Real Estate - Income Approach - another no sense

CFA Level II Alternative Investments
#1

My opinion is that:

Capitalization rate and DCF in real estate make no sense…

  1. They are very very similar and the term Cash Flow is confusing

  2. They make no sense because the NOI does not consider:

_ taxes

_ capital expenditure

Let’s take the example of Italy. Taxes for an owner of an house are high and much higher if you get an income from that property. Taking an extreme example, if the tax rate would be 100% … what would be worth the property for an investor?

Furthermore also the CAPEX should be taken in consideration, after 50 years a property may require a major restructuring …

Why not to use Value = (NOI - taxes - CAPEX) / (WACC - g) ??

Or discount all the CF at the WACC?

#2

PS Maybe in estimating the CAP RATE from comparables taxes would be already taken into consideration but not the CAPEX…