Valuation and arbitrage

The use of discounted cash flow (DCF) methods in investment valuation and appraisal is argued by many academics as being rational and more rigorous than the traditional capitalisation model. However those advocates of DCF should be cautious in their claims for rationality. The various DCF models all rely upon an all-encompassing equated yield (IRR) within the calculation. This paper will argue that this is a simplification of the risk perception which the investor places on the income profile from property. In determining the long term capital value of a property an 'average' DCF method will produce the 'correct' price, however, the individual short term values of each cash-flow may differ significantly. In the UK property market today, where we are facing a period in which prices are not expected to rise generally at the same rate or with such persistence as hitherto, investors and tenants are increasingly concerned with the down side implications of rental growth and investors may indeed be interested in trading property over a shorter investment horizon than they had originally planned. The purpose of this paper is therefore to bring to the analysis a rigorous framework which can be used to analyse the constituent cash flows within the freehold valuation. We show that the arbitrage analysis lends itself to segregating the capital value of the cash flows in a way which is more appropriate for financial investors

The uncertainty of valuation

Valuation is often said to be “an art not a science” but this relates to the techniques employed to calculate value not to the underlying concept itself. Valuation is the process of estimating price in the market place. Yet, such an estimation will be affected by uncertainties. Uncertainty in the comparable information available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the valuation. The degree of the uncertainties will vary according to the level of market activity; the more active a market, the more credence will be given to the input information. In the UK at the moment the Royal Institution of Chartered Surveyors (RICS) is considering ways in which the uncertainty of the output figure, the valuation, can be conveyed to the use of the valuation, but as yet no definitive view has been taken. One of the major problems is that Valuation models (in the UK) are based upon comparable information and rely upon single inputs. They are not probability based, yet uncertainty is probability driven. In this paper, we discuss the issues underlying uncertainty in valuations and suggest a probability-based model (using Crystal Ball) to address the shortcomings of the current model.

Measuring societal awareness of the rural agrarian landscape: indicators and scale issues

The work presented in this report is part of the effort to define the landscape state and diversity indicator in the frame of COM (2006) 508 “Development of agri-environmental indicators for monitoring the integration of environmental concerns into the common agricultural policy”. The Communication classifies the indicators according to their level of development, which, for the landscape indicator is “in need of substantial improvements in order to become fully operational”. For this reason a full re-definition of the indicator has been carried out, following the initial proposal presented in the frame of the IRENA operation (“Indicator Reporting on the Integration of Environmental Concerns into Agricultural Policy”). The new proposal for the landscape state and diversity indicator is structured in three components: the first concerns the degree of naturalness, the second landscape structure, the third the societal appreciation of the rural landscape. While the first two components rely on a strong bulk of existing literature, the development of the methodology has made evident the need for further analysis of the third component, which is based on a newly proposed top-down approach. This report presents an in-depth analysis of such component of the indicator, and the effort to include a social dimension in large scale landscape assessment.

The implications of the 2003 Common Agricultural Policy reforms for land use and landscape quality in England

The assessment of the potential landscape impacts of the latest Common Agricultural Policy reforms constitutes a challenge for policy makers and it requires the development of models that can reliably project the likely spatial distribution of land uses. The aim of this study is to investigate the impact of 2003 CAP reforms to land uses and rural landscapes across England. For this purpose we modified an existing economic model of agriculture, the Land-Use Allocation Model (LUAM) to provide outputs at a scale appropriate for informing a semi-quantitative landscape assessment at the level of ‘Joint Character Areas’ (JCAs). Overall a decline in the cereal and oilseed production area is projected but intensive arable production will persist in specific locations (East of England, East Midlands and South East), having ongoing negative effects on the character of many JCAs. The impacts of de-coupling will be far more profound on the livestock sector; extensification of production will occur in traditional mixed farming regions (e.g. the South West), a partial displacement of cattle by sheep in the upland regions and an increase in the sheep numbers is expected in the lowlands (South East, Eastern and East Midlands). This extensification process will affect positively those JCAs of mixed farming conditions, but it will have negative impacts on the JCAs of historically low intensity farming (e.g. the uplands of north-west) because they will suffer from under-management and land idling. Our analysis shows that the territorialisation between intensively and extensively agricultural landscapes will continue.

Long-distance dispersal and its influence on adaptation to host resistance in a heterogeneous landscape

Small propagules like pollen or fungal spores may be dispersed by the wind over distances of hundreds or thousands of kilometres,even though the median dispersal may be only a few metres. Such long-distance dispersal is a stochastic event which may be exceptionally important in shaping a population. It has been found repeatedly in field studies that subpopulations of wind-dispersed fungal pathogens virulent on cultivars with newly introduced, effective resistance genes are dominated by one or very few genotypes. The role of propagule dispersal distributions with distinct behaviour at long distances in generating this characteristic population structure was studied by computer simulation of dispersal of clonal organisms in a heterogeneous environment with fields of unselective and selective hosts. Power-law distributions generated founder events in which new, virulent genotypes rapidly colonized fields of resistant crop varieties and subsequently dominated the pathogen population on both selective and unselective varieties, in agreement with data on rust and powdery mildew fungi. An exponential dispersal function, with extremely rare dispersal over long distances, resulted in slower colonization of resistant varieties by virulent pathogens or even no colonization if the distance between susceptible source and resistant target fields was sufficiently large. The founder events resulting from long-distance dispersal were highly stochastic and exact quantitative prediction of genotype frequencies will therefore always be difficult.

Changing climate and the Irish landscape

The impacts of current and future changes in climate have been investigated for Irish vegetation. Warming has been observed over the last two decades, with impacts that are also strongly influenced by natural oscillations of the surrounding ocean, seen as fluctuations in the North Atlantic Oscillation and the Atlantic Multidecadal Oscillation. Satellite observations show that vegetation greenness increases in warmer years, a feature mirrored by increases in net ecosystem production observed for a grassland and a plantation forest. An ensemble of general circulation model simulations of future climates indicate temperature rises over the twenty-first century ranging from 1°C to 7°C, depending on future scenarios of greenhouse gas emissions. Net primary production is simulated to increase under all scenarios, due to the positive impacts of rising temperature, a modest rise of precipitation and rising carbon dioxide concentrations. In an optimistic scenario of reducing future emissions, CO2 concentration is simulated to flatten from about 2070, although temperatures continue to increase. Under this scenario Ireland could become a source of carbon, whereas under all other emission scenarios Ireland is a sink for carbon that may increase by up to three-fold over the twenty-first century. A likely and unavoidable impact of changing climate is the arrival of alien plant species, which may disrupt ecosystems and exert negative impacts on native biodiversity. Alien species arrive continually, with about 250 dated arrivals in the twentieth century. A simulation model indicates that this rate of alien arrival may increase by anything between two and ten times, dependent on the future climatic scenario, by 2050. Which alien species may become severely disruptive is, however, not known.

Abiotic drivers and plant traits explain landscape-scale patterns in soil microbial communities

The controls on aboveground community composition and diversity have been extensively studied, but our understanding of the drivers of belowground microbial communities is relatively lacking, despite their importance for ecosystem functioning. In this study, we fitted statistical models to explain landscape-scale variation in soil microbial community composition using data from 180 sites covering a broad range of grassland types, soil and climatic conditions in England. We found that variation in soil microbial communities was explained by abiotic factors like climate, pH and soil properties. Biotic factors, namely community- weighted means (CWM) of plant functional traits, also explained variation in soil microbial communities. In particular, more bacterial-dominated microbial communities were associated with exploitative plant traits versus fungal-dominated communities with resource-conservative traits, showing that plant functional traits and soil microbial communities are closely related at the landscape scale.

Flooding tolerance in four 'Garrigue' landscape plants: implications for their future use in the urban landscapes of north-west Europe?

Within a changing climate, Mediterranean ‘Garrigue’ xerophytes are increasingly recommended as suitable urban landscape plants in north-west Europe, based on their capacity to tolerate high temperature and reduced water availability during summer. Such species, however, have a poor reputation for tolerating waterlogged soils; paradoxically a phenomenon that may also increase in north-west Europe due to predictions for both higher volumes of winter precipitation, and short, but intensive periods of summer rainfall. This study investigated flooding tolerance in four landscape ‘Garrigue’ species, Stachys byzantina, Cistus × hybridus, Lavandula angustifolia and Salvia officinalis. Despite evolving in a dry habitat, the four species tested proved remarkably resilient to flooding. All species survived 17 days flooding in winter, with Stachys and Lavandula also surviving equivalent flooding duration during summer. Photosynthesis and biomass production, however, were strongly inhibited by flooding although the most tolerant species, Stachys quickly restored its photosynthetic capacity on termination of flooding. Overall, survival rates were comparable to previous studies on other terrestrial (including wetland) species. Subsequent experiments using Salvia (a species we identified as ‘intermediate’ in tolerance) clearly demonstrated adaptations to waterlogging, e.g. acclimation against anoxia when pre-treated with hypoxia. Despite anecdotal information to the contrary, we found no evidence to suggest that these xerophytic species are particularly intolerant of waterlogging. Other climatic and biotic factors may restrict the viability and distribution of these species within the urban conurbations of north-west Europe, but we believe increased incidence of flooding per se should not preclude their consideration.

Landscape, regional and global estimates of nitrogen flux from land to sea: errors and uncertainties

Regional to global scale modelling of N flux from land to ocean has progressed to date through the development of simple empirical models representing bulk N flux rates from large watersheds, regions, or continents on the basis of a limited selection of model parameters. Watershed scale N flux modelling has developed a range of physically-based approaches ranging from models where N flux rates are predicted through a physical representation of the processes involved, through to catchment scale models which provide a simplified representation of true systems behaviour. Generally, these watershed scale models describe within their structure the dominant process controls on N flux at the catchment or watershed scale, and take into account variations in the extent to which these processes control N flux rates as a function of landscape sensitivity to N cycling and export. This paper addresses the nature of the errors and uncertainties inherent in existing regional to global scale models, and the nature of error propagation associated with upscaling from small catchment to regional scale through a suite of spatial aggregation and conceptual lumping experiments conducted on a validated watershed scale model, the export coefficient model. Results from the analysis support the findings of other researchers developing macroscale models in allied research fields. Conclusions from the study confirm that reliable and accurate regional scale N flux modelling needs to take account of the heterogeneity of landscapes and the impact that this has on N cycling processes within homogenous landscape units.

Food marketing technology and contingency market valuation

Marketing activities are introduced into a rational expectations model of the food marketing system. The model is used to evaluate effects of alternative marketing technologies on the distribution of the benefits of contingency markets in agriculture. Benefits depend on two parameters: the cost share of farm inputs and the elasticity of substitution between farm and nonfarm inputs in food marketing. Over a broad spectrum of technologies, consumers are likely to be the net beneficiaries and farmers the net losers from the provision of contingency markets