Development Appraisal Flashcards
What is the difference between a development appraisal and a residual valuation?
A development appraisal is used to determine the profit and/or viability whereas a residual valuation is used to determine land value.
What RICS document guides development valuation?
RICS Valuation of Development Property, 1st edition, October 2019.
What document guides development viability?
Assessing Viability in Planning under the National Planning Policy Framework 2019 for England, 1st edition, March 2021.
What policy relates to development viability?
National Planning Policy Framework 2019
What is the purpose of a development appraisal?
A development appraisal is a tool to financially assess the viability of a development scheme.
Can also be used to assess the profitability of a proposed scheme.
What is GDV?
Gross Development Value
The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.
What is a development appraisal?
A calculation or series of calculations to establish the value, viability and profitability of a proposed development.
What is a residual valuation?
The amount remaining once the gross development cost of a project is deducted from its gross development value (GDV) and an appropriate return has been deducted.
What are the steps of a residual valuation?
Gross Development Value minus Total Development Cost (inc. profit) = Land Value.
What components are reflected in the TDC?
Site Preparation
Planning Costs
Building Costs
Professional Fees
Contingency
Marketing
Finance
Profit
What is included in Site Preparation costs?
Demolition, Remediation Works, Landfill Tax, Provision of Services, Site Clearance, Fencing.
What is included in Planning Costs?
Section 106 costs & CIL.
What sources would you establish building costs?
BCIS
SPONS
Information from Clients
Building Surveyor
Quantity Surveyor
Typical Professional Fees?
10%-15% of total construction costs.
Typical contingency fees?
5%-10% of construction costs.
What is included in professional fees?
Architects, consultants, project managers, structural engineers.
Typical marketing costs?
1%-2% of GDV (10% of initial annual rent for letting).
What sources help determine interest rates?
LIBOR
Bank of England
What are the 3 elements for finance?
Site Purchase – (compound straight-line basis)
Total Construction Costs - (S-Curve)
Holding Costs to cover voids - (Compound straight-line basis).
On what costs do we consider the developers profit? GDV or Construction?
15%-20%
Residential – GDV
Commercial - Construction
What are the 2 main types of development finance?
Debt & Equity
What is Debt?
Lending money from a bank.
What is equity?
Selling shares in a company, joint venture or own money.
What is the typical loan to value percentage?
60%
When would you apply loan to cost value?
When in a difficult market.
What is senior debt?
First level of borrowing with a bank, which takes precedence over mezzanine and secondary funding.
What is mezzanine funding?
Additional funding for additional monies required over the normal LTV lending.
What is a ‘swap’ and when is it used?
A form of derivative hedging for interest rates. Swap rate will be the market rate for a fixed rate, fixed term loan.
What are the limitations to a residual valuation?
Does not consider timing of cash flows.
Sensitives to minor adjustments.
Implicit assumptions hidden and not explicit (like DCF).
Requires cross check with comparable site valuation.
What are the 3 sensitivity analysis types?
Simple, Scenario & Monte Carlo.
What is included in a simple sensitivity analysis?
Changes to key variables such as GDV, yields, build costs, finance rates etc.
What is included in a scenario sensitivity analysis?
Change scenarios for the development content such as timings, costs, phasing, modifications to design etc.
What is included in a Monte Carlo sensitivity analysis?
Using profitability theory using software such as ‘crystal ball’.
What is CIL?
Community Infrastructure Levy – Charge by Local Authorities on new developments in the area, used to fund infrastructure such as transport, flooding defences, schools, hospitals etc.
What are the exemptions to CIL?
GIA of less than 100m2
Home extensions and annexes
Charities
Social Housing (less than 70% of MV)
Self-build homes.
What is Section 106? Where does it come from?
Set out in the Town and Country Planning Act 1990 – where developments impact the locality, they are required to pay.
When does section 106 apply or not apply?
Applies for developments more than 15 units – Does not apply where 40% social housing.
What basis are the cost on BCIS usually expressed?
GIA
Where does BCIS obtain the information from?
Monthly updates from Quantity and Building surveyors from recent prices and tenders agreed.
What holding over costs need to be accounted for after the development is completed, until the disposal of the scheme?
Empty rates, service charges and interest charges
What capital stack does the development appraisal process assume?
100% debt finance
Can you explain the concept of the s-curve and why it is applicable?
Assumes that total constructions costs + fees are paid over half the time period
Reflects when monies tend to be drawn down - lower levels of expenditure at the beginning and end of projects
How should you verify the output of a development appraisal?
Cross check site value with comparable site sales if possible
When conducting a residual site valuation, what date should the inputs be taken from?
Taken at the date of valuation
What is overage?
Arrangement for the sharing of any extra receipts received over and above the profits originally expected, as dictated by a pre-agreed formula
Usually shared between vendor/landowner and developer in a pre-arrangement apportionment.
What is the profit erosion period?
Length of time it takes for the development profit to be completely eroded, due to empty rates, service charges and interest costs, following the completion of the scheme.
According to RICS Valuation of development property, 2019, what should Market Value for a development property assume?
Optimum development i.e., the development which yields the highest value, taking into account the perspective economic and planning conditions
What method does the RICS Valuation of development property state should be used for complex and/or lengthy development schemes?
Discounted cash flow (DCF) technique. Simple residual method can be used in other cases.
What does RICS Valuation of development property, 2019 recommend should be done to account for risk in the valuation process?
Risk analysis should be used to show changes to the inputs which might affect the valuation
Risk and return levels and assumptions should be explicitly stated in the valuation report
How should you value land that is in the course of development according to RICS Valuation of development property, 2019?
Value of the land + costs expended at the valuation date
Completed development value - costs remaining to be expended at the valuation date
How should the output of the valuation be reported according to RICS Valuation of development property, 2019?
Reported as a single figure, except where there is potential for significant variation (e.g., if there is uncertainty around the valuation the different options identified should be report).
What do developers consider the greatest risk when undertaking a development?
Planning permission.
