Viability Appraisal Research Articles

Practical Demonstrations of the Use of Select Property Investment Viability Appraisal Models: Net Present Value, Profitability Index and Net Terminal Value

Practical Demonstrations of the Use of Select Property Investment Viability Appraisal Models: Net Present Value, Profitability Index and Net Terminal Value

Risk management processes used in determining project feasibility in the property development process early stages by Australia/New Zealand property developers

PurposeThe purpose is to examine the risk management processes and methods used in determining project feasibility in the early stages of the property development process by Australia/New Zealand property developers, including Monte Carlo simulation, Bayesian models and real option theory embedded in long-term property development and investment decision-making as instruments for providing flexibility and managing risk, uncertainty and change.Design/methodology/approachA questionnaire survey of 225 Australian and New Zealand trader developers, development managers, investors, valuers, fund managers and government/charities/other relating to Australia/New Zealand property development companies' decision-making processes in the early stages of the development process prior to site acquisition or project commencement – the methods used and confidence in their organisations' ability to both identify and manage the risks involved.FindingsFew of the organisations sampled use sophisticated methods; those organisations that are more likely to use such methods for conducting risk analysis include development organisations that undertake large projects, use more risk analysis methods and have more layers in their project approval process. Decision-makers have a high level of confidence in their organisation's ability to both identify and manage the risks involved, although this is not mirrored in their actual risk management processes. Although the majority of property developers have a risk management plan, less than half have implemented it, and a third need improvement.Practical implicationsProperty development organisations should incorporate more modern and sophisticated models of risk analysis to determine the uncertainty of, and risk in, a change of input variables in their financial viability appraisals. Practical application includes using such multiple techniques as what-if scenarios and probability analysis into feasibility processes and utilise these specific techniques in the pre-acquisition stages of the property development process and, specifically, in the site acquisition process to support decision-making, including a live risk register and catalogue of risks, including identification of and plans for mitigation of project risks, as a form of risk management.Originality/valueFirst study to examine the extent of the decision-making methods used by property developers in the pre-acquisition stage of the development process.

Viability of residential properties in Ota, Ogun state Nigeria using modified break-even valuation technique

Viability appraisal as a veritable tool to guide investors of proposed projects could either be carried out through any of deterministic or probabilistic approach. Both approaches with varied types of techniques have been criticized but still have their relevance in determining the viability of any given project based on required objectives. A review of earlier works on viability appraisal was carried out including that of the Nigerian experience. Observation and required measurements in the property market of the study area, Atan-Ota at Sokoto Road to be precise that lies and situates between latitude 60 40‘29.5716” and longitude 30 11‘52.9908”. Amongst all viability techniques, the break-even viability appraisal technique was adopted for this study based on cost maximization so as to enable investors take decision on the barest minimum production level. The break-even point technique though modified using the Net Present Value (NPV) was utilized in the study area on three residential property types readily purchased. They are the 2 bedroom flat, 3 bedroom flat and 4 bedroom bungalow. It was revealed that the 3 bedroom flat is most viable as it will require the sales of 13.03 units to break-even while 2 bedroom flats will require the sale of 14.69 units to break even. The 4 bedroom bungalow will however require the sales of 17.17 units to break-even. The study thereby recommends that investors focus more on the 3 bedroom housing units in the study area for easiest attainment of the break-even point.

Employability skills of real estate graduates in Nigeria: a skill gap analysis

PurposeThe global shift in the traditional skills required of real estate graduates has led to an increased demand for employees who have the required skills and competencies. The purpose of this study is to evaluate employment considerations of real estate firms and analyse employers’ skill expectations and the observed skills possessed by the graduate employees. This study also analysed the self-assessed soft skill levels of the graduate employees, thereby establishing the skill gap.Design/methodology/approachData were sought from real estate employers in the two dominant real estate markets of Nigeria: Lagos and Abuja, and real estate graduate employees who have had a minimum of six months working experience in real estate firms. Data collected were analysed using statistical techniques such as frequency, percentages, mean, correlation, multivariate analysis of variance, paired-samples t-test and independent samples t-test.FindingsThe findings of this study revealed that employers’ soft skills expectations were high with skills such as responsibility, administrative, listening, communication, business negotiation and work ethics. Based on employers' observed skills, there were significant skill gaps with respect to soft skills such as responsibility, business negotiation, logical thinking, marketing and dispute resolution. An analysis of the core skills reveals employers' preference for technical competencies in valuation, agency, property management, marketing, report writing and landlord and tenant laws. However, graduate employees possessed significant skill gaps with regards to technical skills such as valuation, property investment analysis, feasibility and viability appraisal, market research methods and facility management.Practical implicationsAn understanding of the skill gaps will provide useful feedback to professional bodies, regulatory boards, institutions of higher learning, faculty members and other stakeholders regarding deficient skill areas, especially for curriculum review, development and training in the real estate sector.Originality/valueThere is a paucity of information about employers' skill preferences and the skill gaps in the real estate sector.

Risks in feasibility and viability appraisal process for property development and the investment market in Nigeria

PurposeThe feasibility and viability appraisal technique is becoming increasingly crucial in the planning systems, theory, applications and outputs for property development and project investments. This paper aims to account for the findings of the practices associated with risk in the feasibility and viability appraisal process. Also, it examines the need for a practical framework for conducting a feasibility and viability appraisal, which can be employed by estate surveyors and valuers in NigeriaDesign/methodology/approachThis study adopted purposive sampling techniques to administer 240 sets of questionnaires, out of which 210 sets were well-thought-out to be useable for the analysis after data screening. Statistical package for social sciences (SPSS), structural equation modelling (SEM) and analysis of movement structures (AMOS) were the main analytical tools used to carry out the reliability test, normality test, exploratory factor analysis, confirmatory factor analysis, measurement and structural model.FindingsThe analysis results indicated that the P-values of the various forms of concepts of risks in feasibility and viability appraisal process (preparation) for property development and the investment market was statistically significant: technological factor - 0.000; political factor- 0.000 and economic factor- 0.000. However, a non-significant effect was found with socio-environmental factors on the preparation of housing development appraisal with P-value 0.155, and that risk management is neither holistically implemented in the feasibility and viability appraisal process nor extensively taken into cognisance.Research limitations/implicationsThis paper reports the results of the practices among estate surveyors and valuers in regarding the risk associated in the preparation stages of the feasibility and viability appraisal processPractical implicationsThere are limited studies that suggest risk management factors in the appraisal reports for property development. Although previous studies have identified the risk factors, there is a lack of emphasis on management, which entails identification, assessment, monitoring and control. This study, therefore, recommends the incorporation of risk management into the feasibility and viability appraisal process implemented by estate surveyors and valuers. It is envisaged that the process will protect investors from the potential risk factors associated with investments in property development.Originality/valueThe study highlighted the need for practical or empirical research to be used to assess the significant risk factors that are needed to be reflected in the preparation stages of the feasibility and viability appraisal conduct of estate surveyors and valuers in Abuja, Nigeria.

Planning, property and profit: the use of financial viability modelling in urban property development

By drawing upon McAuslan’s analysis of the ideologies underpinning land use planning law, this paper examines financial viability modelling and legal processes in the context of local authority decision-making related to property development on large urban sites. A local authority can make a site ready for development by using ‘compulsory purchase’ powers to acquire land, by transferring that land to a property developer and by granting that developer planning permission to commence construction. Analysis of case law, academic criticism of viability modelling practices and a recent property development project highlight issues arising when local authority planning departments use viability appraisals to legitimise decisions purportedly taken in the public interest. An in-depth examination of viability modelling within local authority estates departments then opens a new site for critical inquiry of local authority land acquisition practices. The paper’s conclusions reflect upon how financial viability modelling shapes decision-making, despite questions surrounding both modelling techniques and the outputs that viability appraisals produce.

Risk in Property Appraisal Report: A Perception of Estate Surveyors and Valuer in Nigeria

Risk analyses are necessary for many forms of investment; therefore, it is vital for Estate Surveyors and Valuers to link and account for these risks explicitly to clients by incorporating more detailed risk analysis techniques to the present appraisal techniques used in order to guard their clients against the effects of instability in the expected outcome of their development. Data collected amongst 90 estate firms in phase III Abuja revealed that only few Estate Surveyors and Valuers firms have carried out the feasibility and viability appraisal in Abuja metropolis in the past 20 years. Analyses of data collected were made using frequency counts, percentage tables and Mean Item Scores, based on 5 points Likert scale with spearman ranking in descending order. From the study, the result shows the significant risk provided for are political, economic, and legal risk, while sensitivity analysis was the most preferred risk analysis technique used by Estate Surveyors and Valuer, the research work also revealed that the more complex the method of analysis, the lower the usage. Monte Carlos technique is recommended to be a suitable method that Estate Surveyors and Valuers can use to report risk explicitly to clients.

What is a ‘competitive return’ to a landowner? Parkhurst Road and the new UK planning policy environment

ABSTRACTIn the UK, contributions from landowners towards the provision of affordable housing are obtained through a process of negotiation that centres on the financial viability of each development proposal. National Planning Practice Guidance, first published in 2014 and recently revised in 2018 and 2019, provides the Government framework for these negotiations and sets parameters for the financial viability appraisals. Failure to achieve levels of affordable housing set out in local plans has been attributed to ‘gaming’ strategies employed by landowners and developers within viability negotiations. This paper examines how planning guidance has influenced financial viability appraisals. A key issue within these appraisals is the determination of a suitable return to the landowner, known as Benchmark Land Value. Using a case study approach to investigate two planning appeals and a subsequent High Court decision concerning a residential development site in London, this paper demonstrates how planning policy and practice guidance on viability can lead to reduced planning obligations being delivered. It identifies the technical concerns that need to be addressed to enable appraisals to determine land prices that are fair to landowners, whilst delivering policy-compliant levels of affordable housing, and discusses whether the revised National Planning Guidance has made those changes.

Parameter determination for a numerical approach to undeveloped shale gas production estimation: The UK Bowland shale region application

The estimation of production potential provides the foundation for commercial viability appraisal of natural resources. Due to uncertainty around production assessment approaches in the unconventional petroleum production field, an appropriate production estimation methodology which address the requisite uncertainty at the planning stage is required to guide energy policy and planning. This study proposes applying the numerical unconventional production estimation method which relies on geological parameters, (pressure, porosity, permeability, compressibility, viscosity and the formation volume factor) as well as the rock extractive index (a measure of technical efficiency). This paper develops a model that estimates the appropriate values for four of these parameters based on a depth correlation matrix while a stochastic process guides two based on known data range. The developed model is integrated with a numerical model to estimate gas production potential. The developed framework is eventually applied to undeveloped shale gas wells located in the Bowland shale, central Britain. The results account for below ground uncertainty and heterogeneity of wells. A sensitivity analysis is applied to consider the relative impacts of individual parameters on production potential. The estimated daily initial gas production rate ranges from 15,000scf to 319,000scf while estimated recovery over 12 years is approximately 1.1bscf in the reference case for wells analyzed.

The calculative turn in land value capture: Lessons from the English planning system

For over three decades, negotiated planning obligations have been the primary form of land value capture in England. Diffusing and evolving over the last decade, a significant policy innovation has been the use of financial calculations to estimate the extent to which policies on planning obligations for actual, proposed development projects and in plan making affect the financial viability of development. This paper assesses the extent to which the use of financial appraisals has provided a robust, just and practical procedure to support land value capture. It is concluded that development viability appraisals are saturated with intrinsic uncertainty and that land value capture that is based on such calculations is, to some extent, capricious. In addition, clear incentives for developers and land owners to bias viability calculations, the economic dependence of many viability consultants on developers and land owners, a lack of transparency, contested or ambiguous guidance and the opportunities created by input uncertainty for bias are further failings. It is argued that how viability calculations are applied has been, is being and will continue to be shaped by power relations.

Assessment of Viability Appraisal Practice by Estate Surveyors and Valuers in Lagos Metropolis, Nigeria

A capital investment appraisal is a means of ensuring value for money. It is not meant to provide an indication of profit or loss, but rather a comparison of costs in relation to those areas where there is an opportunity or an inclination for change. The decision to invest in a project is based on the expectation of future returns since a rational investor does not expect to incur loss on his capital outlay. This decision making is usually hinged on advice obtained during pre-investment appraisal. This study is aimed at evaluating the mode of practicing investment viability appraisal by Estate Surveyors and Valuers in Lagos metropolis. The data for the study was obtained by randomly administering structured questionnaires on eighty-seven (87) practicing Estate Surveyors and Valuers in the study area and the findings were analyzed through descriptive statistical tools such as the Likert scale to present the result. Findings revealed that the payback period is the most adopted appraisal technique in practice as evidenced with a mean score of 3.57. The objective (s) of the investor is also the most significant factor being considered while selecting appraisal technique with a mean score of 3.83 while the problems of actual return varying from the expected return and also difficulty in the repayment of loans always result when a wrong viability technique is employed. The success of any viability study goes beyond knowing the objective (s) of the investor; therefore, it was recommended that appraisers should ensure that they are equipped with adequate knowledge required for the execution of feasibility and on viability studies because knowing the right viability criteria for a particular objective will help in advising an investor on a course of action that will best achieve the developer’s objective.

Financial viability appraisals for site-specific planning decisions in England

In England, appraisals of the financial viability of development schemes have become an integral part of planning policy-making, initially in determining the amount of planning obligations that might be obtained via legal agreements (known as Section 106 agreements) and latterly as a basis for establishing charging schedules for the Community Infrastructure Levy. Local planning authorities set these policies on an area-wide basis but ultimately development proposals require consent on a site-by-site basis. It is at this site-specific level that issues of viability are hotly contested. This paper examines case documents, proofs of evidence and decisions from a sample of planning disputes in order to address two research issues within development viability; the veracity and extent of the knowledge base underpinning development appraisal modelling and the distribution of the development gain between the developer, landowner and community. The paper finds that development viability appraisal is being practiced within a poorly specified and misunderstood modelling framework that compromises the equitable distribution of development land value. It also finds that the use of either market value or price paid as a basis for determining the allocation of development gain to landowners within the modelling framework allows them to maximise their return at the expense of the community by introducing an element of circularity into viability appraisal.

Governing calculative practices: An investigation of development viability modelling in the English planning system

Over the last decade the English planning system has placed greater emphasis on the financial viability of development. ‘Calculative’ practices have been used to quantify and capture land value uplifts. Development viability appraisal (DVA) has become a key part of the evidence base used in planning decision-making and informs both ‘site-specific’ negotiations about the level of land value capture for individual schemes and ‘area-wide’ planning policy formation. This paper investigates how implementation of DVA is governed in planning policy formation. It is argued that the increased use of DVA raises important questions about how planning decisions are made and operationalised, not least because DVA is often poorly understood by some key stakeholders. The paper uses the concept of governance to thematically analyse semi-structured interviews conducted with the producers of DVAs and considers key procedural issues including (in)consistencies in appraisal practices, levels of stakeholder consultation and the potential for client and producer bias. Whilst stakeholder consultation is shown to be integral to the appraisal process in order to improve the quality of the appraisals and to legitimise the outputs, participation is restricted to industry experts and excludes some interest groups, including local communities. It is concluded that, largely because of its recent adoption and knowledge asymmetries between local planning authorities and appraisers, DVA is a weakly governed process characterised by emerging and contested guidance and is therefore ‘up for grabs’.

Effect of vacancy on shopping centres'investment returns in Akure, Nigeria

The paper examined the effect of vacancy rate on the rental returns of shopping centres in six major retail areas in Akure. Data on rental values and vacancy rates in 35 shopping centres were collected from 17 estate surveying firms in Akure. The shopping centres had a total number of 1,352 rentable spaces with 1,183 occupied. The data was analysed using Descriptive statistics such as frequency distribution tables and graph, one sample t - statistics and Simple Linear Regression Analysis. The result showed that vacancy in shopping centres are on the increase especially in Oke ijebu axis of Akure thereby causing a decline in the expected returns from the centres. The result further showed that as vacancy rate in shopping centres increases the rent per meter square reduces as owners tends to reduce rent to retain tenants. There is need for shopping centre developers to employ the services of the Estate Surveyors and Valuers to carry out feasibility and viability appraisal of their projects before embarking on them. This gesture will check over supply of centres. Keywords : Investment, Rental Returns, Shopping centre, Vacancy Rate

The practice of investment viability appraisal in Akure, Nigeria

This paper examines the role played by valuers in choosing the right viability appraisal technique for an investment appraisal. Structured questionnaire was administered on Twenty one (21) registered and practicing Estate Surveying and Valuation firms in Akure out of which fourteen (14) were retrieved and found good for analysis. The data obtained were analyzed using descriptive statistical tools such as frequency tables and weighted mean score 3 and 4-point likert formats. The result of the analysis revealed that Valuers mostly make use of Payback Period, NPV and IRR, which are deterministic in nature. This is as a result of the valuers basing their appraisals mostly on economic and financial criteria only without fully analyzing the various factors such as the prevailing inflation rate in the economy and the level of risk tolerance of their client. The outcome of a good investment appraisal forms the basis upon which any investment decision is based. A good investment is an offset of a good viability appraisal, and the valuers’ role is to give such advice that will maximize the benefit’s objective of the investor. Key Words: Investment, Practice, Risk Tolerance, Valuer, Appraisal Technique, Viability Criteria

The Roles of Construction Professionals in the Nigeria’s Construction Industry

The study traced the history of construction industry, surveyed its development at the present time and described the intensity of competition and roles of each professional among the existing professionals in the Nigeria’s construction industry. Data for the study were collected through well-structured questionnaire directed to construction professionals in the private and public sectors. Data collected were analyzed using frequency distribution table and relative significance index. It revealed that the roles of the Architect are to produce detailed working drawings and specifications (93% significance). The roles of the Builders are to ensure the adequate preparation of project health and safety (94% significance), preparation of construction methodology (93%), preparation of construction programme (90%), and preparation of project quality and management (86%). The Estate surveyors and Valuers are to prepare the valuation of construction works (91% significance), preparation of feasibility and viability appraisal of construction projects (81%), and Construction project management (70%). The Engineer on the other hand is to calculate the load and stresses that the structure can safely withstand (99% significance). The Land Surveyor performs building location survey (96% significance), Provides site plan (73%), Foundation location (69%), and Prepare construction layout (67%). Furthermore, the Town planner’s roles are to prepare Road utility design survey (95% significance), Design layout and draft design statement (94%), and Protect environment and architectural heritage (89%). The roles of the Quantity surveyor are to prepare bill of quantities (100% significance), Estimate cost relating to construction materials, time and labour and cost advise (94%), Variation of work in progress and materials on site for interim payment (87%), The study recommended that there should be strict regulations and implementation of laws by the body of each profession guiding against function overlap among the professionals in the construction industry.

Development appraisal in practice: some evidence from the planning system

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 English planning system. The objective of this paper is to evaluate the application of development appraisal in practice. The paper reviews the literature and the models available to assess the viability of development and analyses a sample 19 development viability appraisals to identify practice. The paper concludes that the practice of development appraisal deviates significantly from the tenets of capital budgeting theory. In particular, in addition to a propensity to oversimplify the timing of income and expenditure, the way in which debt, developer’s return and value and cost change are handled in practice illustrates a major gap between mainstream capital budgeting theory and development appraisal in practice.

Fit for Planning? An Evaluation of the Application of Development Viability Appraisal Models in the UK Planning System

In the context of its increasing use in policy formulation regarding planning obligations, we discuss a number of problematic issues in the application of development viability appraisal modelling in the UK planning system. The increased use of planning obligations to provide affordable housing and to mitigate the effects of negative externalities generated by new development is discussed. The methodology of development viability appraisal modelling is also outlined. Three types of problem are identified. First, there is a set of issues related to intrinsic model and input uncertainty that are problematic in the application of development viability modelling whatever the context. Second, there are problems that are specific to modelling for estimating or justifying planning obligations. In particular, a crucial input that remains contested and uncertain is threshold land value. Clear guidance can resolve this issue. Finally, and more fundamentally, due to spatial and temporal variation in the capacity of development sites to generate financial surpluses for planning obligations, policies that set rules or fix targets on planning obligations without regard to prevailing site and/or market conditions can reduce the supply of development and/or be prone to rapid obsolescence.

Precisely wrong or roughly right? An evaluation of development viability appraisal modelling

PurposeThe purpose of this paper is to investigate the effect of choices of model structure and scale in development viability appraisal. The paper addresses two questions concerning the application of development appraisal techniques to viability modelling within the UK planning system. The first relates to the extent to which, given intrinsic input uncertainty, the choice of model structure significantly affects model outputs. The second concerns the extent to which, given intrinsic input uncertainty, the level of model complexity significantly affects model outputs.Design/methodology/approachMonte Carlo simulation procedures are applied to a hypothetical development scheme in order to measure the effects of model aggregation and structure on model output variance.FindingsIt is concluded that, given the particular scheme modelled and unavoidably subjective assumptions of input variance, that simple and simplistic models may produce similar outputs to more robust and disaggregated models. Evidence is found of equifinality in the outputs of a simple, aggregated model of development viability relative to more complex, disaggregated models.Originality/valueDevelopment viability appraisal has become increasingly important in the planning system. Consequently, the theory, application and outputs from development appraisal are under intense scrutiny from a wide range of users. However, there has been very little published evaluation of viability models. This paper contributes to the limited literature in this area.

The Gain from the Planning–Gain Supplement: A Consideration of the Proposal for a New Tax to Boost Housing Supply in the UK

ABSTRACT This paper reviews the proposal for a new tax on the ‘windfall gains’ arising from the granting of planning permission for residential development in the UK. The theoretical foundations in the theory of economic rent are discussed and the practical problems of applying such a tax, in the form of a ‘Planning-gain Supplement’, are explored. The relationship between any new explicit taxation and implicit taxation through planning agreements is examined. The reactions to this proposal, which come from the Barker Review of Housing Supply, are considered. It is shown that much of the criticism is about implementation difficulties rather than matters of principle. The problem of measuring the site-specific value of economic rent is discussed and the resolution is seen to be in viability appraisals that determine the changes in residual value that are a consequence of planning permission. The data requirements for such an approach are set out. It is argued that a detailed taxation proposal will need to include clear relationships between other demands on the development process, especially the provision of affordable housing through planning.