CBRE CONSULTING AND VALUATION TRAINING

5th May 2017

APPROACH AND METHODOLOGY
DCF Valuation - Residential
DCF - RESIDENTIAL

WHAT IS DCF METHODOLOGY??????

3 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
MEANING

 Forecasting future cash flows from the property (being valued) based on market

assumptions

 Involves explicit modeling of income associated with the development of the

property

 Future financial benefits then are discounted to a present day value by adopting an

appropriate discount rate

4 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
ASSUMPTIONS

 Development Assumptions (FSI, Built-up Area, Loading, Saleable Area)

 Land Assumptions

 Expense Assumptions

 Revenue Assumptions

 Financial Assumptions (Cost of Equity, Cost of Debt, Weightages)

5 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

LAND ASSUMPTIONS??

6 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
LAND ASSUMPTIONS

 Project Level Cost

 Land Cost

 Approval Cost

 Other Regulatory Cost

7 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

EXPENSE ASSUMPTIONS??

8 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
EXPENSE ASSUMPTIONS

 Construction Cost

 Architects & Consultants Fees (% of Construction Cost)

 Administration Expenses (% of Construction Cost)

 Marketing Expenses (% of Construction Cost)

 Contingencies (% of Total Cost)

 Brokerage (% of sale price)

 Escalation in construction cost

9 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

REVENUE ASSUMPTIONS??

10 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
REVENUE ASSUMPTIONS

 Sale Price

 Other Charges (PLC, Car Parking, Club Membership, etc)

 EDC/IDC (Region Specific)

 Escalation in sale price

11 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

CASH FLOWS = REVENUES - COST

12 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
TIME VALUE OF MONEY

TIME VALUE OF MONEY

13 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
TIME VALUE OF MONEY

 A rupee today is worth more than a rupee tomorrow

 TVM depends on:

a) Opportunity Cost – Cash flows today can be reinvested to generate more cash flows

b) Inflation – Fall in purchasing power

c) Risk – Cash flows are uncertain at a later date

14 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
PRESENT VALUE

 The current worth of a future sum of money or stream of cash flows, given a

specified rate of return

 Future cash flows are "discounted" at the discount rate; the higher the discount rate,

the lower the present value of the future cash flows

Where :
PV – present value of money
FV – future value of money
r – annual rate of interest or discount rate n –
number of years

15 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

WEIGHTED AVERAGE COST OF CAPITAL

(WACC)???

16 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
WEIGHTED AVERAGE COST OF CAPITAL (WACC)

 “WACC” is the minimum return that a company must earn on an existing asset base

to satisfy its creditors, owners, and other providers of capital, or they will invest

elsewhere

 It is calculated taking into account the relative weights of each component of the

capital structure as each capital source is expected to generate different returns

Where :
Re – Cost of Equity, Rd – Cost of Debt, E – % of project finance from equity, D - % of
project finance from debt

17 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
WEIGHTED AVERAGE COST OF CAPITAL (WACC)

 For example; if Re = 20% and Rd = 18% ; E = 70% and D = 30%

then, WACC = 0.7 x 20% + 0.3 x 18%

= 14% + 5.4%

= 19.4%

18 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

NET PRESENT VALUE

19 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
NET PRESENT VALUE

 “NPV” of a time series of cash flows, both incoming and outgoing, is defined as the sum

of the present values (PVs) of the individual cash flows of the same entity

 “NPV” can be described as the difference between the sums of discounted: cash inflows

and cash outflows. It takes into account inflation and returns

20 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
NET PRESENT VALUE

Initial
Investmen
Year . t 2016 2017 2018 2019 2020 2021 2022 2023 2024

Total Revenues 831 2003 2197 1498 994 2418 2664 1821

Total Project Cost (460) (483) (507) (533) (559) (587) (617) (647)

Net Cash Flows (4000) 371 1520 1690 965 435 1831 2047 1174

 The difference in cash inflows and outflows in the above table is reflected as net

cash flow given year on year for a real estate development

 Assuming a year on year discounting from year 2021 to year 2016 at the WACC rate

of 20%, the NPV of the above net cash flow is: 439 Mn

21 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL
VALUATION PROCESS
Review of site attributes impacting development potential – Areas, FSI, Usage,
accessibility, topography, profile of surrounding developments, etc.
Location and Site Analysis
Critical assessment of the subject location vis-à-vis the proposed development to
assess suitability of the development and positioning

Market Research / Demand Market Research comprising of existing / upcoming supply, demand dynamics,
Estimation competition in market, pricing trend analysis, etc.

Project level Assumptions

Cost assumptions: Capital expenditure (construction costs) & Operating
expenses
Revenue Assumptions: Sale / Lease income, absorption scheduling & other revenues

Costs Revenues

Net Annual Operating Income for leased assets capitalized post occupancy
Capitalization of stabilized Net stabilization / stabilization of revenue stream
Operating Income
Capitalization rates derived through commercial yields in the micro-market

Discounting of EBDITA NPV derivation through discounting of periodic EBITDA cash flows;
Discounting rates derived through WACC

Market Value of Property

22 CBRE | PRESENTATION TITLE

DCF - RESIDENTIAL

THANK YOU

23 CBRE | PRESENTATION TITLE