Development Appraisal Flashcards
What is the purpose of a development appraisal?”
Appraisals are used to calculate the profitability/viability of the land
“2. What are the key appraisal inputs and how do they affect value and developer’s profit?”
the Key Inputs to a Development Appraisal include:
Build Costs, Planning Costs, Professional Fees, Finance Rate, Timescales, Developer’s Profit”
What is your understanding of the RICS guidance on Financial Viability in Planning, Conduct and Reporting (2019)?”
“sets out mandatory requirements for Financial Viability Assessments in England
recognises the importance of practitioners acting with impartiality, objectivity and transparency
Practitioners must employ;
1) evidence based judgement
2)collaboration
3)transparency &
4) a consistent standardised approach”
How do you work out your contingency rate?
Typically this range is between 5 and 10% dependent on risk.
What is the contingency?
Contingency is there in case of any unpredictable issues that arise such as additional construction costs.”
How do you reflect for letting void?
“This could be reflected in the cash flow at the end of the construction process.
Alternatively you can reflect it within the yield.”
How would you measure an industrial site?
on a GIA Basis
How do you calculate the gross development value (GDV) of an Office Site?
It would depend on what type of development it was however, for an office building I would gather compatible evidence of rental values and capitalise this at an appropriate market derived yield.
Where would you take account of planning costs?
This would be accounted for as additional costs.
“What finance rate did you use in your development appraisal?
Follow up question: Where did you get this finance rate from?”
“6%
I ascertained this rate from my client as it is the rate at which they could borrow money.
I spoke with one of my directors who had recently worked on a similar project and informed me that 6% was an appropriate rate to use.
Alternatively you could look at current 10 year swap rates (1.4% approximately)and add a percentage for risk.”
How did you calculate professional fees?
“Professional fees tend to range between 10 to 15% plus VAT of construction costs.
In this case the professional fees were calculated at 12.5%
A lower percentage would be appropriate for larger projects.”
What professional fees are normally included?
“Architect
CDM consultant
M&E consultant
Structural engineer
Environmental consultant
Project manager”
What is the methodology of a residual site valuation?
“Gross development value
Less total Development cost
Less developers profit
= Residual site value
GDV – TDC – developers profit = Residual value”
How do you calculate the profit of a development?
“Gross development value
Less total development costs
Less residual value
= profit
GDV – TDC – residual value = profit”
What is overage?
Overage is an pre agreed arrangement made between the vendor and the developer for the sharing of profits received over and above the profit originally expected.
What is a typical LTV (loan to value) ratio?
“Typically in the region of 60%.
It used to be towards 70% however lenders are now more risk averse.”
“What are the main forms of development finance used by developers?”
“Debt funding – money from a bank/financial institution
Equity funding – selling shares in a company, JVs or using your own money”
What does a developer typically borrow money for?
“Site purchase
Construction costs
Holding costs”
How do you calculate the finance for land purchase?
On a straight line basis compounded over the length of the development period.
How do you calculate the finance required for the construction period?
“You based this on an S curve. This assumes total construction cost over half the time period.
Usual assumption is to halve the interest.
Reflects more accurately when monies are drawn down.”
What are three levels of debt?
“Senior debt
Secondary funding
Mezzanine funding”
How is interest calculated on development finance?
“On a rolled up basis
i.e. Added to the loan as the project proceeds”
What is sensitivity analysis?
“This is required to analyse key variables such as GDV, build costs and the finance rate.
Slight changes in key variables can have a large impact on the profitability of a development.”
What forms of sensitivity analysis are there?
“1) Simple sensitivity analysis
– On key variables (rent, Build costs, yield and finance rate)
2) Scenario analysis
– On variables such as content/timing/costs
3) Probability analysis
– Probability theory (oracle crystal ball software)”
What is a profit erosion period?
“The length of time it takes for the development profit to be eroded by holding charges following
completion.”
What other methods of finance are there?
“Joint ventures
2+ parties join together to develop
Forward sales
Scheme is presold to an investor/occupier”
What planning costs would you consider in your appraisal?
“Depending on the size/type of the proposed scheme I would take into consideration:
Section 106 payments
C I L charges
Section 278 payments
Planning application”
What is C I L?
“C I L is the community infrastructure levy.
This sets out payments made by developers to LPAs to raise funds for local infrastructure.
Payments are based upon the SQM or the additional SQM of floor area.
Payments are established via a charging schedule and are non negotiable.”
What is included in the preconstruction period?
“Typically Includes:
Site assembly
Obtaining vacant possession
Planning
Agreeing architectural designs
Soil investigations”
What is included in the construction period?
“Decontamination
Demolition
The main build”
What is reflected in the post construction period?
“Letting voids
Rent free periods
Sale/letting”
What is a CDM co-ordinator?
“This has now been replaced by The principal designer.
This is someone who will monitor the H and S of the entire process of a development.”
What is an environmental impact assessment?
“This is a report which is required prior to planning permission being granted which assesses the
environmental effects of a proposed development.”
What act governs the section 106 agreements?
Town and country planning act, 1990
What regulations govern CILs?
Community infrastructure regulations, 2015
What impact would there be on your development appraisal if you were undertaking it on behalf of a charity looking to purchase the property?
I’ll take into consideration that there would be no SDLT payable.
What is BCIS?
“The building cost information service, created by the RICS.
It’s gathers information from recent construction projects and from relevant contractors.”
Why would you use Excel instead of Argus?
Able to track calculations and see errors in inputs
What national planning guidelines are you aware of?
The National planning policy framework.
What forms of sensitivity analysis are you aware of?
“Simple sensitivity analysis
Analysis of key variables
Scenario analysis
changing key parts of a scenario
i.e. Content or timing
Simulation analysis
Testing probability (crystal ball software) (Monte Carlo)”
What would you say are some key variables of a development appraisal?
“Yields
Build costs
Finance rate
Rent”
Are there any exemptions from CIL?
“Minor developments are exempt
100 m² or less”
How is CIL calculated?
“This is calculated using a charging schedule.
The payment is based on the m² of additional floor area”
What is an AVM?
“An automated valuation model
– Argus”
What are the limitations of an AVM?
“Cost
Some assumptions are hidden
Some calculations are hidden
– hard to determine where something has gone wrong.”
What is an IRR?
An IRR is the discount rate which is required in order to achieve an NPV of 0
What are some typical development costs that you include in your appraisals?
“Site preparation (demolition)
Planning costs
Build costs
Professional fees
Contingency
Marketing
Letting/disposal fees
Developers profit
Finance
VAT”
What would you typically include in your professional fees?
“Professional fees typically range from 10 to 15% plus VAT.
Includes:
Architect
M&E consultant
Structural engineer
CDM coordinator
Planning/environmental consultant
Quantity surveyor”
What fees would you typically associate with the disposal?
“Agent fee – 1%
Legal fee – 0.5%”
What fees would you typically associate with a letting?
“Agent fee – 10%
Legal fee – 5%
“
What would you typically include with acquisition costs?
“Stamp duty
Agent fee
Legal fee
Survey/planning”
What are section 278 payments?
Payments for highway works
What is a development appraisal?
“It is used to assess the value, viability, profitability or suitability of a development scheme and typically uses clients inputs”
What is a residual valuation?
It is used to establish the value of a site at one moment in time using market inputs.
“What is the difference between a residual valuation and a development appraisal?”
“A residual valuation establishes the value of a site at one moment in time using market inputs,
where as a development appraisal establishes the viability, suitability or profitability of a development scheme typically using client inputs.”
Where would you get your build costs from?
“BCIS (Building cost information service)
Information sourced from recent construction projects.
The client (in-house QS)
Alternatively, I would speak to a 3rd party specialist such as a building surveyor.”
“What is the difference between a development appraisal and a residual valuation? “
“A Development Appraisal assess the viability of a development scheme;
A residual valuation assess value only”
What are the weaknesses to the residual method?
“The inputs must be accurate
does not consider timing of cash glows
very sensitive to minor adjustments
Always cross-check with comparable site valuation if possible “
What is sensitivity analysis and why is it important?
“This is required to analyse key variables such as GDV, build costs and the finance rate.
Slight changes in key variables can have a large impact on the profitability of a development.”
When would you use a Development Appraisal?
ould use a development appraisal when I needed to calculate the profit of a client’s proposed development, or offer advice on a proposed development.
What is IRR
Internal rate of return is a time weighted measure of return.
Internal rate of return is the annual rate of growth an investment is expected to generate.
The higher the IRR the better. Reduce timescales to improve.
What is the S-Curve?
The S-curve is the pattern of cash flow which I assume the construction costs follow within my Argus Residual Appraisal.
It represents the assumption of how costs are spread across the construction period, with the majority expected during the middle of the construction period.
The purpose is to reflect when monies will be spent.
The interest is expected to follow the same pattern across this period.
What are the limitations to the residual method?
he use of assumptions and not real costs.
Assumes 100% debt finance which isn’t realistic.
Small changed to inputs can have a large impact on profit/residual land value.
As per the RICS guidance note: Valuation of Development Property 2019 - you should cross check with the comparable method.
hat is the basis of measurement used for the calculation of build costs and where would you find an up to date estimate of such costs?
GIA
BCIS (Build Cost Information Service)
Consult a building surveyor
hat outputs would you expect to show in a sensitivity analysis
Effect on Land Value
Effect on Profit Amount
hat interest rate do you typically use?
ically within my development valuations I assume the project will be 100% debt financed and generate a general market facing finance rate (to allow for comparison purposes and not accounting for developer specific discounts).
Typically I apply 6.5% which includes the Bank of England base rate (0.1%) cost of borrowing and arrangement fees.
ow do you phase affordable housing in a cash flow?
sing the ‘golden brick’ method, to reflect the typical income flow from the RP where usually you would expect a percentage of the receipt to be paid up front, sometimes with an element in the middle of the construction period (depending on the length of development) and the remainder on practical completion.
Why is stamp duty not included within your case study?
It was accounted for under purchasers costs
Why have you used profit on cost?
Reflective of the risks associated with the development and a market facing input I would typical expect given the requirements of developers on similar development projects.
hat abnormal costs can occur in a development?
round Contamination.
Ground retention needed.
Piled foundations being required.
Allowances for flooding.
hat is the likely level of required profit in a development appraisal?
20% on Cost
Where does BCIS Data come form
BCIS obtains its data from tender cost analysis
List some weaknesses of BCIS
ften taken from public sector development which has a reduced specification.
Need to account for exclusions within the data.
Offers guidance but specific costs of a project can vary.
larger housebuilders tend not to submit data, so costs are inflated
What are the 3 ways to calculate finance rate?
Bank of England base rate + premium
Might be provided in client’s loan terms
The LIBOR rate (London Inter Bank Offer Rate) + premium (variable lending rate between banks for a three month borrowing term)
n.b. LIBOR is being replaced with SONIA (Sterling Overnight Index Average) rate by the end of 2021.
If BCIS was limited, how would you deal with this?
ior debt - first level of borrowing
2. Mezzanine - additional money required over the LTV
hat is new build premium?
ue to being brand new and never lived in
Apply 10 - 15%
w do Land Registry record new build prices?
ey report on the NET SALES PRICE - as developers will often add incentives such as free kitchen appliances to the sales.
Developers need to complete a disclosure of incentives form to Land Regis
at is a typical IRR for a small development site?
30% aprrox.
The larger the site, the lower the IRR as far away from getting the money and being in a positive position
How do you calculate dinance for borrowing for ourchasing of site
n a straight line basis, using compound interest over the length of the development period
How do you calculated a financial viability assessment?
Benchmark Land Value - Residual Value
If it’s positive then its viable, if it’s negative then its unviable.
How do you calculate a benchmark land value?
EUV + Premium (typically 10-15%) to incentivise development .
