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Resident-funded retirement village valuations : complications with the application of the DCF

McAuliffe, Brett (2010) Resident-funded retirement village valuations : complications with the application of the DCF. Australian and New Zealand Property Journal, 2(8), pp. 485-493.

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Abstract

Retirement village assets are different from traditional residential assets due to their operation in accordance with statutory legislation. Designed for independent living, retirement villages provide either detached or semi-detached residential dwellings with car parking and small private yards with community facilities providing a shared congregational area for village activities and socialising.

In essence, the village operator provides the land and buildings to the residents who pay an amount on entry for the right of occupation. On departure from the units an agreed proportion of either the original purchase price or the sale price is paid to the outgoing resident. As ongoing levies are typically offset by ongoing operational expenses the market value of the operator's interest in the retirement village is therefore predominantly based upon the estimated future income from deferred management fees and capital gain upon roll-over receivable by the operator in accordance with the respective residency agreements. Given the lumpiness of these payments, there is general acceptance that the most appropriate approach to valuation is through discounted cash flow (DCF) analysis.

There is however inconsistency between valuers across Australia in how they undertake their DCF analysis, leading to differences in reported values and subsequent confusion among users of valuation services. To give guidance to valuers and enhance confidence from users of valuation services this paper investigates the five major elements of DCF methodology, namely cash flows, escalation factors, holding period, terminal value and discount rate.

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ID Code: 41796
Item Type: Journal Article
Additional URLs:
Keywords: Valuation, Retirement Village, Discounted Cash Flow (DCF), Independent Living Unit (ILU), Deferred Management Fee (DFM)
ISSN: 1834-5662
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > COMMERCIAL SERVICES (150400) > Real Estate and Valuation Services (150403)
Divisions: Past > QUT Faculties & Divisions > Faculty of Built Environment and Engineering
Past > Schools > School of Urban Development
Copyright Owner: Copyright 2010 Australian Property Institute & Property Institute of New Zealand
Deposited On: 26 May 2011 07:47
Last Modified: 10 Jun 2011 05:33

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