Development Appraisal

Question 1

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

Answer 1

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

Question 2

What is the purpose of a development appraisal

Answer 2

To assess feasibility and to aid key decision making

Question 3

What is the methodology for calculating residual site value

Answer 3

Gross development value - less development costs =
equals gross site value

Gross site value – purchasers costs = residual site value

Question 4

What cost would you allow for as part of the total
development cost

Answer 4

• Site preparation
• Planning costs
• Building costs
• Professional fees
• Finance costs

Question 5

What will be included in your estimate for site preparation costs and how would you estimate them

Answer 5

• Demolition, Remediation works, site clearance, levelling and fencing.
• Obtain a contractors estimate for this works

Question 6

What would be included in the estimate for planning costs

Answer 6

• Section one 106 payments
• CIL payments
• Required percentage of affordable housing for new residential development
• 278?

Question 7

How do you estimate the build costs?

Answer 7

• Client information
• BCIS
• Quantity surveyor estimate/building surveyor estimate

Question 8

What basis are the costs in BCIS usually expressed?

Answer 8

• Usually based on GIA

Question 9

What does BCIS include?

Answer 9

• XXX

Question 10

What would be included in your estimate for professional
fees and how would you estimate them?

Answer 10

• Typically 8 to 10% of the construction cost
• From conversations with building surveys project managers and architects…

Question 11

What would you include in your estimate of marketing cost
and fees?

Answer 11

Sale (1-2% of GDV)
Letting (10 -15% of rent)

Question 12

How do you estimate the interest rate?

Answer 12

• 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%

Question 13

Explain the concept of the S-curve?

Answer 13

It assumes that total construction costs plus fees Paid over half the time period

Reflects when monies tend to be drawn down

Question 14

How do you verify the output of a development appraisal?

Answer 14

Crosscheck site value with comparable site sales if possible

Question 15

What is a typical loan to value LTV ratio?

Answer 15

60% on GDV

Question 16

What are the typical components of the capital stack for development financing

Answer 16

• Senior debt
• Mezzanine finance
• Equity

Question 17

What is overage?

Answer 17

Many forms - an agreement, in addition to the purchase price, that the buyer will pay more when and if the land value increase

Question 18

What is the profit erosion period

Answer 18

• The length of time it takes for the development profit to be completely eroded

Question 19

What is included within Valuation of Development property
2019 (Guidance Note)

Answer 19

• 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

Question 20

What is sensitivity analysis?

Answer 20

xxx

Question 21

What variables would you typically conduct a sensitivity
analysis on?

Answer 21

• GDV
• Build cost

Question 22

What Guidelines did the RICS release on valuing development
property

Answer 22

• RICS valuation development property 2019
• Best practice avoid reliance on a single approach

Question 23

Finance without Argus?

Answer 23

• Trying to emulate the s curve
• Land (100%)
• Professional fees (75%)
• Construction Costs (50%)

Question 24

What are first homes?

Answer 24

• Homes at a discount of 30% compared to the market price

Question 25

Why do you assume 100% debt finance?

Answer 25

Reflects the weighted average cost of capital

Question 26

What profitability do you assume on affordable housing?

Answer 26

Typically, 6-8% of the GDV

Question 27

S.106 / CIL

Answer 27

• S.106 is (in installments quarterly)
• CIL (Lum sum at the start)

Question 28

Residential development site, Southampton (LV2)

Answer 28

• 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

Question 29

Residential development site, Chichester (LV2)

Answer 29

• 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

Question 30

Development consultancy, Gosport (LV3)

Answer 30

• 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.

Question 31

Development consultancy, Chichester (LV3)

Answer 31

• Red book valuation
• MV and on the assumption that planning had been achieved for a low-rise residential scheme
• 1. 4,400 sq m office
• 2. Low rise residential scheme of 18 dwellings
• 1. (Negative £4m)
• 2. (Positive £1.3m)