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Synthesis of Short-Cut DCF Appraisal and Spreadsheet Iteration of Freehold Rental Growth Rates Across Specific Valuation Epochs

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  • Ataguba Joseph Obaje

    (Department of Estate Management and ValuationThe Federal Polytechnic Idah, Kogi StateNigeria)

Abstract

While the use of simple deterministic models to calculate rental value growth (RVGrowth) rate of reversionary freeholds across epochs prior to upward rent review appears illusive, literature evidence of the synthesis between short-cut DCF valuation and Solver tools in a spreadsheet does not constitute an exhaustive list of solutions. This study examined alternative spreadsheet and iteration tools that can determine RVGrowth rate of freehold investment properties across rent review epochs. With recourse to a hypothetical case of a freehold investment property, this experimental study identified the mathematical composition of RVGrowth in an explicit DCF framework, performed short-cut DCF Valuation and equivalent yield calculation at specific epochs prior to and including the full reversion; as well as using Goal Seek to calculate RVGrowth across all epochs prior to- and including the full reversion. Excel® Solver and Goal Seek, as well as the graphing/root-solving tool in Kyplot® were found to feasibly produce identical results for RVGrowth rate. This is among the limited studies that identified and researched the veracity of alternative tools for RVGrowth rate iteration. The value of this study is the awareness of alternative analytical tools avail freehold investors who desire knowledge of RVGrowth rate when making purchase-, hold-, and sales decisions.

Suggested Citation

  • Ataguba Joseph Obaje, 2021. "Synthesis of Short-Cut DCF Appraisal and Spreadsheet Iteration of Freehold Rental Growth Rates Across Specific Valuation Epochs," Real Estate Management and Valuation, Sciendo, vol. 29(2), pages 52-70, June.
    • Handle: RePEc:vrs:remava:v:29:y:2021:i:2:p:52-70:n:5
    DOI: 10.2478/remav-2021-0013
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    References listed on IDEAS

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    1. Jim Clayton & David Ling & Andy Naranjo, 2009. "Commercial Real Estate Valuation: Fundamentals Versus Investor Sentiment," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 5-37, January.
    2. Angus P. J. McIntosh & Stephen G. Sykes, 1985. "A Guide to Institutional Property Investment," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-07154-8, December.
    3. Neil Crosby & Nick French & Charles Ward, 1997. "Contemporary UK market valuation methods for over-rented investment properties: a framework for risk adjustment," Journal of Property Research, Taylor & Francis Journals, vol. 14(2), pages 99-115, January.
    4. Adams, A.T. & Booth, P.M. & MacGregor, B.D., 1999. "Property Investment Appraisal," British Actuarial Journal, Cambridge University Press, vol. 5(5), pages 955-982, December.
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    More about this item

    Keywords

    scenario analysis; rental growth; freehold investment property; short-cut DCF; equivalent yield;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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