Financial management techniques used by residential property developers

Abstract

Real estate development can be one of the largest contributors of wealth in society; and it plays a key role in determining the level of economic prosperity of individuals, business firms and the country. For residential property developers to be successful wealth creators, they have to do sound financial planning, make the right decisions and use prudent financial management techniques. These decisions involve numerous alternatives, of which only one may yield the ultimate benefits and create the most wealth. The objective of this article is to investigate which financial techniques and methods residential property developers apply in practice when they undertake capital structure decisions or determine their cost of capital, as well as the methods they use when they make capital budgeting decisions., Important relationships such as the sources of finance used by residential property developers and the capital structure they tend to choose were identified by means of statistical testing. The results showed relatively low costs for obtaining both debt and own funds. Developers tend to disregard techniques such as the net present value (NPV) and the internal rate of return (IRR), because these techniques are unfamiliar to them. The relevance and importance of promoting the study of finance among real estate practitioners and familiarising them with its decision-making techniques and methods was one of the main recommendations of this article.

Keywords

• Capital asset pricing model
• Capital structure
• Cost of debt
• Cost of equity
• Dividend discount model
• Internal rate of return
• Net present value
• Residential property development
• Weighted average cost of capital