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Explicit discounted cash flow methods are used in many countries to assess the value of real estate 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, leading to debate about different approaches. A parallel situation exists in the case of UK development sites: both cash flow appraisals and simpler residual valuations are used to assess site values. Yet debate here has been limited, even though traditional residual valuations involve steps that depart from project appraisal practices used in mainstream capital budgeting. We explore the relationship between the profit and interest allowances used in traditional residual valuations and the internal rates of return that they appear to imply. Published residual valuations typically allow for profit through use of a simple proportionate relationship between required profit and the cost or final value of a scheme. They also show limited variation in their profit assumptions, but this implies large differences in expected IRRs. Simulated examples then illustrate the implications of applying standard profit-on-cost rates to schemes of different lengths and with different levels of land value. Findings for project duration, in particular, are noteworthy since they indicate that lower IRRs are implied for longer projects, though this relationship is not necessarily rational. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

This paper investigates the application and use of development viability models in the formation of planning policies in the United Kingdom (UK). Particular attention is paid to three key areas: the assumed development scheme in development viability models, the use of forecasts and the debate concerning Threshold Land Value. The empirical section reports on the results of an interview survey involving the main producers of development viability models and appraisals. It is concluded that, although development viability models have intrinsic limitation associated with model composition and input uncertainties, the most significant limitation is related to the ways in which they have been adapted for use in the planning system. In addition, it is suggested that the contested nature of Threshold Land Value is an example of calculative practices providing a façade of technocratic rationality in the planning system. [ABSTRACT FROM AUTHOR]