What approach is DCF in?
Income (growth explicit investment method)
What’s a DCF?
Valuation model that determines value of property by examining the future net income/ cash flow and discounting it to arrive at the current value
When do you use it?
- Properties with income voids/ complex tenures
- ‘Alternative’ investments
- Phased development projects
How does it differ to using an all risks yield?
It separates out and explicitly identifies growth assumptions instead of combining it within an ARY
What’s the methodology?
- Estimate cash flow (income minus expenditure) for agreed holding period
- Estimate the exit value
- Select discount rate
- Discount at discount rate
- Value is the sum of the completed discounted cash flow to provide the Net Present Value
How do you determine if it’s met the investor’s target rate of return?
NPV positive = it has
NPV negative = it hasn’t
What’s an IRR?
Internal Rate of Return
Define an IRR
Used to assess the total return from an investment opportunity
How do you calculate an IRR?
- Input current market value as a negative cash flow
- Input projected rents over holding period as positive value
- Input projected exit value as assumed positive value
- Discount rate (IRR) is the rate chosen which provides an NPV of zero
- If NPV is more than 0, target rate is met
What’s the RICS document?
RICS Practice Information: Discounted cash flow valuations (Nov 2023)
What does RICS Practice Information: Discounted Cash Flow Valuations (Nov 2023) cover?
- Context for applying the method
- Differences between the inputs for market value and investment value
