Development Appraisal Flashcards
What is the difference between a development appraisal and a residual valuation
Development appraisals – Establish the viability/profitability of the proposed development using a client’s inputs
Residual valuation – establish the market value of a site using market inputs
What is the purpose of a development appraisal
To assess feasibility and to aid key decision making
What is the methodology for calculating residual site value
Gross development value - less development costs =
equals gross site value
Gross site value – purchasers costs = residual site value
What cost would you allow for as part of the total
development cost
- Site preparation
- Planning costs
- Building costs
- Professional fees
- Finance costs
What will be included in your estimate for site preparation costs and how would you estimate them
- Demolition, Remediation works, site clearance, levelling and fencing.
- Obtain a contractors estimate for this works
What would be included in the estimate for planning costs
- Section one 106 payments
- CIL payments
- Required percentage of affordable housing for new residential development
- 278?
How do you estimate the build costs?
- Client information
- BCIS
- Quantity surveyor estimate/building surveyor estimate
What basis are the costs in BCIS usually expressed?
- Usually based on GIA
What does BCIS include?
- XXX
What would be included in your estimate for professional
fees and how would you estimate them?
- Typically 8 to 10% of the construction cost
- From conversations with building surveys project managers and architects…
What would you include in your estimate of marketing cost
and fees?
Sale (1-2% of GDV)
Letting (10 -15% of rent)
How do you estimate the interest rate?
- The rate at which the client can borrow money
- The Bank of England base rate plus a premium
- UK Valuation Best Practice - General Interest Rate Overview 7.15%
Explain the concept of the S-curve?
It assumes that total construction costs plus fees Paid over half the time period
Reflects when monies tend to be drawn down
How do you verify the output of a development appraisal?
Crosscheck site value with comparable site sales if possible
What is a typical loan to value LTV ratio?
60% on GDV
What are the typical components of the capital stack for development financing
- Senior debt
- Mezzanine finance
- Equity
What is overage?
Many forms - an agreement, in addition to the purchase price, that the buyer will pay more when and if the land value increase
What is the profit erosion period
- The length of time it takes for the development profit to be completely eroded
What is included within Valuation of Development property
2019 (Guidance Note)
- When valuing development avoid reliance on a single approach.
- In a basic residual valuation, finance is assumed at 100 per cent of both land and building costs
What is sensitivity analysis?
xxx
What variables would you typically conduct a sensitivity
analysis on?
- GDV
- Build cost
What Guidelines did the RICS release on valuing development
property
- RICS valuation development property 2019
- Best practice avoid reliance on a single approach
Finance without Argus?
- Trying to emulate the s curve
- Land (100%)
- Professional fees (75%)
- Construction Costs (50%)
What are first homes?
- Homes at a discount of 30% compared to the market price
Why do you assume 100% debt finance?
Reflects the weighted average cost of capital
What profitability do you assume on affordable housing?
Typically, 6-8% of the GDV
S.106 / CIL
- S.106 is (in installments quarterly)
- CIL (Lum sum at the start)
Residential development site, Southampton (LV2)
- Agency mandate deciding if to sell the site
- 3 Town houses and 9 Apartments
- No affordable housing through FVA
- CIL @ 100k
- Demolition cost provided @50k
- Land value circa £500k
Residential development site, Chichester (LV2)
- To aid my client in making a board decision to sell
- The site had full planning consent for 18 dwellings 6 of which were affordable
- Client provided a GI assessment
- Adopting market facing inputs I arrived at a land value
Development consultancy, Gosport (LV3)
- An options and appraisal report to aid the landowner in whether to sell the site or develop themselves
Two options
- 1) 192units and 22 stories with 20,000 sq ft commercial
- 2) 88 units and 6 stories with 20,000 sq ft commercial
1) £2.8m deficit
2) £2.7m residual value
The site was allocated, and I was provided with a number of inputs such as their anticipated build costs and time scales.
Development consultancy, Chichester (LV3)
- Red book valuation
- MV and on the assumption that planning had been achieved for a low-rise residential scheme
- 4,400 sq m office
- Low rise residential scheme of 18 dwellings
- (Negative £4m)
- (Positive £1.3m)
