DCF Flashcards
What is a DCF
Discounted cash flow
Growth explicit investment method of valuation
By examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value (NPV)
When might you use a DCF?
Short leasehold interests and properties with income voids or complex tenures
Phased development projects
• Some ‘Alternative’ investments
. Non-standard investments (say with 21-year rent
reviews)
• Over-rented properties & social housing
• The approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY
What’s one main difference between a DCF and Conventional investment method?
Explicitly identified growth assumptions rather than incorporating them within an ARY
Simple methodology for a DCF to find MV
- Estimate the cash flow (income less expenditure)
for an agreed holding period - Estimate the exit value at the end of the holding period
- Select the discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed discounted cash flow to provide the NPV
What is IRR
Internal rate of return
The rate at which all future cash flows must be discounted to produce an NPV of 0 aka breake even
What is the IRR used for?
Assess the total return from an investment opportunity making some assumptions re rental growth, re-letting and exit assumptions
How to calculate the IRR
Some use software others use linear interpolation from the cash flow
What is the RICS guidance for discounted cash flows?
RICS practice information: discounted cash flow valuation November 2023
What does the RICS practice information: DCF November 2023 set out?
Global guide covering use of DCF
Covers
- explicit DCF method vs implicit method
- context for applying explicit DCF methods
- differences between the inputs for market value and investment value
