Recorded Webinar: Back-to-Basics: Part 3

Back-to-Basics: Part 3 – Discounted Cashflow Method

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Presented by:

Trevor Richardson
Director of Beare Holdings

Martin Fitchet
Director of Knight Frank

CET:

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Back-to-Basics: Part 3 - Discounted Cashflow Method

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1 / 10

1. From Gordon’s Growth Model where k= r-g or r= k + g, what does ‘r’ stand for?:

a. Discount rate

b. Capitalisation rate

c. Expected growth rate

2 / 10

2. From Gordon’s Growth Model where k= r-g or r= k + g, what does ‘k’ stand for?:

a. Discount rate

b. Capitalisation rate

c. Expected growth rate

3 / 10

3. True or False, Typical investments have dividend growth and capital growth. The same is true for a property investment – We collect net rent (dividends) and the property grows in value over time (capital growth).

a. True

b. False

4 / 10

4. When one considers growth rates and escalation rates, the basic property fundamentals of location, physical condition, age of improvements, amenity and lease tenure must be considered. You have strong growth nodes and weak growth nodes. These shift all the time due to external influences i.e.:

a. Political turmoil

b. Change in technology

c. Power supply

d. Transport

e. All of the above

5 / 10

5. The foundation of the income capitalisation approach:

i. Assumes a fully let building at market related rental for 12-month period from the date of valuation
ii. Assumes a fully let building at market related rental for 12-month period from the date of purchase
iii. Market related (normalised) property expenses for a 12-month period from the date of valuation
iv. Market
v. (Normalised) Property expenses for a 12-month period from the date of purchase

a. i & iii

b. i & iv

c. i, ii & iv

6 / 10

6. True or False, the calculation for an escalating annuity with compound interest rate is as follows:

a. True

b. False

7 / 10

7. The first part in the DCF calculation is called the:

a. Reversion period

b. Term period

c. Escalation period

8 / 10

8. True or False, the risk premium reflects the uncertain nature of future cash flows. The greater the risk the greater the premium.

a. True

b. False

9 / 10

9. What are the salient factors in deriving a property risk premium, in terms of market risk?

a. Failure to meet market rental expectations (forecast rental growth)

b. Failure to meet market yield expectations (forecast yield shift)

c. Risk of locational, economic, physical, and functional depreciation through

d. Risks associated with legislative change (e.g., EIA’s, NBR, EWC)

e. All of the above

10 / 10

10. Alternative approaches to determining the target rate of return might be to adopt:

(i) A single discount rate for all property investments
(ii) A discount rate for each class of property – either by use (offices, shops, etc.), subtype (unit shops, shopping centres, etc.) and/or location
(iii) A discount rate reflecting the risks of a specific property cash flow
(iv) Different discount rates applied to different components of the cash flow according to their risk – for example the passing contractual rent until lease expiry (risk dependent on known tenant covenant), reversionary rent at future rent reviews (risk dependent on known tenant covenant and market rental change) and rental income beyond lease expiry (risk dependent on unknown tenant covenant and market rental change).

Although each approach has advantages and disadvantages, which methods are recommended to distinguish between covenant risk and market risk?

a. ii & iv

b. i & iii

c. All of the above

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