Discount rate (taux d'actualisation)

A euro received in ten years is worth less than a euro received today: one has to wait for it, and one cannot be sure of receiving it. The discount rate reflects those two ideas. The Charte de l’expertise en évaluation immobilière (the French property valuation charter) defines it as the rate that converts future flows into present value, used mainly for the discounted cash flow (DCF) method, for the valuation of complex rights (usufruit, building lease, temporary rights) and for investment analysis.

It is not the same as the capitalisation rate. In a DCF, rental growth and works are written explicitly into the cash flows; the discount rate therefore no longer needs to contain them, and it is generally higher than the capitalisation rate for the same property, since it rewards the risk on projected flows.

Where the rule comes from

Title III, chapter 8, § 8.3 of the Charte (6th edition, November 2025) presents the discount rate and points out that the choice of method for deriving it must be documented and justified according to the level of risk anticipated on the flows, the quality of the assumptions and the projection period. § 2.3.2, step 3, lists the approaches: analysis of comparable transactions (ideal but rare), risk premium added to the risk-free rate, property yield adjusted for explicit growth, weighted average cost of capital of a typical buyer. The Charte insists on consistency: if the flows are optimistic, the rate must be higher; if they are prudent, lower.

In a valuation report

I set out how the rate is built: reference risk-free rate (government bond of comparable maturity), property risk premium, premium specific to the asset (location, tenant, liquidity). I check consistency with the capitalisation rates observed in the market and with the exit yield adopted for the terminal value. The report presents a sensitivity analysis, because a change of 0.5 point in the rate materially alters the result, and points out that the rate adopted reflects the expectations of the market, not those of a particular investor, where a market value is sought.

Example

A usufruct over a let flat is to be valued for a remaining term of eight years. Expected net annual income: €9,000. With a discount rate of 5 %, the sum of the eight discounted flows is €58,200 rounded (9,000 × 6.463). With a rate of 6 %, it falls to €55,900. The report adopts 5.5 %, justified by the eight-year risk-free rate plus a premium of 2.5 points, that is €57,000 rounded, and shows both bounds.

Not to be confused with

The capitalisation rate turns a single income into a value, with growth implicit. The yield measures a return on a price including purchase costs. The exit yield is the capitalisation rate applied to the final year’s income to calculate the resale value in a DCF.