Performance metrics, required returns and achieved returns for UK real estate development

The aim of this research is to improve the understanding of the form, extent and variability of the financial returns achieved by real estate developers, focusing on the UK real estate market.

Profits or returns from real estate development vary depending on the nature, location and timing of each scheme. Development appraisal methods vary in the way that they incorporate or measure developer returns. Cash margins on cost or value are very common, while rates of return are frequently used as well. Sometimes finance is incorporated in the valuation explicitly and sometimes it is absorbed within the developer's rate of return.

This variation among market participants and across methods in the handling of developer returns raises methodological questions when it comes to development appraisal. For example, is there a relationship between expected cash margins (profit on cost or value, for example) and rates of return, what is an 'appropriate' developer return, and how do returns vary depending on scheme, timing and the way the return is measured?

This research attempts to answer these questions by (a) reviewing relevant literature, (b) examining published development viability appraisals, (c) analysing published accounts for real estate developers, and (d) undertaking a survey of developers, supplemented by a small number of confidential interviews with market participants.