The impact of covenant strength on property pricing

Norman E. Hutchison, Alastair S. Adair and Nicky Findlay

Journal of Property Research, 2010, vol. 28, issue 2, 167-188

Abstract: Recent volatility in the commercial property markets has brought into sharp focus the importance of the cash flow security in property pricing. The explicit contribution of income risk factors, such as covenant strength, to the pricing model does not have a major coverage in the literature. This paper evaluates, from a conceptual perspective, how the property industry should treat and price covenant strength risk and considers whether the risk premium associated with this risk factor can be calibrated. It includes a quantitative analysis of insolvency and delinquency data and the impact of covenant strength on equivalent yields using Investment Property Databank (IPD) data. The paper also reports on a survey of UK institutional investors, carried out in 2008, which examined both the approach and the pricing of default risk. Evidence emerges of mispricing of both the systematic and specific risk as the UK market was swept along by a wave of cheap money and short‐term investment outlook. The quantitative and qualitative analysis shows that the risk of default was largely ignored in a buoyant market. Investors appear guilty of pricing at a point in the cycle rather than taking the longer view and pricing through the cycle. Investors need to be aware of the fundamental relationship between covenant strength and the business cycle, lease length and sector.

Date: 2010
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/09599916.2010.538479 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jpropr:v:28:y:2010:i:2:p:167-188

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RJPR20

DOI: 10.1080/09599916.2010.538479

Access Statistics for this article

Journal of Property Research is currently edited by Bryan MacGregor

More articles in Journal of Property Research from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().