The Application of Financial Analysis and Market Research to the Real Estate Development Process

Abstract

James A. Graaskamp developed and adapted analytical techniques to increase the reliability and accuracy of real estate feasibility analysis. He supported the use of discounted cash-flow analysis as a powerful tool to assist in the implementation of methodologies for appraisal and risk analysis. However, Graaskamp was fully aware of the need to increase the competence of real estate market research and the depth of real estate information gathering to justify the use of discounted cash-flow analysis. In this chapter, we integrate Graaskamp’s concepts of financial feasibility, appraisal and risk analysis, and real estate market research in the context of the real estate development process. We introduce an approach to real estate development feasibility analysis that matches information quality with a series of financial-analysis techniques. Our approach employs static analysis tools to make initial cost-to- value comparisons and select the most promising projects among those under consideration. Appraisal-based tools are used to demonstrate how to incorporate assumptions about the future into value estimation and provide a bridge from static to dynamic analysis. With appropriate information, discounted cash-flow analysis is shown to be the logical tool for use in analyzing solvency, minimum yield, and profit maximization. We demonstrate an effective use of discounted cash-flow analysis to address timing issues and handle the variable cash flows associated with the development process. A simple case study is provided to illustrate the application of this financial feasibility methodology to the real estate development processKeywordsReal EstateVacancy RateCapitalization RateCapital BudgetReal Estate DevelopmentThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.