Capitalisation: reflections and practice for project appraisal

Abstract

Income capitalisation is a widely used in commercial property for valuation, development appraisal or for project feasibility analysis. As a decision-making tool, its technical and philosophical limitations are manifest but often overlooked. If bungled, capitalisation, can lead to ‘white elephant’ projects, investment losses or even corporate collapse. To help avoid such waste, the research reviews some technical issues and philosophical conundrums around capitalisation of property investments. Sound capitalisation practice scopes projects, considers capital market, geographic and institutional context and clarifies valuation base(s). Judicious market comparison, risk diagnostics and analytics filter out noise and render complex data to estimate yields or an appropriate discount rate. For a project feasibility analysis, supplementary salient concerns include wider strategic imperatives, indigenous land rights, stakeholder management, administrative probity and the inclusion of environmental or social spillovers