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

Author

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  • Neil Crosby
  • Steven Devaney
  • Peter Wyatt

Abstract

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.

Suggested Citation

  • Neil Crosby & Steven Devaney & Peter Wyatt, 2017. "The implied internal rate of return in conventional residual valuations of development sites," ERES eres2017_162, European Real Estate Society (ERES).
  • Handle: RePEc:arz:wpaper:eres2017_162
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    More about this item

    Keywords

    Development appraisal; Development Viability; Internal rate of return; Residual valuation;
    All these keywords.

    JEL classification:

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

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