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Lookup NU author(s): Dr Raymond Abdulai
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
An appraisal is normally conducted to determine financial viability of property development projects for several purposes. The residual valuation method is normally used to appraise such projects and the purpose of the paper is to examine its financial viability decision rules used by practitioners.The qualitative research approach was adopted based on the case study strategy of enquiry where 48 development appraisal reports from 37 Royal Institution of Chartered Surveyors registered firms in London were accessed from the internet and critically reviewed.Site–specific and area–wide development appraisals for planning purposes dominated the reports. Five financial viability decision rules were identified. A development project is financially viable if: (i) computed residual profit expressed as a percentage return is equal to or greater than a determined market benchmark risk–adjusted return; (ii) computed residual profit expressed as a percentage return is positive; (iii) calculated residual land value is greater than open market land value or benchmark land value; (iv) computed residual land value is positive; and (v) there is a surplus when appraisal cost variables including land costs plus allowance for developer’s profit are deducted from gross development value. In some reports, it was discovered some appraisal cost variables were excluded whilst others were inappropriately treated.The first and third financial viability decision rules are reasonable whilst the remaining are fraught with problems and using them can make development projects that are financially unviable to be viable. Also, excluding relevant cost variables and treating some inappropriately understate the appraisal cost component resulting in incorrect financial viability outcomes. These can lead to wrong recommendations about financial viability being proffered that negatively affect the practitioners’ clientele. The dominance of development appraisals for planning purposes shows the important role development appraisals continue to play in the English planning system.It is the first time financial viability decision rules in development appraisals have been systematically investigated in England with resultant new empirical findings and arguments.
Author(s): Abdulai RT
Publication type: Article
Publication status: Published
Journal: Journal of Financial Management of Property and Construction
Year: 2024
Pages: epub ahead of print
Online publication date: 08/08/2024
Acceptance date: 18/07/2024
Date deposited: 31/07/2024
ISSN (print): 1366-4387
ISSN (electronic): 1759-8443
Publisher: Emerald Publishing Limited
URL: https://doi.org/10.1108/JFMPC-04-2023-0014
DOI: 10.1108/JFMPC-04-2023-0014
ePrints DOI: 10.57711/a2sy-7111
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