VisiCal was invented in 1979, Lotus123 in 1983 leading to DCF models very shortly thereafter. Computing, data analytics and methodologies have come a long way in the past 44 years. Hard to describe DCF as a 'new method'. Single point deterministic models have limited application in understanding future value. The Commercial Real Estate market needs to radically rethink how it evaluates value and risk if it wants to be a mainstream asset class and avoid regulators concern with systemic risk.
We all agree DCF is not anything new, but it's how data around its composition is going to be disclosed to the public and how this data should be used for mark-to-market purposes.
@@gutawiedner DCF modelling provides little transparency in reality. It may appear to be transparent but that is largely spurious. For example there may be a significant level of detail (transparency?) around costs but the assumptions made by the valuer on discount rate or inflation or rental levels or tenant default rates will swamp those details. The fact that there are necessarily so many assumptions required for the cashflow means it is not really transparent. CRE appraisals should recognise there is uncertainty around future cashflows and reflect that in how they produce mark to market valuations. The majority of this uncertainty is market risk which DCF models do not really address.
@@hrad8671 A Discount Rate tend to reflect a Market Risk Premium (MRP) which is used in DCF. If you would like to discuss this more in depth and how DCF can provide more clarity about the make up of a property value, we would love to welcome you to our courses. Please send us email at info@cambridgerefinance.com and we will be happy to address any other questions you may have.
VisiCal was invented in 1979, Lotus123 in 1983 leading to DCF models very shortly thereafter. Computing, data analytics and methodologies have come a long way in the past 44 years. Hard to describe DCF as a 'new method'. Single point deterministic models have limited application in understanding future value. The Commercial Real Estate market needs to radically rethink how it evaluates value and risk if it wants to be a mainstream asset class and avoid regulators concern with systemic risk.
We all agree DCF is not anything new, but it's how data around its composition is going to be disclosed to the public and how this data should be used for mark-to-market purposes.
@@gutawiedner DCF modelling provides little transparency in reality. It may appear to be transparent but that is largely spurious. For example there may be a significant level of detail (transparency?) around costs but the assumptions made by the valuer on discount rate or inflation or rental levels or tenant default rates will swamp those details. The fact that there are necessarily so many assumptions required for the cashflow means it is not really transparent. CRE appraisals should recognise there is uncertainty around future cashflows and reflect that in how they produce mark to market valuations. The majority of this uncertainty is market risk which DCF models do not really address.
@@hrad8671 A Discount Rate tend to reflect a Market Risk Premium (MRP) which is used in DCF.
If you would like to discuss this more in depth and how DCF can provide more clarity about the make up of a property value, we would love to welcome you to our courses. Please send us email at info@cambridgerefinance.com and we will be happy to address any other questions you may have.