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MARKET VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS - CONSISTENCY IN ASSUMPTIONSPowerPoint Presentation

MARKET VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS - CONSISTENCY IN ASSUMPTIONS

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MARKET VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS - CONSISTENCY IN ASSUMPTIONS

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MARKET VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS - CONSISTENCY IN ASSUMPTIONS

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MARKET VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS- CONSISTENCY IN ASSUMPTIONS

Stellan Lundström

Royal Institute of Technology

Christina Gustafsson

IPD Norden

- 1997 Establishment of the Swedish Property Index in co-operation with IPD
- A quality control process for index valuations
- An ambition that assumptions should be consistent

- 1997 – 2008: 24 000 Valuations
- 83 % with DCF technique
- All DCF assumptions and results are in a database

- Valuation accuracy tested to be on a good level.
- Feed back on DCF parameters raises question about the relevance in assumptions about discount rates, exit yields, rents, vacancies, operations and maintenance

Main question

”How are DCF assumptions related to each other

Specific question

”What is the meaning of DCF yields and discount rates when DCF is used for market valuations”

Operation & maintenance

cost as % of gross rent

Source: IPD Multi National Index Spreadsheet 2008

Office rents in Stockholm CBD

Initial and long term vacancy rate in valuations

Office Stockholm CBD, 1st January 1998 - 2008

= Assumptions in valuations long term

= Actual outcome = initial vacancy rate

Assumed operations and maintenace costs

in relation (%) to actual outcome

NOI year 2007

Valuation of Office properties in Stockholm CBD 2004

- Discount rates and exit yields

10

9.5

9

8.5

Discount rate, %

8

7.5

7

6.5

6

5.5

6

6.5

7

7.5

8

Valuation yield (exit yield) %

Implicit vs explicit yields

NOI

n

0

time

8.7 – 3.3 = 5.3 < 6.9

- ”All assumptions are biased – the result is OK!”
- The same discussion as 30 – 40 years ago
- Swedish valuers has developed;
- An industry standard for valuation
- A market monitoring system

- Valuers - legitimacy
- Investors – Interpretation of and need for decision support
- Auditors– new role due to IFRS
- Opinion about
- Market value (fair value)
- Assumptions behind market value

- Opinion about
- To value ”green buildings” there is a need for more explicit assumptions about NOI