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RICS Investment and Finance Pathway > Development Appraisal > Flashcards

Development Appraisal Flashcards

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1
Q

What appraisal tool do your currently use

A

Bespoke excel based appraisal

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2
Q

How do you calculate interest manually ?

A

Divide your interest rate by the number of payments you’ll make in the year (interest rates are expressed annually).

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3
Q

What did you include for professional fees for CE

A

5% of the estimated construction costs as the site already benefited from planning permission and it was proposed to use a D&B contract. There was sufficient budget to cover the design costs.

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4
Q

On CE, where did you source your comparative values and rents ?

A

Land registry
Speaking to agents
Local Housing Allowance
Property listings

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5
Q

How would you weight different types of comparable evidence ?

A

Category A- Directly related comparable- from reliable sources
Category B- General market Data- provides guides
Category C- Other data

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6
Q

What is a development appraisal ?

A

A development appraisal is a process undertaken to understand the viability of a project.

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7
Q

How do you carry out sensitivity analysis ?

A

By changing the build costs and GDV in upward and downward 5% increments

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8
Q

How do you calculate stamp duty

A

A
Residential:
Up to £125k 0%
£125k-250k – 2%
250k- 925k – 5%
£925k – £1.5m – 10%
1.5m + - 12%

Commercial:
Up to £150k- 0%
£150,001 to £250,000- 2%
Remaining amount above £250,001 is 5%

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9
Q

How do you calculate CIL

A

(CIL) is calculated per square metre. The calculation involves multiplying the CIL charging rate by the net chargeable floor area (based on Gross Internal Area)

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10
Q

How do you get to the GDV of a site

A

By researching comparable sales values and an appropriate applying the £/sqft to each residential unit.

On commercial, this will involve researching comparable rents and sales comps and then capitalising the income using an All risk yield to get a capital value.

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11
Q

What yield would you use to calculate a commercial property.

A

All risk yield

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12
Q

How do you calculate s.106 costs ?

A

Review planning policy to see what the borough changes for key items i.e. playspace, transport and employment. All s.106 costs are negotiated.

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13
Q

What method of appraisal did you use to appraise CE ?

A

Discounted Cash flow (proval)

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14
Q

How did you carry out a sensitivity analysis and what did you change ?

A

Changed the build costs and GDV

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15
Q

What is the difference between sensitivity analysis and scenario analysis ?

A

Sensitivity changes the key variables- yield, GDV, build cost and finance rate.

Scenario analysis changes the tenure, timing, costs and phasing.

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16
Q

What payment profiles did you change and what did this involve ?

A

Build duration

Phasing of scheme

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17
Q

What finance rate did you use on Church End ?

A

3.5% as this was the rate available to my client.

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18
Q

How is interest rate broken down ?

A

At present is London Interbank Offered Rate + risk premium

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19
Q

What is the typical interest rate

A

6-7% at present
Arrangement fees (up to 1.5%)

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20
Q

6-7% at present
Arrangement fees (up to 1.5%)

A

Risk- higher interest rate if it perceived to be more risk in a transaction.

Supply and demand- if there is a lot of demand for debt capital then higher interest rates.

Base rate- based on future outlook. To encourage spend reduce interest rates. To encourage saving, increase interest rates.

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21
Q

What is BCIS ?

A

Build cost information Service

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22
Q

Are there any limitations to BCIS ?

A

Only deals with base build costs, no externals/ Landscape

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23
Q

Why did you speak to a quantity surveyor to see if your build costs were sensible on Alperton

A

QS has live examples of similar schemes and will be able to give an indication on sensibility of assumptions based on recent projects.

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24
Q

What is a s-curve cost profile and why would you use it ?

A

S curve is a mathematically calculated payment profile which shows the cumulative progression of costs during a construction project.

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25
Q

On what basis where both options viable on CE project ?

A

Payback period was within 30 years are required by the client.

Positive NPV

Internal rate of return was higher than the cost of borrowing for my client

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26
Q

Why would the profit change when doing a bulk sale ?

A

Reduction in the total GDV amount but the same costs to build

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27
Q

What did you include in your existing appraisal on your case study project ?

A

The existing appraisal delivered the highest amount of profit and could not be discounted.

This was kept to show the difference between the preferred and original option.

28
Q

What inputs changed in your appraisal when changing it to 100% affordable in your case study project ?

A

Number of private units
Removed car parking revenue- 75
Removed incentives – 324
Development and other- Additional legal fees 28
Removed completed homes costs- 52
Sales and marketing – 220
Overheads – 60
Profit- 2

29
Q

What is profit erosion ?

A

The length of time it will take for the development profit to be eroded by holding charges following completion of the scheme.

30
Q

What is NPV

A

Net present value (NPV) is a method used to determine the current value of future cash flows

31
Q

What is IRR

A

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero

32
Q

Why is there no contingency in your appraisal ?

A

Contingency is assumed within the build costs and the development and other costs.

Typically a 5% contingency is assumed but varies due to risk

33
Q

How could you make your scheme more profitable

A

Increasing density
Changing the design
Having a better specification

34
Q

Describe in its simplest form a development appraisal.

A

GDV-TDC-Site value = Profit

35
Q

What is the difference between a development appraisal and a residual appraisal?

A

Residual is a method of valuation which uses market inputs at a particular moment in time, on a valuation date to get a site value.

Development appraisal is to process used to assess the viability of a project using the clients input

36
Q

What would you do differently for a development appraisal that had planning permission vs one which didn’t?

A

a. Cost- get greater clarity on costs on a scheme with planning and not use assumptions.

b. Time- set a clearer programme of works

c. Risk- Can lower the profit margin due to the reduced risk of securing planning

37
Q

How do you arrive at your interest rate for your development appraisal?

A

My client does not require interest to be included in the development appraisal as they only want to see the gross profit before interest or tax.

My Client has revolving credit facility which they utilize on a group level for all of their projects

38
Q

What are three sources of loan finance?

A

Junior,
mezzanine
senior debt

39
Q

If you were to conduct a sensitivity analysis on a development appraisal what factors would you choose to change?

A

GDV
Build cost
Interest rate
Yields
Rental value

40
Q

For CE please explain to me how you changed the payment profile to better understand the schemes cashflow and financial viability (Affordable)?

A

Changed when shared ownership completed against affordable rented

Changed the staircasing assumptions on the shared ownership units

Changed fee payment profile between s-curve and straight line

Changed works from computer generated s-curve to QS’s cashflow (S-curve)

Amending the breakdown of construction costs by using a mixture strait line and S-curve for (site clearance, specification, fit out and overall works)

41
Q

What other things could have an impact on the outcome of your development appraisal?

A

Planning permission
Delays to construction programme
Archaeological finds
Economy

42
Q

What percentage would you put in for professional fees on a development appraisal and how would this be broken down?

A

12% of construction costs broken down as follows:
Architect: 4%
Civil Engineer: 1%
Mechanical engineer: 1%
Structural engineer: 1.5%
Project manager: 0.5%
Quantity surveyor: 0.5%
Miscellaneous (Reports, building control etc): 3.5%

43
Q

In Alperton, Wembley what profit metric was the client using that a 50% affordable and 100% affordable scheme were both profitable?

A

Pay back period
Positive NPV
Internal rate of return

44
Q

What do you think of pro-val and what is your preference ?

A

Utilises the Discounted cashflow approach. Helpful for apprising affordable rented schemes but not so good for carry out development appraisals for private sale.

45
Q

What other measures can be used to assess a projects performance ?

A

Payback period
IRR
% of GDV
ROCE

46
Q

What stage would you decide to use a development appraisal and residual valuation ?

A

Residual valuation at the point of purchase or disposal

Development appraisal- carried out throughout the development cycle

47
Q

Alperton- how did you assume that the units were sold offplan and what the impacts were ?

A

The units will be sale completed a month after the construction works are complete.

48
Q

What were the price per sqft on the Alperton development ?

A

What were the price per sqft on the Alperton development ?

49
Q

Where would you look to see the house prices ?

A

Category A- similar properties with full information

Category B- Land registry or right move and asking prices

50
Q

What’s included in the total development costs in an appraisal?

A

Professional fees- 10/15% of build costs
Construction costs- BCIS or quantity surveyor
Contingency- 5-10% depending on risk
Interest/ finance- 6-7% rolled up method of calculation
Planning costs- s278 works, s106, CIL, planning consultant and specialist report.
Marketing fees- 2% of GDV
Developers profit- 15/20% depending on risks

51
Q

What’s included in professional fees?

A

Architect
Civil Engineer
Mechanical engineer
Structural engineer
Project manager

52
Q

What’s included in your construction costs?

A

Demolition and site clearance
Site facilities
Build works and finishing

53
Q

What’s included in planning costs?

A

Planning application fees
s.106 costs
s278 works
CIL
A proportion of professional fees
Specialist reports

54
Q

What is s278?

A

is a section of the Highways Act 1980 that allows developers to enter into a legal agreement with the council to make alterations or improvements to a public highway, as part of planning approval.

55
Q

What is s106?

A

are a mechanism which make a development proposal acceptable in planning terms, that would not otherwise be acceptable.
They must be:
necessary to make the development acceptable in planning terms;

directly related to the development; and

fairly and reasonably related in scale and kind to the development.

56
Q

What’s the difference between CIL and s106?

A

S106 is negotiated whereas CIL is tariff based charging system

CIL could cover a whole areas whereas s.106 is a site specific charge.

CIL is tested at a district wide level whereas s106 is tested on a case by case basis.

CIL cannot be used for affordable housing but s.106 can.

57
Q

What legislation do s106 and s278 come under?

A

S.106 is from the Town and Country Planning Act 1990

S278 is from the Highways Act 1980

58
Q

How much affordable housing is required on a development?

A

Typically between 35-50% depending on viability and whether it is publicly owned land

59
Q

How do you calculate ROCE

A

Net profit/ Operating capital

60
Q

What key performance indicators do you look for in a development appraisal?

A

ROCE
IRR
NPV
Profit Margin
Profit Erosion
Profit on cost
Profit GDV
Profit on NDV

61
Q

What is the diffrence between a development appraisal and a feasibility report ?

A

What is the diffrence between a development apprisal and a feasibility report ?

62
Q

What are the inclusions and exclusions of BCIS?

A

The cost of the building with preliminaries apportioned.

Excludes external works, contingencies and design fees.

The sample is from actual building contracts and represents a price including the contractors’ overheads and profits included in the contract. The buildings sampled represent projects submitted to BCIS and will not necessarily be representative.

63
Q

What methods can you use to calculate build costs

A

Spons

BCIS

Quantity surveyor

64
Q

Tell me about your understanding RICS Financial Viability in Planning.

A

RICS professional standards and guidance, England. Financial viability in planning: conduct and reporting 1st edition, May 2019

Changes:
- no contingency-based fees
- market inputs, not client specific
- will be made public
- requires a sensitivity analysis

65
Q

What is financial viability?

A

Also known as an FAV, this is the process of assessing whether a site is financially viable, by looking at whether the value generated by a development is more than the cost of developing it. Typically, this is calculated using a Residual Land Value approach.

Viability helps to strike a balance between the aspirations of developers and landowners, in terms of returns against risk, and the aims of the planning system to secure maximum benefits in the public interest through the granting of planning permission.

Benchmark Land Value (BLV) is used as the basis of value in a FAV, which is defined in the latest PPG. It is based on Existing Use Value (EUV), plus a premium for the landowner. This is also known as EUV+ or the EUV plus approach.

Existing Use Value (EUV) is not the definition set out in the UK National Supplement to the Red Book in VPGA 6.1, which relates instead to financial reporting. It is a different definition required under Government policy, which does not need to be formally declared as a departure to the Red Book providing that the valuation purpose, financial viability in planning, is made clear in the surveyor’s report.

Furthermore, EUV is effectively the value of land in it’s existing use. This is not the same as the price paid and it must disregard any hope value.

66
Q

What is a cash flow

A

Assessment of cash going in and out of a business

RICS Investment and Finance Pathway (54 decks)

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