The implicit and explicit essay valuation model Flashcards
(19 cards)
What is the dominant valuation model for investment properties in the UK?
The implicit valuation model
What yield is derived from the implicit valuation model for property sales?
Net Initial Yield
What is the All Risks Yield (ARY) in property valuation?
A yield used in the valuation derived from the Net Initial Yield
What is the ‘Years Purchase’ in the context of the implicit valuation model?
The reciprocal of the ARY, a multiplier applied to rental income
List the common valuation methods of the implicit valuation model.
- Initial Yield
- Equivalent Yield
- Term and Reversion
- Layer/Hardcore methods
What does the Discounted Cash Flow (DCF) technique calculate?
The present value of future expected cash flows after discounting
Why is the DCF method considered explicit?
It allows for the assumption of growth to be included in the calculation
What is the equivalent yield technique used for in implicit valuation?
To capitalise both term and reversionary incomes
What does the equivalent yield represent in investment valuation?
The internal rate of return of a growth implicit cash flow
What is a key benefit of using the equivalent yield method?
It eliminates mathematical problems and arbitrary adjustments of yields
What does the full DCF method reveal compared to the implicit model?
The growth expectation in the market
What types of assets benefit most from the DCF method?
- Shopping centres
- Student housing
- Investment portfolios
What are some advantages of the DCF method over the implicit model?
- Flexibility
- Accuracy
- Ability to reflect key characteristics and risks
What are the limitations of DCF models?
- Reliance on accurate financial data
- Sensitivity to underlying assumptions
- Complexity and data-intensiveness
True or False: Both the implicit and explicit models can produce the same results in a stable market.
True
What has the RICS recommended regarding property investment valuations since 2022?
Incorporate the use of the discounted cash flow as the principal model
In what scenarios is the implicit method still suitable?
In mature industries with stable cash flows and consistent performance
What is one example of when to prefer traditional valuation methods?
Valuing a single-unit high street shop
What is the conclusion about the explicit DCF model compared to the implicit method?
The explicit DCF model should be the principal method for most valuations
