Development viability appraisals: applying the residual method of valuation in a planning policy context

Due to the requirement to demonstrate financial feasibility of policy proposals and scheme-specific planning obligations, development viability and development appraisal have become core themes in the UK planning system. Whilst there is an array of variations of the residual model that can be used to undertake financial appraisals of real estate development opportunities, development appraisal models and techniques have received little attention from the academic community. Most real estate development textbooks focussing on commercial property development outline and illustrate these conventional techniques. This, in turn, underpins their dominance in pedagogy, professional practice and commercial software. A critique of development appraisal models has evolved focussing on their oversimplified representation of reality and intrinsic theoretical weaknesses. However, there has been little critical analysis of the extent to which models are being applied in the context of the UK planning system. It is therefore timely to review the theory and practice of development appraisal in its emerging role at the centre of planning negotiations. The first section of this paper describes conventional development appraisal models and this is followed by a critique and a review of textbook applications of approaches to development financial appraisal and, drawing upon the corporate finance literature, the ways in which they violate the mainstream project appraisal. There is then an examination of practice followed by a discussion of the practical problems of using conventional approaches to development valuation to planning viability studies. Finally, conclusions are drawn.