Property Investment Appraisal Techniques: Introduction

Investment appraisal systems need a clear criterion on which to measure the proposals for investment in a project. The appraisal can only deal with money considerations; items can then be quantified in cash terms. It cannot deal with qualitative assumptions, thus the criterion is measured on a cash yard stick. The method used must also allow other alternative investment projects to be measured against one another. In this section we look at the development of capital appraisal techniques in the business sector for comparison with methods in the property sector. Just as in the property field there is a comparison of traditional methods of appraisal with discounted cash flow approaches; the development of capital appraisal techniques in business mirrors this. The traditional methods in business, however, are more basic than those in the property field. Property valuation methods take into account the concept of discounting income and costs in the future, which illustrates the time value of money in the sense that a £1 available today is worth more than a £1 in a year’s time even ignoring an inflation effect. This is because if a £1 is immediately consumed, the benefit is obtained a year earlier or the £1 can be invested and earn interest over the year. In property valuation the traditional Years Purchase approach takes into account the time value of money, whereas in business valuation traditional methods ignore this. The more advanced approaches of discounted cash flow involving net present value (NPV) and internal rate of return (IRR) are dealt with later in this chapter. The two basic approaches discussed first are the payback period method and the rate of return on investment method.