Understanding inputs and outputs of property cashflows Flashcards Preview

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Flashcards in Understanding inputs and outputs of property cashflows Deck (10)
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If using Excel, what should be done with your model assumptions?

All assumptions need documenting in an accompanying ‘Guide to the Model’ and assumptions noted in blue. Best to start from scratch each time.


What are the key assumptions of a cashflow model?


Property Stats

Development Costs

Purchase and Sale


What are the key sections of the development model?

Absorption (timing and pace of sales)




Land acquisition (capital cost)

Pre-construction costs

Construction costs

Financing and interest expense

Levered Free Cash Flow


What information should the output pro forma include?

Property stats

Schedule – summary key dates

Financing assumptions

Sales assumptions ($ total / per unit / per SF)

Budget ($ total / per unit / per SF)

Returns (IRRs) / Profit Outputs (IRR and profit and NPV)

Return on cost

Return on sales

Sensitivity analysis


What is the Net operating income (NOI)?

NOI = gross rental revenue less operating expenses such as; property taxes, insurance, repairs, maintenance, capital expenditures

NOI = key profitability or cash flow measure used to evaluate real estate development transactions


What is the Capitalisation Rate?

Cap rate = NOI divided by the value of the property is expressed as a percentage and used to value real


How might you evaluate certain RISKS in a financial model?

Sensitivity analysis

Scenario Testing

Monte Carlo analysis

Should all be considered as part of the core of the work, not optional extras!

The main purpose behind sensitivity and scenario analysis is to deal with uncertainty about the future


How does a sensitivity analysis work?

You need to check the impact of the different key variables (typically term, market rent, exit yields, vacant periods) and result on NPV and IRR with respect to your 'base case'

Idea is to check how would the final results change if one input variable/assumption were marginally different

Involves measuring the percentage change in the final result, given a small change in the inputs e.g: a 1% increase in the exit yield implies a X% decrease in the property value


How does scenario testing work?

One should think in terms of bad scenarios and good scenarios in an investment

For each possible scenario, you should know how all your input variables should be changed

e.g. I estimate exit yield = 5% from comparable properties

I then estimate that in a good scenario exit yield could be instead 4.5%

I then estimate that in a bad scenario exit yield could be instead 5.5%

I can then do the same for rental growth and other input variables


What does the RICS 2019 professional standards and guidance, Financial viability in planning: conduct and
reporting note state about sensitivity analyses?

All Financial Viability Assessments (FVAs) must provide a sensitivity analysis and commentary = exercise to 'stand back' and apply judgement

Helps to:
- allow applicant / decision-maker to consider how changes in inputs affect viability
- understand extent of these results to conclude on viability of the scheme