Global economic and investment environments do not stand still, and this drives the need for the appropriate consideration of valuation measures and methods.
Over the last few decades, there has been a succession of standards from IVSC, RICS and other international and national valuation standard setters concerning the discounted cash flow (DCF) method of valuation. The new practice information paper replaces the previous RICS UK guidance note Discounted cash flow for commercial property investments, published in 2010.
This new practice information is timely in light of the recommendations Peter Pereira Gray made in the Valuation Review.
The recommendations related to DCF were primarily in three parts:
- Recommendation 8 – Analytical Approaches (i) Discounted Cash Flow
The valuation profession should incorporate the use of discounted cash flow as the principal model applied in preparing property investment valuations.
- Recommendation 8 – Analytical Approaches (ii) Advanced Analytics
RICS should improve the knowledge and application of valuers in respect of advanced analytical techniques.
- Recommendation 10 – Standardised Property Risk Advice
RICS should develop a framework to standardise property risk advice.
Peter Pereira Gray believed several misconceptions and misunderstandings were present in the evidence presented to him concerning what is meant by a DCF valuation. The practice information paper addresses a range of questions surrounding what DCF encompasses and how it fits into the regulatory and advisory framework. It is hoped that this practice information will clarify many of these issues and add to the advancement of knowledge within real estate valuation practice globally.
During the consultation for this practice information, concerns were expressed from across the valuation industry against the prescription of explicit DCF over the more implicit, income capitalisation methods, traditional to some markets. Peter Pereira Gray discussed the circumstances where explicit DCF may not be the appropriate principal model and nothing in this practice statement disturbs the individual valuers’ responsibility for deciding the appropriate model to use in any valuation.