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The implied internal rate of return in conventional residual valuations of development sites

Crosby, N., Devaney, S. and Wyatt, P., (2017) The implied internal rate of return in conventional residual valuations of development sites. Working Papers in Real Estate & Planning. 03/17. Working Paper. University of Reading, Reading. pp14.

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Abstract/Summary

Explicit discounted cash flow methods are used in many countries to assess the value of property investments or their likely rate of return given a particular price. These are typically supplemented by simpler models for the purpose of estimating market value and this has led to debate over the merits of different approaches. A parallel situation exists in the case of UK development sites: both cash flow appraisals and simpler residual valuations are used by the real estate industry to assess site values and development viability. Yet traditional residual valuation methods involve making assumptions that are inconsistent with financial theory and this makes it difficult to compare the required returns for such schemes against those used for other investment opportunities. Hence, in this paper, we explore the relationship between the profit and interest allowances used in traditional residual valuation models and the internal rates of return that they appear to imply. This is done with reference to a number of simulated examples of different schemes and the implications for practice are then assessed.

Item Type:Report (Working Paper)
Divisions:Henley Business School > Real Estate and Planning
ID Code:71964
Publisher:University of Reading
Publisher Statement:The copyright of each working paper remains with the author. If you wish to quote or cite any paper please contact the appropriate author; in some case a more recent version of the paper may have been published elsewhere.

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