Development Flashcards
What is a development appraisal?
A tool to financially asses the viability of a development scheme
What market conditions might you highlight to a client when undertaking a DA
- High borrowing costs impact upon return
- pull back of borrowing products
- Build costs remaining high
What are the outputs of a development appraisal?
Viability of different uses
Profitability
Sensitivity
Value
What are the current unit costs for the West Midlands?
BCIS- Estate Housing
Lower- £ 118
Median - £139
Higher- £152
What is included in site preparation?
Demolition
Remediation Work
Provision of Service
Levelling
Site Clearance
Do you assume site preparation costs?
No- need a contractors cost plan, however may reflect a high contingency
What costs related to planning are there
S106
CIL
Affordable Housing
Section 278
Planning Consultant
Specialist Reports
General steps of a development apprasial?
Depends on the purpose, viaiblity would be
GDV
-
Costs ( Site Prep, Planning, Build Costs, Professional Fees, Contingency, Marketing, finance)
= Land Value ( Compare to BLV)
What are building costs and how do you get these?
Total cost of building works
Souce:
BCIS
Client
Quantity Surveyor cost plan
Building Surveyor
Spons Architects and builders price book
Where does BCIS get their data from?
Obtained from BS and QS sources, recent contract prices/tenders agreed
Pros and Cons of BCIS
Advantages:
- Widely used and respected
- Provides good coverage of construction costs
Disadvantages:
- Can be out of date
- May not be relevant to your specific project
- Limited control over data
What measurement basis does BCIS use
Gross Internal Area
What are the time periods BCIS use?
Backward facing- quarters
What is commonly included in Professional Fees?
Architects - account for highest proportion
Project Managers
Structural Engineers
CDM principle designer costs - Health and Safety responsible
What are contingency costs?
Account for the level of risk and likely movements In building costs
What are marketing/sales fees?
Marketing Budget
EPC coosts
NHBC Warranty
What type of interest rate benchmark is used for development finance?
SONIA- Stering Overnight Index Average
Bank of England Base Rate plus premium
Developer own
What are the 3 elements developers can get finance on? and how are they shown?
1) Site Purchase (inc purchasers costs)- Straight Line- Compound Interest
2) Construction costs- S curve- half costs over the length of build
3) Holding costs to cover voids- Stright Line- Compound interest
What does Argus assume in terms of dev finance ?
Assume 100% debt finance
What are the two methods of development finance?
1) Debt Funding- Money from a bank or institution
2) Equity Funding- Selling shares in a company, own money or JV
What are the levels of Debt Funding
What is a swap rate?
The market interest rate for a fixed rate or fixed loan term
What are other methods of arranging finance?
Joint Venture- 2 or more parties join to develop
Forward Sale- Where completed schemes are presold to either an investor or developer
What do you understand by overage/clawback?
Arrangement for sharing of recipients over and above original profits expected, shared between vendor and developer in pre arranged apportionment.
e.g. Plot Sales- where a developer acquires land for residential development for a fixed sum and agrees to pay the landowner a further sum if the aggregate revenue realised from the residential plot sales exceeds a certain threshold figure.
Is VAT payable on professionally fees?
Yes
Profit Erosion Period
Length of time it takes for development profit to be eroded by the holding charges following completion of the scheme- due to interest charges and if the scheme is loss-making
What are the three types of sensitivity analysis?
Simple sensitivity of key variables
Scenario analysis
Monte Carlo- probability theory- software such as Crystal Ball
What is the key RICS document for Valuation of Development ?
RICS Profesional Standards: Valuation of Development Property 2019
Supplements the International Valuation Standard for Dev Property
What key points does the RICS Profesional Standards: Valuation of Development Property 2019 cover?
Best practice avoids reliance on one approach - should cross-check
How might you cross check a development appraisal
Recent Sales transactions ( comparable)- Prices
What other documents might you make reference to in your development examples for viability?
RICS Professional Standard: Financial Viability in Planning: Conduct and Reporting 2019
What will influence the level of profit required by a developer?
Depends on the level of risk
If scheme is low-risk (or pre-let / sold) a lower return may be required
Current riskier market conditions means the percentage of profit required has
Why is profit on cost a more reliable method of measuring developers’ profit than profit on GDV?
GDV is subject to more variation
What variables would you typically conduct a simple sensitivity analysis on?
GDV
Build costs
Finance rate
What variables would you typically conduct scanrio analysis on?
Scheme content
Timings
Phasing
Design
What does the RICS Professional Standard: Financial Viability in Planning: Conduct and Reporting 2019 cover?
Mandaotry
- Guidance on reporting of benchmark land value
- Must provide a sensitivity analysis
What is a Benchmark Land Value
Existing Use Value plus a Premium
What is the premium in a BLV
A reasonable incentive for a land owner to bring forward land for development while allowing a sufficient contribution to fully comply with policy requirements
What is typical professional fees would you assume?
10-15%
What is typical contingency fees would you assume?
5-10%
How do you value a random strip?
1) Refer to Stokes v Cambridge
- Where ransom value was 1/3 of the development site ( Having already deducted profit and costs)
e.g Land is worth 4.5million
