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Capitalisation: reflections and practice for project appraisal

Simon Huston


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.

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