Whilst the real estate development appraisal practices of large national and international real estate companies are well understood, relatively little is known about how development appraisals are conducted by indigenous appraisers and valuers in developing countries. The purpose of this paper is to investigate how development appraisal is conducted in Brazil, compared to the UK, focusing primarily on the methods employed by small- and medium-sized real estate practices and their appraisers to appraise the viability of commercial real estate developments in the State of Sao Paulo.
The study employs a two phase Delphi Method to capture and analyse empirical data from small- and medium-sized real estate appraisers in Brazil. Using the long established and relatively transparent UK Residual Method of development appraisal as a template against which to compare Brazilian appraisal methods, guidance and practice. To understand how indigenous development appraisers operate the Brazilian development appraisal methods, the research was conducted in Portuguese by a bi-lingual real estate expert who was familiar with both UK and Brazilian practice.
The research establishes that appraisers working for small- and medium -sized real estate practices in Brazil rarely use the Residual Method. Instead, they employ a range of methods, the choice of which is heavily influenced by the availability of comparable market data, with Direct Comparison of market data and the Capitalisation of Income being the methods of choice. Appraisers rarely employ the Residual Method as the principal development appraisal technique, using instead the Comparative Method and Discounted Cash Flow (DCF) analysis. Land prices are usually agreed or already known and developer’s profit is usually determined using DCF analysis and is highly sensitive to fluctuations in construction costs.
The research engaged with a small number of appraisers and valuers in small- and medium-sized practices in the State of Sao Paulo using a two-phase Delphi Method. The long established UK Residual Method of development appraisal was used as a template against which to compare practice in Sao Paulo State. There is potential therefore to replicate the research in other Brazilian States and transfer the methodology to other developing countries.
In Brazil, when development land in urban areas is acquired on the basis of plot exchange, land is often sold at less than market value and the original landowner retains an equity stake in the development and shares in the development overage. The practice of “permuta física”, giving landowners the freehold of part of the development, or “permuta financeira”, whereby the landowner receives an enhanced land price, indexed against development value, is of potential relevance to the UK and other developed countries that need help in urban unlocking land markets.
The research is a unique comparative study of development appraisal methods employed by small- and medium-sized practices in Brazil. It contributes to the limited literature that has so far been published in English on Brazilian development appraisal methods and reveals the similarities and differences with the Residual Method of development appraisal that is widely used in the UK and other developed countries.
The authors are indebted to the Brazilian professional body IBAPE and wish to acknowledge the contribution of all participants who took part in the study.
Greenhalgh, P. and Soares Bendel, R. (2015), "An investigation of development appraisal methods employed by valuers and appraisers in small and medium sized practices in Brazil", Journal of Property Investment & Finance, Vol. 33 No. 6, pp. 530-547. https://doi.org/10.1108/JPIF-03-2015-0019Download as .RIS
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