PROPERTY VALUATION: A RATIONAL MODEL

Abstract

The mathematics of property valuations commonly used in practice exist in several formulations which have been adopted over the years. All are similar in that they represent simple discounted cash flow models equating the estimated future earnings capacity of a property to a net present (capital) value. The process, whilst appearing somewhat daunting, is in fact accomplished in a manner such that, under normal circumstances, the estimated future cash flow beyond the next rent review is not explicitly expressed. Instead of generating a future income flow (assuming some rate of rental growth) and discounting at a money rate of interest (suitably adjusted for risk), the estimated rental income at the next review is capitalised at a relatively low investment yield rate which merely implies a future rental growth rate.