Comparison of the DCF and German income approach

Abstract

Purpose The majority of institutional investors in Germany use the German income approach (GIA) while investors abroad prefer the discounted cash flow (DCF). The debate around the two methods has been largely theoretical, lacking large-scale empirical evidence. The paper aims to discuss this issue. Design/methodology/approach The analysis consisted of a performance comparison and hedonic regressions based on ordinary least squares. Fitted GIA and DCF values were obtained for all observations in the data set in order to eliminate distortions caused by different property characteristics in the two valuation sub-samples. Findings The research hypothesis, stating that the two methods result in statistically identical estimations of value, was rejected. The performance analysis showed that GIA valuations displayed smoother total return performance due to less volatile capital growth in comparison to DCF valuations. Comparing the fitted values obtained from the regressions showed that GIA valuations were on average lower than their DCF counterparts. The difference was small and both methods resulted in very similar fitted values. The difference between fitted values was not constant over time and decreased toward the end of the analysis period. Practical implications The research adds empirical arguments to the ongoing debate between GIA and DCF valuations. So far empirical proof has been scarce or one-sided. Originality/value This analysis is the first large-scale empirical comparison of the DCF and the GIA within the same market.

Application of income capitalization approach for emerging rental income cash flow in Enugu metropolis property market

“…The study revealed that Swedish valuers utilized discounted cash flow method as their main method of commercial property valuation, but their usage of direct market comparison method has increased. Reinert (2019) analyzed the debate over the German income approach (GIA) and DCF models. The research included a performance comparison as well as hedonic regression using ordinary least squares.…”

“…Reinert (2019) analyzed the debate over the German income approach (GIA) and DCF models. The research included a performance comparison as well as hedonic regression using ordinary least squares.…”

Firm Value Variation Illustrated by Income and Real Option Analysis

“…The simplified methods although being better, are prone to more valuer bias as the valuer must decide what information to exclude if the simplified version of the valuation is chosen. Valuation methods can also vary slightly from country to country and thus need to be followed when a valuation is taking place in another county (Reinert, 2019). The norms of a country can have further effects on the way in which the valuer makes decisions and the rules of thumb they use (Bellman & Öhman, 2016).…”

“…This method is a cash-based financial model where the various prospective assumptions and specific timing of contractual events are explicit inputs. The method sums up all the future net cash flows associated with the subject property (Reinert, 2019). Those future cash flows are discounted into present value using the appropriate discount rate.…”

“…The article presents valuation models that can be used to derive the value of vary real properties. The valuation of real properties plays a major role in the real estate asset management for example when the real property is being sold (Reinert, 2019). The traditional models were studied, and it was found that the income capitalization method is the most popularly used formula when appraising the commercial spaces as they generate income-the potential income that the real property will generate in the future is estimated income.…”