Use of Discounted Cash Flow in real estate investment valuation

Discounted Cash Flow (DCF) Review implementation strategy

  1. The recent, independent review of real estate investment valuations (the Valuation Review), made a number of recommendations to the RICS Standards and Regulation Board (SRB), aimed at strengthening public and market confidence in this crucial area of professional services. This included two recommendations directly related to the use of DCF in market valuations: (8) Analytical Approaches (i) Discounted Cash Flow (ii) Advanced Analytics, and a third recommendation: (10) Standardised Property Risk Advice.
  2. SRB has established the Valuation Review Implementation Committee (VRIC) to bring forward carefully considered proposals for change in light of the Valuation Review. This consultation is issued by VRIC, following detailed consideration by an expert working group.
  3. Recommendations 8(i) and 8(ii) lay down a challenge to the surveying profession to embrace more explicit methodologies in the field of valuation work, through use of analytical models such as DCF. This is a key part of improving confidence and aligning more closely with wider financial analytics.
  4. Given the breadth and diversity of RICS Registered Valuers in the UK and around the world, VRIC recognises the importance of bringing about lasting change through a holistic assortment of proportionate and supportive measures, over an appropriate timeframe, rather than through any one single regulatory intervention. For this reason, VRIC is pleased to consult on a series of proposed outputs that it hopes will create a platform for change.
  5. The key workstreams to deliver change in respect of recommendations 8(i) and (ii) in the Valuation Review are detailed below, along with a questionnaire for each section. The key areas for consultation are as follows:
  6. Section (A) explains current RICS Valuation -Global Standards (Red Book Global Standards) standards covering valuation methods and models and seeks feedback on possible changes.
  7. Section (B) contains a new draft RICS Valuation - Global Standards: UK national supplement UK VPS 4 standard for the valuation of investment property that suggests where a valuer should consider the use of DCF.
  8. Section (C) includes examples of supporting tools to help valuers' professional development, that RICS may include on a DCF transition hub. This could support stakeholders operating in markets where DCF is less used or only used for some sectors and purposes.
  9. Section (D) includes a questionnaire covering the best ways of 'upskilling the valuation profession' to expand the capacity for offering DCF and other analytical approaches and risk analysis referred to in the Valuation Review.
  10. Finally, Section (E) includes a draft of a new global practice information Discounted Cash Flow valuations.
  11. Each of these workstreams is potentially crucial to the wider understanding and application of DCF. Not only is DCF important for valuers, but it also has application across many areas where analytics are key to providing strategic advice. It is increasingly important for surveyors, clients, regulators and other stakeholders to be conversant with DCF, and our intent is to encourage greater use and uptake for valuation and beyond. We welcome your contribution.