The debate over property valuation methods has persisted for decades, often relegated to technical discussions among specialists rather than receiving the strategic attention it deserves.
Thirty years after the Mallinson Report first identified the need for improved standards in real estate appraisal, the question of whether valuers should adopt more explicit methods remains largely unresolved—considered by many to be too technical, too divisive, and too tedious to address head-on.
In December 2021, the Royal Institution of Chartered Surveyors (RICS) took a definitive step by publishing an Independent Review of Real Estate Investment Valuations. Among its 13 core recommendations was a clear endorsement of explicit discounted cash flow (DCF) modelling as the principal method for valuing income-producing property. The rationale was compelling: models that explicitly articulate assumptions on growth, costs, vacancies, and exit values provide greater transparency and enable more informed investment decisions. In response, RICS published its Practice Information on DCF valuations in November 2023.
Yet despite this formal endorsement, the Practice Information was received with little fanfare. It arrived quietly and, if anything, seemed to reassure valuers that they need not change established practices. But as the Independent Review emphasised, the push for change isn’t coming from valuers—it’s coming from clients who are increasingly dissatisfied with opaque, assumption-laden valuations:
“What is apparent is that clients are becoming less accepting of ‘implicit’ valuation inputs, assumptions, and outcomes within the method and models used; instead, the models should be ‘explicit’ to achieve the required levels of transparency, understanding, and education.”
If clients are the primary beneficiaries of this transparency, and they ultimately pay for valuation services, perhaps they should lead this transformation. This article presents the case for explicit DCF valuations from the client’s perspective, highlighting how this approach enhances understanding, supports better investment decisions, and strengthens the integrity of the entire valuation process.
Valuations as investment tools
For investors, a valuation is far more than a number on a page—it’s a foundation for comprehensive financial analysis. Whether employing Net Present Value (NPV) calculations or Internal Rate of Return (IRR) assessments, investors require not just the final value but a clear understanding of the assumptions that underpin it.
At its core, the value of any asset depends on the present value of its expected cash flows, discounted at the investor’s required rate of return. Real estate investors frequently reverse this logic, calculating the IRR based on the acquisition price, projected income streams, and anticipated exit value. When the calculated IRR exceeds the investor’s target return, the investment opportunity appears attractive.
Traditional valuations, however, rarely make these critical assumptions explicit—particularly regarding exit values. IRR analysis is highly sensitive to this component, yet implicit valuations typically provide only a starting yield that embeds numerous assumptions about growth, reversion, and risk. Without unpacking these assumptions, it becomes difficult—if not impossible—to apply consistent or justifiable adjustments at exit. This lack of transparency undermines the reliability of IRR-based investment decisions.
Why explicit matters
The strength of explicit DCF valuation lies in its transparency. Rather than concealing growth, cost, and vacancy assumptions within an adjusted All Risks Yield (ARY), the valuer presents them clearly, allowing clients to understand the basis of pricing at entry and therefore determine the appropriate basis for pricing at exit.
Even minor variations in exit yield assumptions can significantly impact the calculated IRR. Explicit DCF models make these sensitivities visible and allow for exit pricing to be tailored to anticipated lease events, tenant rollover risks, and capital expenditure requirements—factors that traditional implicit methods often obscure.
Comparables and contradictions
The necessity of using comparable evidence should not be misconstrued as justification for relying solely on simple capitalisation rates. While comparables provide an essential foundation, they rarely account for differences in lease structures, tenant covenants, or reversionary potential without further analysis.
The use of comparable transactions remains a cornerstone of valuation practice, but it introduces significant challenges when lease terms differ. Unless the properties being compared are identical in terms of tenant quality, lease duration, rent review provisions, and covenant strength, the ARY must be adjusted. These adjustments inevitably involve assumptions about growth, costs, and vacancies.
In effect, valuers are already making these explicit adjustments—they’re just doing so implicitly, creating what amounts to a “black box” valuation. To put it another way: “It’s not that valuers don’t use explicit DCF—they just do it in their heads.”
Clients should challenge this opacity. When comparable evidence presents contradictions, it’s better to acknowledge these openly than to conceal them within a yield figure. Transparency enables all parties to make more informed judgments about pricing and risk.
A workable compromise
While the case for explicit DCF is compelling, the valuation profession rightfully values consistency and stability. During periods of low market liquidity or financial stress, a simplified approach may indeed be “good enough” to maintain market functionality.
A pragmatic compromise is to produce both: a traditional valuation using ARY alongside an explicit DCF model. This dual reporting approach would not only enhance transparency but also help build the comprehensive datasets needed to support more sophisticated risk and return analysis across the industry.
Ultimately, the shift to explicit DCF valuation is about trust. Investment and lending decisions rest on valuations. If the assumptions underlying those valuations remain unclear, market confidence suffers. The current reliance on comparable transactions also becomes problematic when transaction volumes decline.
Explicit DCF valuation opens the door to more sophisticated analysis, better alignment with financial market practices, and the potential to incorporate external data to inform pricing. In doing so, it strengthens the foundation upon which real estate investment decisions are built.
Conclusion
The 2021 RICS Independent Review was correct: the real estate industry needs to move toward greater transparency. Explicit DCF valuations offer the clarity and rigor that investors increasingly demand. While valuers may not initiate this change independently, clients can and should.
By demanding explicit valuations, clients can drive the evolution of valuation practice, enhance their own decision-making processes, and contribute to building a more informed, transparent, and resilient property market. The historical reluctance to adopt explicit DCF methods – dating back to the Mallinson Report in 1994 – need not determine the future of valuation practice. The time has come for clients to lead this transformation.
Follow the Unofficial Campaign for DCF Valuations on LinkedIn: https://www.linkedin.com/showcase/campaign-for-explicit-dcf
This article was originally published in the Summer 2025 Issue of The Property Chronicle.
