Cash Flow Residual Valuations PDF

Preview

Summary

MSc Real Estate Development Appraisal Lecture delivered by Rebecca Gee....

Description

Cash Flow Residual Valuations Residual Advantages: - Quick and easy - Uses all the main costs and revenues - Gets you 90% of the way there Residual Disadvantages: - Finance calculations are very basic - Does not allow for early sales revenue - Difficult therefore to use for a phased scheme Cash Flow - The solution is to use a cash flow. - In practice, the report output from software packages shows a residual appraisal with a cash flow alongside. - Allows you to break down the timing of costs and revenues. Data Input: - The headline figures are the same as for the residual method. - The cash flow allows to breakdown the overall cost or revenue to allow for a different pattern of payment. - All that changes is the amount of finance you incur on that cost, or perhaps payback on the revenue. Finance Calculations - Finance now has to be calculated on different amounts each month or quarter. - In a period-by-period cash flow, the interest is calculated for each quarter and added to the capital, and the sum is carried forward to the next period. - Assumes 100% debt funding. Advantages of Rolling cash flow: - Shows maximum deficit - Shows timing of maximum deficit - Can be used in arranging finance - Can form basis for budget and project cash flow. - How much do we really need to borrow? Splitting Costs or Revenues - Start by deciding on the probable timing of costs and revenues. - Build cost is split so it is lower at the start and the end. - Cumulatively, you will see an ‘S’ curve – starts off low, builds up to a peak, and then comes back down again. - Payments can be profiled in any way, to match how the developer and contractor anticipate payments. - The actual amount does not change, just the way it is paid. - You have to try and break down the cost of the build so you get an ‘S’ curve.

Timing of Costs and Revenues - 18 months in total.

Straight Line vs ‘S’ Curve

Discounted Cash Flow - The rolling cash flow is typically referred to as the ‘cash flow’ when developers run an appraisal. - There is an alternative type of cash flow which is Discounted Cash Flow. - DCF is calculated on the basis that the project is 100% equity funded. - It is used to find the return to the developer, or the land value. - The return should be expressed as an IRR. - The return reflects the whole risk of the project, including funding. - There is no individual calculation for finance (because there will not be any, as it is all equity), or for developer’s profit....