RATIONAL MODELS OR PRACTICAL METHODS?

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Abstract
This paper criticises the ‘rational’ model of valuation propounded by McIntosh and Sykes in their two papers in the Journal of Valuation. It concludes that, in the case of freehold investments with a standard pattern of income flow, the years' purchase method of valuation (adopting a single capitalisation rate) is likely to be more appropriate, and in the case of short leasehold investments a full discounted cash flow approach is preferable. Only in the case of long reversions or non‐standard short reversions may the ‘rational model’ prove optimal, but in these cases it seems merely a sensible application of conventional DCF techniques rather than a new valuation method.

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