The discounted cash flow model for property valuations: quarterly in advance cash flows
| DOI | https://doi.org/10.1108/JPIF-06-2013-0030 |
| Date | 20 September 2013 |
| Pages | 610-614 |
| Published date | 20 September 2013 |
| Author | Nick French |
| Subject Matter | Property management & built environment |
EDUCATION BRIEFING
The discounted cash flow model
for property valuations: quarterly
in advance cash flows
Nick French
Department of Real Estate and Construction,
Oxford Brookes University, Oxford, UK
Abstract
Purpose – There are three approaches to valuation: cost, market and income. As a subset to the
income approach, the investment method looks at the pricing of assets that produce income over an
investment holding period. The discounted cash flow (DCF) technique or model can be developed to
look at the cash flows on a quarterly basis to reflect the actual receipt of the cash flows. This Education
Briefing is a overview of the DCF quarterly model and the need to analyse comparables appropriately.
The paper aims to discuss these issue.
Design/methodology/approach – The DCF quarterly model can be seen to produce estimates of
market value.
Findings – As the use of DCF is developed and expanded, it is useful to be able to model the cash
flows appropriately.
Practical implications – The old adage “value as you analyse” applies to DCF valuations. If
valuing quarterly, then the analysis needs to be done on the same basis.
Originality/value – This briefing is an overview of the pricing of freehold rack rented properties in
the UK.
Keywords Property valuation,Implicit models, Explicit models,Discounted cash flow,
Quarterly cashflows, Investments
Paper type General review
Introduction
In an earlier Education Briefing (French, 2013), it was shown that the explicit discounted
cash flow (DCF) valuation easily adapts to quarterly cash flows. In that briefing, the
models illustrated (implicit annually in arrears, explicit DCF annually in arrears, implicit
quarterly in arrears and explicit DCF quarterly in arrears) all produced valuations of
£12.5m based on an annual rent of £1m. Admittedly, the simple YP models, where the
yield used are the reciprocals of the multiplier applied are easier to use as the analysis
and the valuation are the same model. Hence, the adage, “value as you analyse”. So,
referring to the annually in arrears model, the all risk yield (ARY) used would have been
obtained by the analysis of comparable sales of similar properties in a similar location in
a similar time frame. In other words, it is a method of comparison.
Comparable evidence
For comparable evidence to be acceptable in court (which ultimately could be the final
arbiter of a valuation), it needs to be verifiable. Ideally, good should be the subject
of previous valuations that the valuer has previously undertaken his or herself.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Journal of Property Investment &
Finance
Vol. 31 No. 6, 2013
pp. 610-614
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-05-2013-0030
JPIF
31,6
610
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