156.
  37. Ross, S., & Zisler, R. (1991). Risk and return in real estate. The Journal of Real Estate Finance and Economics, 4, 175–190.
  38. Saaty, T. L. (2001). Fundamentals of the analytic hierarchy process. In Schmoldt, D. L., Kangas, J., Mendoza, G. A., & Pesonen, M. (Eds). The Analytic Hierarchy Process in Natural Resource and Environmental Decision Making. Managing Forest Ecosystems, vol 3. Dordrecht, Springer.
  39. Saaty, T. L. (2004). Decision making—the analytic hierarchy and network processes (AHP/ANP). Journal of Systems Science and Systems Engineering, 13, 1–35.
  40. Sagi, J. S. (2021). Asset-level risk and return in real estate investments. The Review of Financial Studies, 34(8), 3647–3694.
  41. Sharpe, W. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, 19, 425–42.
  42. Stokes, J., & Cox, A. (2023). Commercial real estate finance and the lending cap rate. Journal of Property Investment & Finance, 41(1), 2–10.
  43. Sun, C., Abbas, H. S. M., Xu, X., Gillani, S., Ullah, S., & Raza, M. A. A. (2021). Role of capital investment, investment risks, and globalization in economic growth. International Journal of Finance & Economics, 28(2), 1883–1898.
  44. Tang, G., & Wai, S. (2003). The conditional relationship between Beta and returns: recent evidence from international stock markets. International Business Review, 12, 109–126.
  45. UNESCO (1971). Convention on Wetlands of International Importance Especially as Waterfowl Habitat. Available at: https://en.unesco.org/about-us/legal-affairs/convention-wetlands-international-importance-especially-waterfowl-habitat (accessed 3 November 2024).
  46. Unbehaun, F., & Fuerst, F. (2018). Cap rates and risk: a spatial analysis of commercial real estate. Studies in Economics and Finance, 35(1), 25–43.
  47. Wong, S. K., & Cheung, K. S. (2017). Renewing a Lease at a Discount or Premium? Journal of Real Estate Research, 39, 215–234.