Development Appraisal

Question 1

What are the three steps to take before undertaking a valuation?

Answer 1

1. Competence - Am I competent to undertake this work?
   If not refer to a find a surveyor
2. Independence - Think first, then check for any conflicts or personal interests
3. Terms of Engagement
   Set out in writting, your full confirmation of instructions to the client before starting the work and receive written confirmation back.
   The extent and limitations of the valuer must be stated.

Question 2

What are the six steps when collating comparable evidence?

Answer 2

1. Search and select comparables
2. Confirm and verify the details
3. Assemble them in a schedule
4. Adjust the comparables using the hierarchy of evidence
5. Analyse the comparables to form a opinion of value
6. Report value and prepare file note

Question 3

What RICS Professional Standard is used for Comparable Evidence?

Answer 3

The RICS Professional Standard: Comparable Evidence in Real Estate Valuation ‘1st edn’ 2019

Question 4

What does the RICS Professional Standard: Comparable Evidence in Real Estate Valuation ‘1st edn’ 2019 set out?

Answer 4

The document outlines principles in the use of comparable evidence. It provides advice in dealing with situations where there is limited availability of evidence and sets out a non-prescriptive hierarchy of evidence, noting that ‘the valuer should use professional judgement to assess the relative importance of evidence on a case-by-case basis’.

Question 5

What are three 3 categories in the hierarchy of evidence?

Answer 5

Category A - Direct comparables of contemporary
Category B - General market data
Category C - Other sources

Question 6

How do you find relevant comparables?

Answer 6

• Inspection of an area to find recent market activity by seeking agents boards
• Speaking to local agents
• Auction results (although this is gross and can be a special purchaser)
• In house records/data bases
• The date of the evidence is crucial, hence the focus on contemporary.

Question 7

What is the purpose of a development appraisal?

Answer 7

To financially assess the viability of a development scheme. They can be used to establish the residual site value or assess the profitability.

Question 8

What is a development appraisal?

Answer 8

A calculation or series of calculations to establish the value/profitability of a proposed development based upon the clients inputs. It can assume a site value or calculate a site value. It provides guidance as to the viability of the proposed development.

Question 9

What is a residual site valuation?

Answer 9

It is a form of development appraisal. Used for a specific valuation of a property holding to find the market value of the site based on market inputs. At one moment in time, at the valuation date, for a particular purpose. All inputs are always taken at the date of valuation.

Question 10

What is GDV.

Answer 10

Gross development value which is the capital value of the completed scheme.

Question 11

What are included in total development costs?

Answer 11

• Site prep
• Planning costs
• Building costs
• Professional fees
• Contingency
• Marketing costs
• Finance costs

Question 12

What is included in the professional fees and how much is usually allowed?

Answer 12

10 - 15% of the total construction costs. It includes architects, M&E consultants project managers, structural engineers.

Question 13

How much should be allowed for contingency?

Answer 13

5-10% of construction costs

Question 14

What is the calculation to find the Land Value?

Answer 14

GDV - Build Costs + Profit = Land Value

Question 15

What are the limitations of BCIS Build Costs?

Answer 15

Based on the public sector
Not site specific
Time lag
PLC’s don’t have an input

Question 16

What are the three reasons developers need to borrow money?

Answer 16

• for the land purchase
• for the build costs
• for the holding costs

Question 17

What should a valuer assume in terms of the % of debt finance?

Answer 17

100%

Question 18

What is the principle of the S curve?

Answer 18

As the payment of construct costs adopts the profile of an S-shaped curve over the length of the development project. The usual assumption is to halve the interest that would be borrowed for all of the construction period.

Question 19

What is the usual developers profit?

Answer 19

15-20%.

Question 20

What are the two main methods of financing?

Answer 20

1. Debt finance - (bank loan)
2. Equity finance - (shares, JV, own money)

Question 21

What is the usual Loan to value ratio?

Answer 21

60%

Question 22

What is senior debt?

Answer 22

The first level of borrowing which takes precedence over secondary/mezzanine funding?

Question 23

What is mezzanine funding?

Answer 23

Additional funding for the additional monies required over the normal LTV lending

Question 24

What are swaps?

Answer 24

A form of derivative hedging rate for interest rates.

Question 25

What is a swap rate?

Answer 25

The market interest rate for a fixed rate, fixed term loan

Question 26

What are other methods of arranging finance?

Answer 26

JV or forward sales

Question 27

What is overage?

Answer 27

It is a pre-agreed formula where any extra receipts over the expected profit are shared between the landowner and developer in a pre-arranged apportionment. Known as a claw back.

Question 28

What is profit erosion?

Answer 28

The length of time it will take for the development profit to be eroded by the holding charges following the completion of the scheme until the profit form the scheme has been completely drawn down, and the scheme is making a loss.

Question 29

What are the limitations of a residual valuation?

Answer 29

• Importance of accurate information and inputs
• Does not consider the timing of cash flows
• Very sensitive to minor adjustments
• Implicit assumptions
• Always cross-check with the comparable method.

Question 30

What is a sensitivity analysis?

Answer 30

A series of calculations resulting from the residual appraisal involving one or more variables (rent, sales values, build costs, etc.) that re varied to show the differing results.

Question 31

What is market value?

Answer 31

‘the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’.

Question 32

What are the three forms of sensitivity analysis?

Answer 32

1. Simple sensitivity analysis of key variables
2. Scenario analysis
3. Monte Carol simulation

Question 33

What is the guidance called for development appraisals?

Answer 33

RICS Professional standard ‘Valuation of development property’ 2019.

Question 34

What is the definition of development property?

Answer 34

It is where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date.

Question 35

What type of development are included in the RICS Professional standard ‘Valuation of development property’ 2019.

Answer 35

• the construction of buildings
• previously undeveloped land which is being provided with infrastructure
• the redevelopment of previously developed land
• the improvement or alteration of existing buildings or structures
• land allocated for development in a statutory plan
• land allocated for a higher value use of higher density in a statutory plan.

Question 36

What is best practice?

Answer 36

Avoid reliance on one single approach or method of assessing the value of development property. Look at risk analysis and state it in the report.