Market Valuation Based on Discounted Cash Flow Analysis - Consistency in Assumptions

Stellan Lundström and Christina Gustafsson

ERES from European Real Estate Society (ERES)

Abstract: The technical discussion about consistency and the meaning of different parameters in income-based methods for market valuations is basically the same as 30 ñ 40 years ago. At that time focus was on models named Ellwood and Inwood and different kind of residual models. Discounted cash flow analysis (DCF) is a modern technique for market valuation, which is widely used in the Swedish market and the dominating valuation method for the Swedish property index. The resent discussion about the use of DCF is about how different parameters should be interpreted in relation to each other. That is the same kind of discussion as 40 years ago. The main content is a survey based on a unique data set with input data and results from some xx 000 DCF valuations conducted for the Swedish property index between 1997 and 2007. All critical DCF assumptions about rents, vacancies, operation and maintenance, investments are captured in a database. The finding is that all DCF parameters to some extent are biased in relation to each other and in relation to the actual outcome from the rental market and property management. The valuers have developed standardized levels and relations between parameters that by experience results inan accurate market value.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2009-01-01
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