The Independent Review of Real Estate Investment Valuations’ by Peter J. Pereira Gray, published in December 2021, made an interesting recommendation: not only was the real estate valuation community encouraged to adopt a discounted cash flow (DCF) approach (recommendation 8), but also to discuss the risk premium with clients: “Cash flows should account for matters such as the prospective growth rate (net of depreciation), the risk premium, and the discount rate for the derived cash flows; the discussion with the client should be all the richer for this.”

This would be a fascinating change – an explicit discussion with clients about the derivation of risk premiums rather than having the risk premium wrapped up in an all-risks yield.

At RES we have these discussions when measuring sector risk premiums in our Asset Allocation Model. To find out more please get in touch or see our website.