Unconventional Conventional Wisdom: Rethinking Development Appraisal

There are a number of convetional techniques that are used to appraise real estate development opportunities. Probably the major advance in development appraisal over the last two decades has been the widespread adoption in the academic literature of (discounted) cash flow techniques instead of the traditional residual approach. All development-focussed textbooks outline and illustrate these conventional techniques reinforcing their use in practice and in development appraisal software. However, conventional approaches to the application of discounted cash flow techniques are not applied in a manner that is consistent with mainstream capital budgeting theory (see Geltner, Eichholtz, Clayton and Miller, 2007; Brown and Matysiak, 1999). It is revealing that the real estate academics that have identified this issue specialise in real estate finance and investment rather than real estate development. In this paper, we discuss the flaws in conventional DC F applications to development appraisal and suggest an alternative that is more consistent with mainstream capital budgeting theory. We also consider some of the challenges that arise in the practical application of such an approach. References Brown, G and Matysiak, G. (1999) Real Estate Investment: A Capital Market Approach, Prentice Hall, London. Geltner, D. Eichholtz, P. Clayton, J and Miller, N. (2007) Commercial Real Estate Analysis and Investments, Thomson South-Western.