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Improving African Real Estate Pre-Development Appraisals through Risk and Uncertainty Analysis

Author

Listed:
  • Olusegun Adebayo Ogunba
  • Timothy Oluwafemi AYODELE
  • Uduakobong Enamidem Akpan

Abstract

Property investment appraisal by way of deterministic pre-development viability predictions appears to be the norm in Africa. However, economic volatility has rubbished deterministic viability predictions and has resulted in serious financial losses to appraisers’ clients. African appraisers now face increased incidence of risk (predictable future negative changes in development variables) and uncertainty (inability to predict variables). The paper seeks to enhance African development appraisals in volatility periods, by complementing traditional deterministic NPVs and IRRs with risk and uncertainty analysis. The benefits of such a paradigm shift were illustrated with a case study: A seven-story commercial property being developed in Victoria Island, Lagos, Nigeria, for which the deterministic pre-development appraisal estimates were obtained. A risk analysis and options analysis were conducted using Hillier’s (1965) certainty equivalent risk analysis and Samuelson-Mckean’s (1965) options analysis respectively. The risk analyses showed that the positive expected developer’s profit (NPV), offered the client very risky advice. The options analysis evaluated the option of scaling and offered the client advice to stop construction at five floors. The study advocated the urgent adoption of risk and uncertainty analyses in Africa to enhance the accuracy, reliability, and flexibility of pre- development appraisals in periods of economic volatility.

Suggested Citation

  • Olusegun Adebayo Ogunba & Timothy Oluwafemi AYODELE & Uduakobong Enamidem Akpan, 2024. "Improving African Real Estate Pre-Development Appraisals through Risk and Uncertainty Analysis," AfRES 2024-050, African Real Estate Society (AfRES).
    • Handle: RePEc:afr:wpaper:2024-050
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    References listed on IDEAS

    as
    1. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119-119.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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