THE ROLE OF DEVELOPMENT APPRAISAL IN PUBLIC DEVELOPMENT PROJECTS
This chapter focuses on the background of the study, the statement of problem and the aims and objectives of the study. It also deals with the research questions, scope, justification, significance and limitation of the study.
1.1 Background of the Study
Real property Investment involves the giving up of a capital sum for real property development in anticipation of benefits to be derived in the future (Udoudoh, 2016). Property is constantly being destroyed and recreated under the inevitable process of development and redevelopment, which is required to meet the changing demands of society (Kuye, 2009).
Therefore, Development appraisal which is basically a pre-investment analytic evaluation of a proposed project is fundamental. The major idea is to enable investors accept projects that create value for money sunk into the project and reject those that will not enhance the existence and growth of the project.
According to Udoudoh (2016), an appraisal of property development requires the careful estimation of all the factors or components that add value to the envisaged project. The primary aim is to answer the question, “can the project be carried out?” (Feasibility) and if this is in the positive direction, it creates room for yet another question, “should the project be embarked upon?” (Viability).
Feasibility and Viabity are clearly distinguished from each other by Umeh, (1977) as cited in Lawal, (2000). Umeh stated that Feasibilty appraisal is concerned with the fundamental question of the practicability or possibility of the subject matter of a proposed decision, be it development scheme, investment project, grant of a loan, coming up with an answer for the question – can it be done? On the other hand, viability is of the question – is the project capable of being done?
However, Udoudoh, (2016) further explained that thereliability of a project appraisal depends on the experience, competence and integrity of the investment analyst. A good appraisal requires the appraiser carryout his services professionally, commencing with a reconnaissance survey of the neighbourhoodwherethe development is to be sited, noting the effective date of the appraisal, determining the effective location of the project, verifying the title documents, noting the purpose of the appraisal and types of development desired as instructed by the client.
Appraisal is an important aspect of real estate investment. Therefore for an Estate Surveyor and Valuer to give proper advice on real estate investment, amidst competitions with other investment analysts, he must be conversant with the trend in the property investment industry and market, legal instrument framework and property environment. Unlike other forms of business transactions, investments in landed property require heavy capital outlay which is often hard to come by. Investors thus resort to credit facilities, despite the harsh and stringent conditions attached to it. The huge financial requirements results from the many and complex stages involved in property development and transactions. Conducting Development Appraisals seeks to underscore to the investor, the potentials of the proposed project, the independence of the project, the continuity/sustainability of the project and the social benefits accruable from the project
Again, the stated objectives can only be achieved where the right procedure is followed at the right time and place with the right professional, such as the Estate Surveyors and Valuer, who is trained to carryout pre-investment appraisals, using various methods, one of which is the Residual Appraisal Technique.
The Residual Appraisal Technique estimates the maximum purchase price of the site by deducting the expected total cost of development, including allowances to cover risks and profits from the expected sale of the completed project. The method works on the premise that the price which a purchaser can pay for a property is the surplus after all the proceeds has been met out from the sale of the finished development, cost of construction, cost of purchase and sale, the cost of finance and an allowance for profit required to carry out the project (Udoudoh, 2016).This study therefore had been designed to examine the role of pre-investment appraisals on public development projects, which in most cases are developed for social benefits and as such non-remunerative but must at least be cost efficient.