Understanding inputs and outputs of property cashflows Flashcards
If using Excel, what should be done with your model assumptions?
All assumptions need documenting in an accompanying ‘Guide to the Model’ and assumptions noted in blue. Best to start from scratch each time.
What are the key assumptions of a cashflow model?
Schedule
Property Stats
Development Costs
Purchase and Sale
What are the key sections of the development model?
Absorption (timing and pace of sales)
Revenue
Commissions
Warranty
Land acquisition (capital cost)
Pre-construction costs
Construction costs
Financing and interest expense
Levered Free Cash Flow
What information should the output pro forma include?
Property stats
Schedule – summary key dates
Financing assumptions
Sales assumptions ($ total / per unit / per SF)
Budget ($ total / per unit / per SF)
Returns (IRRs) / Profit Outputs (IRR and profit and NPV)
Return on cost
Return on sales
Sensitivity analysis
What is the Net operating income (NOI)?
NOI = gross rental revenue less operating expenses such as; property taxes, insurance, repairs, maintenance, capital expenditures
NOI = key profitability or cash flow measure used to evaluate real estate development transactions
What is the Capitalisation Rate?
Cap rate = NOI divided by the value of the property is expressed as a percentage and used to value real
estate
How might you evaluate certain RISKS in a financial model?
Sensitivity analysis
Scenario Testing
Monte Carlo analysis
Should all be considered as part of the core of the work, not optional extras!
The main purpose behind sensitivity and scenario analysis is to deal with uncertainty about the future
How does a sensitivity analysis work?
You need to check the impact of the different key variables (typically term, market rent, exit yields, vacant periods) and result on NPV and IRR with respect to your ‘base case’
Idea is to check how would the final results change if one input variable/assumption were marginally different
Involves measuring the percentage change in the final result, given a small change in the inputs e.g: a 1% increase in the exit yield implies a X% decrease in the property value
How does scenario testing work?
One should think in terms of bad scenarios and good scenarios in an investment
For each possible scenario, you should know how all your input variables should be changed
e.g. I estimate exit yield = 5% from comparable properties
I then estimate that in a good scenario exit yield could be instead 4.5%
I then estimate that in a bad scenario exit yield could be instead 5.5%
I can then do the same for rental growth and other input variables
What does the RICS 2019 professional standards and guidance, Financial viability in planning: conduct and
reporting note state about sensitivity analyses?
All Financial Viability Assessments (FVAs) must provide a sensitivity analysis and commentary = exercise to ‘stand back’ and apply judgement
Helps to:
- allow applicant / decision-maker to consider how changes in inputs affect viability
- understand extent of these results to conclude on viability of the scheme
