Property Investment Appraisal

Abstract

ABSTRACTThis paper considers the application of discounted cash flow (DCF) techniques to the analysis of the property investment market. The traditional method of property valuation is briefly outlined and its shortcomings highlighted. An alternative DCF procedure is derived to calculate the present value of a property investment. This method will be familiar to actuaries, but is not always used in property disciplines. The sensitivities of this formulation to changes in the force of real interest, force of real rental growth and force of inflation are derived. It is suggested how these formulae may be used for property investment appraisal and risk analysis. We conclude that DCF offers a more flexible and accurate means of estimating the value of a property, and that property valuers, financial economists and actuaries should work jointly to develop practical DCF methods. However, so long as traditional methods of valuation prevail, a rational investor must use both methods to identify mispriced property assets. There have been few property contributions to the actuarial literature in the United Kingdom; this paper is intended to build on the few previous papers and suggests directions for future work.