The discounted cash flow valuation

The basic idea behind the discounted cash flow valuation is that the current market value of a property is determined by the sum of all net earnings expected in the future (= net income, excluding ancillary costs minus operating, maintenance and repair costs), which are discounted at the current point in time. The discount rates are adjusted to current market conditions on the basis of changes in ownership and capital market trends. While net earnings generated in the past are important and useful for determining levels and trends, they are not included in the valuation mechanism. All expected earnings (inflows) and all expected outgoings (outflows) in respect of the property are forecast over a ten-year horizon. The difference between expected earnings (inflows) and outflows results in the so-called net cash flow per period. The net cash flows per annum are then discounted using a risk-adjusted discount rate and the discounted residual value added in the eleventh year. The market value is thus determined as the sum of net cash flows over years 1 to 10 plus the 'technical sales value', calculated from the expected cash flow situation in the eleventh year.

Additional information:

Risk-adjusted discounting

Modern portfolio theory has shown that the higher the yield (discount rate), the greater the risk the investor has to accept. In this connection, Wüest & Partner speaks of risk-adjusted discount rates.

Wüest & Partner tries to use the discount rate that corresponds to the average, rational market player. In determining this rate, risk elements and/or aspects such as property qualities (condition and standard), microlocation (location within the community/part of town) and the community respectively part of town themselves play a significant role.

Market situation

The market situation is determined by factors such as accessibility, tax risk, number of jobs, size of the market, vacancy rates and future opportunities.

Microlocation (quality)

Factors: attractiveness of the surroundings, pollution and special features of the area.

Object (quality)

Factors: attractiveness of the buildings, condition, standard and flexibility of use.