An option pricing approach to valuing upward only rent review properties with multiple reviews

Abstract We begin by considering how to model market rents using random walk and autoregressive models. We then show how to value rental income on properties subject to upward only rent reviews where market rents are described by these two models. The values are obtained using three valuation methodologies. Two of the valuation techniques take account of the embedded upward only rent review option whereas one of the techniques takes the traditional approach, effectively ignoring the option value. The resulting values depend both on the model of the behaviour of rents and on the valuation method.