I was reading through the International Valuation Standards section "105 Valuation Approaches and Methods" to better understand the standards for performing a DCF and it describes the discount rate as such "Valuers must consider the risk of achieving the forecast cash flow of the asset when developing the discount rate. Specifically, the valuer must evaluate whether the risk underlying the forecast cash flow assumptions are captured in the discount rate."
If you are building up the discount rate using the risk free rate + risk premium, does this then imply that the risk premium is the expected risk of volatility in cashflows?
Every time I have read a post on WSO real estate forum about the discount rate and risk I have seen people describe all sorts of risks that are not directly related to the peformance of an assets cashflows.
If the risk premium is specific to volatility of cashflows what are specific examples of those types of cashflow risks besides vacancy and the tenants ability to consistently pay rent?
Interested to hear thoughts on this.
Based on the highest ranked content on WSO, the risk premium within the discount rate does not exclusively evaluate the risk to cash flows. Here are some key points to consider:
Risk Premium Components:
Types of Risks:
Examples of Cash Flow Risks:
Broader Risk Considerations:
In summary, the risk premium in the discount rate is a composite measure that includes various types of risks, not just those directly related to cash flow volatility. This broader approach ensures a more comprehensive evaluation of the asset's risk profile.
Sources: , Jnjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjj, Thinking Like an Investor, How various professionals see the world, The School Bell Rings! It's Time for Class!
Bump
Anyone have more specific experience than the generic AI bot?
Office = 10% discount rate
value add other = 8%
stabilized new purpose build rental: 6-7%
AAA market premium: less 1-2%
Aside from appraisers and hardo institutional shops that deal with pension fund money, nobody thinks that hard about discount rates in real estate (if they consider them at all - just slap a cap on it bro!). And frankly appraisers don't really think about them that hard lol
The language you're describing just seems to be a general all-encompassing "needs to account for risks" - all the risks you're saying you see normally described are risks because the ultimate result of them occurring is an impact on the asset's performance/cash flow.
If you're really getting granular on discount rates, then yes, you would consider all your typical risks - financial risk, business risk, liquidity risk, political/geographic risk, etc. etc.
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