In the financial industry, cash flow is the excess earned by a company that can be used either for dividend payments or to cover internal investment expenditure.1
In the property sector, cash flow is the detailed presentation by period of incoming and outgoing payments associated with a property investment. The cash flow projection for a property is prepared for the purpose of property valuation, property investment or financing, and as a business plan for current asset management and for project development. Accordingly, the financial position and profitability of a property or a portfolio can be derived from the cash flow.2
There are various forms of differentiation depending on the payment size analysed.
In the property industry these include the following forms of differentiation:
Direct (operating) cash flow:
The direct cash flow takes into account the initial investment costs at t0, i.e. the date the property is acquired. These include the acquisition price of the property and the additional acquisition costs (e.g. brokerage, notary, entry in land register). Income in a period (tn) after the date of acquisition (t0) is predominantly generated from rental or leasing. Furthermore, ongoing costs are incurred within each period tn during the holding phase of a property. These include, for example, operating costs, maintenance costs, administrative expenses and period-specific expenses, such as modernisation costs. At the end of the holding phase of the property, a positive cash flow is usually generated by the sale of the property less the associated costs to sell. The excess income for each period is calculated as the difference between the income and the expenses.3
Indirect (investment) cash flow:
The excess income derived from the direct cash flow can be used for the indirect cash flow. This includes, for example, borrowing costs, repayment or reinvestment in financial alternatives. Tax payments are also taken into account in the indirect cash flow.4
Both the direct and indirect cash flow are necessary to calculate internationally established return figures in the dynamic calculation of development costs.5
Key figures such as the net present value of an investment or the internal rate of return can be derived from this. In addition, the direct cash flow is the basis for calculating market value using the discounted cash flow (DCF) method.
The cash flow of a property from its acquisition phase to its sale phase can simplistically be presented as follows.
Figure: Property cash flow
Source: Own research based on Hoerr, Pamela (2011): Real Estate Asset Management. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 645.