The conventional residual method of valuation, together with profit margins on either cost or value predominate in project appraisal practice for small and medium sized developers, as opposed to more contemporary cash-flow based techniques. Larger developers tend to use cash-flow techniques and rate of return-based performance measures, in combination with cash-margin measures.
There was also a divide between those developers that focused solely on residential development, who favoured residual methods of appraisal and cash margin-based metrics, and those who undertook either commercial development or both commercial and residential schemes. The latter were more likely to undertake cash-flow modelling of feasibility alongside any residual valuation-based assessment of profit or land bid.
Based on a survey of the sector, a figure of 20% profit on costs was mentioned regularly for sites without significant risks, and 25% for those sites with higher levels of perceived risk. Real estate development returns are frequently referred to as a standardised metric. In reality they are based on the multifaceted risk profile of the project.
This research should make a significant contribution to informing all those stakeholders engaged with the sector either as surveyors, landowners, developers, planners, funders, public decision-makers and members of the community. It should also be the start of a regular survey of development returns as the market progresses through its typically cyclical pattern.