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The Appraisal of Data Centres: Deconstructing the Cash Flow

Author

Listed:
  • Patrick McAllister

    (Department of Real Estate & Planning, University of Reading)

  • Pavlos Loizou

    (CB Richard Ellis)

Abstract

This paper analyses the appraisal of a specialized form of real estate - data centres - that has a unique blend of locational, physical and technological characteristics that differentiate it from conventional real estate assets. Market immaturity, limited trading and a lack of pricing signals enhance levels of appraisal uncertainty and disagreement relative to conventional real estate assets. Given the problems of applying standard discounted cash flow, an approach to appraisal is proposed that uses pricing signals from traded cash flows that are similar to the cash flows generated from data centres. Based upon 'the law of one price', it is assumed that two assets that are expected to generate identical cash flows in the future must have the same value now. It is suggested that the expected cash flow of assets should be analysed over the life cycle of the building. Corporate bond yields are used to provide a proxy for the appropriate discount rates for lease income. Since liabilities are quite diverse, a number of proxies are suggested as discount and capitalisation rates including indexed-linked, fixed interest and zero-coupon bonds.

Suggested Citation

  • Patrick McAllister & Pavlos Loizou, 2007. "The Appraisal of Data Centres: Deconstructing the Cash Flow," Real Estate & Planning Working Papers rep-wp2007-04, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:repxwp:rep-wp2007-04
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    File URL: http://www.henley.reading.ac.uk/rep/fulltxt/0407.pdf
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    References listed on IDEAS

    as
    1. David Babbel & Craig Merrill, 1998. "Economic Valuation Models for Insurers," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(3), pages 1-15.
    2. Robert Reitano, 1997. "Two Paradigms for The Market Value of Liabilities," North American Actuarial Journal, Taylor & Francis Journals, vol. 1(4), pages 104-122.
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