Development Appraisal Flashcards
Purpose
Tool to financially assess the viability of a development scheme. Used to assess profitability of a proposed scheme and sensitivity to changing inputs. It can assume a site value or calculate a site value.
GDV
- MV of completed development at current date
- MR/ARY use comparables to find these
NDV
GDV less purchaser’s costs of 6.8%
5% STAMP
1% AGENT + VAT
0.5% LEGAL + VAT
Profit Calculation
- Calculate GDV
- Less:
o Site price
o Planning
o Construction Costs
o Prof fees
o Marketing and agents costs
o Finance
o Purchasers’ costs
Development Costs include:
- Site Prep – Demolition/remedial/obtain cost plan
- Planning costs – S106/CIL/affordable housing
Town and Country Planning Act 1990 S106 Payments - Building Cost Information Service - BCIS index
- Prof fees – 10-15% of construction costs (architects largest)
- Contingency – 10%-15% of total construction costs
- Marketing costs (quotes/budget), EPC cost
- Agents fees – 1% for sale-10% for letting
- Developers profit (on cost/GDV – 15-20%)
SONIA
Sterling Overnight Index Average
SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.
Calculation of Finance
- Bank of England Base Rate plus a Premium (5.25% + premium)
- Rate at which the developer can borrow money
- Interest on finance is rolled up, compound basis, interest starts low and then builds up – OCC – opportunity cost of capital
3 elements for finance
- Site purchase – compound rolled up – straight line
- Total construction costs – S-curve
- Holding costs – cover voids – straight line
Finance for borrowing money to purchase land – calculated on a straight-line basis over length of development period. Rolled up method. S curve adopts profile of payment of construction fees
Bridging Finance
Short-term finance solution, favored by investors and developers to quickly purchase a property seek exit at loan term.
Mezzanine Finance
Hybrid version of finance that combines elements of debt and equity investment, secured against the property. Helps developers reduce their cash flow requirement so they can finance projects normally requiring a larger capital share.
Senior Debt Finance
This takes precedent to be repaid first over other financing options.
Debt/Equity
- Debt Finance – lending money from a bank or lending institution
- Equity finance – selling shares in a company or a JV or own money
LTV – Loan to Value ratio, typically 60% but varies amongst assets.
Sensitivity Analysis
- Simple analysis – key variables – GDV, build costs, finance rate
- Scenario analysis – timing, costs, phasing
- Monte Carlo Simulation – probability theory with software
Overage
Arrangement made for sharing any extra receipts received over and above profits expected in pre-agreed formula ‘claw back’.
Profit Share
Any amount above the profit on cost originally agreed.
Profit Erosion
The length of time profit is eroded by holding charges following completion until the profit has been completely drawn down.
RICS Professional Standard-Financial Viability in planning: conduct and reporting 2019
Used when undertaking a planning viability assessment. Compulsory
Discusses residuals and GDV calculations amongst saying to compare against actual land transactions.
RICS Professional Standard-Valuation of Development Land 2019
To supplement IVS 410 ‘Development Property’ – SA’s must be clearly stated in the valuation report. Best practice - not rely on one approach.
CIL/MCIL
Charged on uplift in area.
CIL charging schedule, borough dependent. If not indexed, you can take from BCIS index and bring back to 2023.
How to get Section 106 costs?
With planning: Get from S106 agreement.
Without planning: Can benchmark from similar schemes which have planning and break it back to psf and go to planning consultant.
Co-living Development, Battersea
LEVEL 2
- Comps, GDV, assumed operational and stablised, deducted purchaser’s costs to arrive at the NDV. BCIS index £320/ft2 this is above average but as expected as the scheme was high spec.
- Deducted total land and development costs to arrive at developer’s profit amount – construction increased development would not be viable.
Office Refurbishment, City of London
LEVEL 2
50,000 sqft office 1 GSH
- Several appraisals, higher cost higher ERVs
- Adopted prof fees sent by architects and wider DM team.
- Spoke with agent’s for opinion of MR, and voids.
- Benchmarked all.
- Market assumptions for contingency, finance, marketing, letting and sale costs.
- Risk, reward review to show client different options.
Proposed PBSA Development, Sheffield
LEVEL 3
Site for 454 PBSA beds, has planning.
- Rent and investment comps to form opinion of GDV, deduct PC to give NDV.
- Checked costs with building surveyor and deducted total land and development costs from NDV to give profit.
- All studios, advised to convert some to ensuite as more affordable and Sheffield over supplied.
Office Redevelopment, Barbican
LEVEL 3
No planning permission for residential but bought site to convert to co-living.
Ran scenario with planning not obtained in initial timeframe - increased contingency and timescale.
Beech Street - Hope Value?
An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.
