Valuation of Investment Properties in Sub-Sharan Africa, Time for the DCF Approach?

Objective: Without making rules, the paper makes a strong case for the use of Discounted Cash Flow (DCF) techniques in valuation practice in the sub-region. We discussed the current investment property market in Ghana and appraised the valuation methods currently in use by professionals in estimating the price/value and worth of such investments. The traditional capitalization method was critically analyzed and found wanting given, the current state of the property market and technology. The DCF method is explicit, elaborate and theoretically sound. We argue that the time has come for professionals in the sub-region to appreciate the usefulness of DCF and use it when possible and practical. Results: Using secondary data and scenario analysis, we established that for the valuer to meet international standards and position his/her self as a modern appraiser, it is eminent that DCF becomes one of the preferred techniques for valuing income producing assets. With the development of computer software and availability of complex calculators, there is rarely an excuse for reliance on the overall capitalization rate with its several unsupported and often inexplicable components. We established that the traditional capitalization approach increases the uncertainty with the valuation opinion and DCF approach when thoughtfully applied, can report and even reduce the uncertainty in valuation to an extent. Net Present Value (NPV) and Internal Rate of Return (IRR) need to be used and encouraged, specifically in investment property valuation in Ghana and the sub-region in general. Conclusions and Significance: This study shows the practically of the Discounted Cash Flow approaches even in our very unstable and young property markets. In particular the study makes a case for the DCF and will be very useful to professionals in deciding instances when it is very expedient to apply it instead of the capitalization approach. We urge sister institutions in the sub-region to kick-start the process of establishing DCF standards for their members and organize Continues Professional Development (CPD) sessions to educate them on the methodology and software availability.