Sell or hold a development: compare the whole cash flow

Put both strategies on the same starting line

Define the decision first. Before land acquisition, the alternatives should include land and the costs required to deliver each scheme. At completion, an owner deciding whether to accept a sale offer needs a forward comparison from that date. Historic construction expenditure does not change between those forward options, although it still matters when reporting the overall project result.

Our example starts before acquisition. Both strategies use the same land and construction payments so the effect of the income strategy is easy to inspect. A real comparison may require different design, fit-out, operating systems and ownership arrangements. Keep those differences in the relevant option rather than forcing every assumption to match.

State the currency, time basis and whether cash flows are before or after financing and tax. The following comparison uses nominal annual project cash flows before both. It does not assume a loan, refinancing distribution or a return target for a particular investor.

Build the sale case from collections, not just prices

A sale forecast needs quantities, achievable prices and dates when cash becomes available. Separate a reservation, a signed sale and a completed collection. Then deduct selling expenditure on its own basis. If prices are already net of commission or incentives, another blanket percentage would deduct the same cost twice.

For this invented project, acquisition costs 4 million at time zero. Construction costs 6 million at the end of Year 1 and 2 million at the end of Year 2. The completed asset sells for 16 million at the end of Year 2. A chosen selling cost of 2% is 0.32 million, leaving net sale receipts of 15.68 million. There are no earlier buyer collections.

Total project costs are 12 million and the undiscounted sale surplus is 3.68 million. Year 2 net cash is 13.68 million because the last 2 million of construction is paid at the same year-end as the sale. This timing convention is deliberately simple; an actual scheme may need monthly collections and payments.

Let the retained asset pass through lease-up

In the hold case, completion at the end of Year 2 produces no sale receipt. The owner starts receiving rent in Year 3. The example uses collected rent after vacancy and incentives, so it does not subtract either again. Owner-paid operating costs cover recurring property expenditure, while a separate capital-spending line represents additional cash leaving the asset.

Collected rent rises from 1.40 million in Year 3 to 1.90 million in Year 4 and 2.00 million in Year 5. Operating costs are 0.50, 0.55 and 0.60 million respectively. Capital spending is 0.10 million each year. Cash before financing and tax is therefore 0.80, 1.25 and 1.30 million. These amounts are chosen for the example, not rental benchmarks.

For an actual asset, explain the path to those collections through occupancy, rent, concessions, payment terms and lease events. Identify costs the owner retains during vacancy and expenditure needed to make space lettable. Stabilisation should describe a supportable operating position, not merely the date on which the model begins using a higher income.

Give the hold case a transparent end point

RICS describes an explicit DCF as forecast income over a period combined with an exit value. That exit can be estimated using future rental value and a suitable capitalisation basis. The assumptions need to fit the asset and the purpose of the exercise.

Assume the owner sells at the end of Year 5, after receiving that year's operating cash. Expected Year 6 collected rent is 2.10 million and operating costs are 0.63 million, giving forward net operating income of 1.47 million. Capitalising it at an assumed 7% produces a gross exit value of 21 million. Selling costs of 2% reduce the receipt to 20.58 million.

The 7% yield is applied to income before capital spending, so evidence used to support that yield must have a compatible income definition. Year 6 is used only to estimate the exit value. Its rent is not also received by the seller, and there is no additional property value after the disposal. Year 5 cash is 1.30 million plus 20.58 million, or 21.88 million.

Sources: RICS: Discounted cash flow valuations, section 4: exit value

Compare present values as well as total cash

Discount both schedules to time zero using 10% annually for this controlled example. Each year-end cash flow is divided by 1.10 raised to that year number; the time-zero cost is not discounted. Using one rate isolates the cash-flow difference. It does not claim the two strategies have identical risk or establish an appropriate market discount rate.

The sale case has a net present value of 1.8512 million. The hold case has a net present value of 3.9331 million under the stated assumptions. The hold case also leaves capital exposed for longer. Its undiscounted surplus of 11.93 million cannot fairly be set beside the sale surplus of 3.68 million without that timing and exit context.

Test the assumption doing most of the work

About 85% of the present value of the hold case's positive net cash flows comes from the net disposal receipt. That concentration deserves attention before treating the higher NPV as a robust conclusion. Keep the income forecast unchanged and increase only the exit yield from 7% to 8.5%. Gross exit value falls to 17.2941 million and the net receipt falls to 16.9482 million.

The hold NPV then falls to 1.6781 million, below the sale case's 1.8512 million. The comparison has reversed without a construction overrun or lower rent. This is a sensitivity result, not a forecast that yields will move or evidence that selling is generally preferable.

Then examine slower lease-up, higher owner-paid costs, additional capital works and a delayed exit. Change linked assumptions together where a coherent scenario warrants it. An asset that takes longer to lease may also incur extra incentives and carry costs; testing those separately can understate the consequences of the same event.

Bring capital and operating capacity back into the decision

A hold strategy needs an owner able to fund completion and operate through lease-up. Add a separate funding schedule to establish equity requirements, debt service and any refinance conditions. Do not add refinancing proceeds to the project-income comparison without also showing the new debt and its eventual repayment in the investor view.

In a Gulf project, test the strategy against the actual permitted use, sale and leasing evidence, owner obligations, service arrangements and transaction costs. Use the relevant local evidence rather than importing a rental yield from another asset class or assuming all receipts are freely available. Add applicable tax and currency effects on a consistent basis before an investment decision.

RICS encourages transparent modelling but does not mandate DCF for every valuation. This example is an investment comparison, not a formal market valuation. The useful conclusion is conditional: which assumptions support each option, how easily the comparison changes and whether the owner can carry the capital and operating obligations it requires.

Sources: RICS: Discounted cash flow valuation: practice information and method selection