Development Appraisal Flashcards
What is a development appraisal?
A financial appraisal of a development. Typically output is development profit although other output metrics can be used.
What can a development appraisal be used for?
Analysis of a scheme to consider whether the level of required planning obligations is viable
Assessing whether a development is viable or not based on the level of profit achieved
Assessing the best and highest use for a property or to compare different schemes or proposals
Assessing affordable housing requirements.
What is the difference between a development appraisal and a residual valuation?
A residual valuation has one main purpose which is to determine the market value of the land. Inputs are usually fixed and doesn’t have to involve a precise cashflow finance costs can be crudely calculated.
A development appraisal has several purposes albeit most often to establish profitability of development options. Inputs often variables. Always incorporates a precise cashflow and calculated finance costs. Requires software. More detailed complex application.
Is there any RICS guidance available?
Valuation of development property 1st edition 2019
Valuation of land for affordable housing 2nd edition 2016
What measurement basis do you calculate build costs?
GIA basis
Where would you get your build costs from?
BCIS, The client, 3rd party building surveyor, recent projects
How do you work out your contingency rate?
Typically between 5 and 10%, dependent on risk, how much site investigation done, level of abnormal
What is contingency?
If any unpredicted issues arise such as additional construction costs.
How do you reflect for letting void?
Reflected in cash flow at end of the construction process. Alternatively reflect in yield
How is the typical development appraisal structured?
GDV – input costs – fixed land cost = profit
What is the equation for residual land value?
GDV – Total costs – developers profit = residual land value
Impacts on RLV?
Increasing the GDV increases RLV
Increasing the TDC lowers the RLV
Increasing the DP lowers the RLV
What are some other output metrics other than profit?
Internal rate of return, return on capital employed, rent cover
What is intental rate of return?
A measure of an investments profitability over its lifetime. I higher IRR indicates a more profitable investment.
How do you calculate GDV?
Value of completed property. Market value x number of units
What costs are deducted from GDV?
Build costs
Professional fees
Planning fees
Marketing, letting, disposal
Contingency
Finance costs
Fixed land cost
Where would you take account of planning costs?
Within total costs
How did you calculate professional fees?
Tend to range between 10-15% plus VAT of construction costs.
What professional fees are normally included?
Architect, structural engineer, project manager
Where does the information provided by BCIS come from?
RICS service. Updates are obtained monthly from recent contract prices/tenders agreed
How do you calculate profit of a development?
GDV – Total development costs – residual value = profit
What is overage?
A pre agreed arrangement between vendor and developer for sharing profits received over and above the expected profit.
What is a typical loan to value ratio?
In the region of 60%, used to be 70% but now more risk adverse.
Main forms of development finance used by developers?
Debt funding, equity funding
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?
S curve. Assumes total construction cost over half the time period. Usual assumption is to half the interest. Reflects more accurately when monies are drawn down.
What are 3 levels of debt?
Senior debt, secondary funding, mezzanine funding
How is interest calculated on development finance?
On a rolled up basis.
What is sensitivity analysis?
A method of quantifying risk. Required to analyse key variables such as GDV, build costs, finance rate. Slight changes in key variables can have a large impact on profitability of a development
What forms of sensitivity analysis are there?
Simple sensitivity analysis (rent, build costs, yield), scenario analysis (content, timing, costs), probability analysis (oracle crystal ball software)
What is profit erosion period?
Length of time it takes for development profit to be eroded by holding charges following completion.
What other methods of finance are there?
Joint ventures, forward sales, scheme presold to an investor
What planning costs would you consider in your appraisal?
Section 106, CIL charges, Section 278, planning application
Can you give a brief methodology of a development appraisal?
Gross development value – costs (including land value) = developer profit
What is meant by a twin track approach?
Do residual valuation and also comparable method to crosscheck values
Can you talk me through some of the key inputs for a development appraisal?
GDV, Build costs, professional fees, planning costs, abnormal, profits, land value
What is the difference between S106 and CIL?
S106 negotiable, s106 goes in and around the development
CIL is rate per m2 , dictated within local development plan, not negotiable
Development appraisal in Cardiff, demolition of pub, did the client provide the abnormal, how did you calculate?
Had a rate per m2 for demolition, internal building surveyor team. Beyond expertise. I sought advice from the team.
What is the typical range of contingency and why?
2.5-5%, if greenfield site, no contamination will go lower, if brownfield site with more issues then raise contingency, also take into account abnormals provided by the client. Ift here are lots then bring down the contingency as already been accounted for
Can you remember what profit you applied to pub?
18%
What is typical range of profits?
15-20% this is dependent on risk. Greenfield lower risk, brownfield higher, flatted scheme higher.
Why do we carry out sensitivity analysis?
Highlighting the risk, increasing and decreasing build costs and GDVs, different schemes, highlight what small changes can have big impact on appraisal
What current market conditions would you highlight when providing Development Appraisal advice to a client?
I would highlight the importance of considering current rising interest rates and high levels of inflation that result in the following:
Rising borrowing costs depending on the financing model being adopted for the development could mean a lower level of return
Falling demand for commercial office space following the impact of Covid-19 and a shift towards home working could result in lower levels of rental income, longer void periods and a reduction in the Gross Development Value
There has been recent pull back of borrowing products from specialist lenders who are withdrawing competitive borrowing rates and being much more selective
High levels of inflation and a strong demand for specialist labour and building products has resulted in building costs remaining high resulting in increased build costs and lower levels of return for developers
Typical contingency for a greenfield and brownfield site?
Brownfield 5%, Greenfield 3%
How profit and risk relate to each other and the development, when would you adopt a higher, medium or lower profit?
Profit = risk
High risk and therefore higher profit would be speculative development, economic uncertainty, bespoke, difficult site, no site investigations, long term scheme, restricted market
Medium risk shortfall, established demand, popular, brownfield with SI
Low risk – pre sold/let, joint venture, greenfield, high demand, affordable housing, PRS
What is the usual profit range?
15-20%
What is a usual contingency range?
3-5%
How do you determine the amount of interest paid on the cost of borrowing the building related costs?
Set out the costs as a cash flow and determine the total interest payments. These are then included as a cost to be deducted from the development proceeds. Some software adopts this approach. It represents a cash flow model assuming 100% borrowing on land and building/ancillary costs and a fixed profit based on a per cent of GDV or costs.
Interest on construction= based borrowings can be more crudely approximated by assuming that interest accumulates on half the development costs excluding land and profit at the cost of borrowing over the whole construction period.
It can be approximated by assuming that the whole of those costs is borrowed over half the construction period.
How does the length of the development period impact finance?
Longer period – more expensive finance
Earlier you receive the income – lower finance
Higher the cost of site prep – high early outgoings – higher finance
What is the current interest rate?
5%
What does Valuation of development Property, 2019 say?
Sets development valuation process, basis of valuations, valuation approach (comparable and residual), assessing development potential, risk analysis, profit
Why does planning policy have an impact on development appraisals?
Planning sets policies in specific areas, sets affordable housing requirements, determine S106 and CIL
What would you look at in reference to planning policy?
Affordable housing policy, CIL rates
Can you tell me more about the cash flow approach?
Period by period cash flow, good to accurately reflect timing pf pyamnets, pputcome of each period carried forward to next period, final period gives profit, use simple calculations for each period, horizontal method – calculation across rows, good for breaking down overall costs and allowing for different payment pattern, shows timing of maximum deficit, useful to arrange finance, can be basis for a budget
Carmarthen - What was the proposed development in Carmarthen?
Housing association suggested mixed -use scheme of resi and either office or retail. I considered this but also considered alternative scheme of housing for over 55s.
Carmarthen - Where there any restrictions because the building was an old post office?
Building was part 2 grade listed, because of this I adopted a higher contingency to reflect risk as redevelopment of an older listed building
What was the construction of the post office?
Edwardian, sash windows, ashlar façade, slate roof, early 1900s. Othe hald was bick built with sash windows.
Carmarthen - Why did you consider a different scheme?
Felt other schemes weren’t maximum and best use. Retail sector shows the number of empty retail units are increasing. Carmarthen was no exception. Lots of vacant units on the high street and a number of charity shops. The property did not have large glass frontage which is desirable for retail units on a high street. Also being grade 2 listed there is limitations on how the property can be altered. Suggested low demand.
Demand for office accommodation of grade a standard. Modern premises with top notch amenities and facilities. Heating, ventilation and air conditioning of high efficiency. Those in old buildings need high spec and this is costly. Property at risk of E EPC rating and unable to let commercial property below E without legitimate reason. Due to costs, suggested wasn’t viable.
Carmarthen - What was the scheme you suggested?
Over 55s.
Carmarthen - Why did you suggest over 55s scheme?
Because over 55s are larger units with higher values. This was a low value area and OMVs were not viable. Evidence showed there was a market for the locality.
Carmarthen - What changes did you carry out in your sensitivity analysis?
Adopting different build costs and increasing and decreasing the GDV by 5%
Carmarthen - What did you sensitivity analysis show?
That the open market scheme was unviable and therefore the over 55s scheme was the scheme I suggested.
Carmarthen - Why did you consider comparable land sales?
As per RICS guidance note, twin track
Carmarthen - What land sales did you look at?
Properties with development potential to be converted – other grade 2 listed properties.
Carmarthen – What were your assumptions?
That the property would meet the minimum requirements set out by the Energy Act 2011.
What are the minimum requirements set out by the Energy Act 2011?
Minimum level of E for resi and commercial
Carmarthen – What was your special assumption?
That full planning permission was granted reflecting residential development
Carmarthen – was it in a mining area?
No, not in an underground mining area.
Carmarthen – was it in an area of flooding?
No, not a potential risk.
Carmarthen – what planning application had been made on the site?
Applications had been made referring to change of use of the ground floors. No planning applications for residential development had been made.
Carmarthen – what build costs did you adopt and why?
I adopted MQ prices.
Carmarthen - what is a net to gross adjustment? Common range? What figure did you adopt and why?
Only adopted on flatted schemes. Relates to communal spaces such as stairways and shared corridors. 5-15% usual range. A high rise flatted scheme would have higher percentage as it would have lifts etc. A smaller flatted scheme would have a lower percentage. I adopted 15% as greater net to gross area due to there being more communal areas for an over 55s scheme.
Carmarthen – What rate did you apply for external works and why? Timing?
5% due to lack of external space being a flatted scheme. Over the construction period.
Carmarthen – what profit did you adopt and why?
20%, higher end of profit due to being a redevelopment of a part listed building therefore higher risk
Carmarthen – What site purchase costs did you apply?
1% agent fee and 0.5% legal fees
Carmarthen – What marketing costs did you apply and timing?
1.5% on open market units and £600 legal fees per unit. Cost of £5,000 from RP, paid at the end of construction, beginning of sales.
Carmarthen – what finance rate did you apply?
7% assuming 100% debt funding
Carmarthen – what professional fee figure did you apply?
6%
Carmarthen – what contingency rate did you apply and why?
8% as this was an older listed building.
Carmarthen – Where did you get build costs from?
BCIS and VOA quantity surveyors as BCIS did not include sprinklers as required under Domestic Fire Safety (Wales) Regulations. They advised a cost of £30/m2
Carmarthen – what abnormals did you adopt and what were they? Timings?
Client provided a cost of £300,000 for demolition. I adopted this within my appraisal at the beginning of the construction period.
Carmarthen – what s106? Any CIL payments?
The subject property had been vacant fo over 10 years and has been challenged to enable development schemes to be viable. Therefore of the opinion that could negotiate no S106 payable because of this did not apply any S106 contributions.
Carmarthen – what phasing did you apply?
A year long build period. RP purchase at the end of build period. Sales start 3months after construction continuing until 3 months after construction completed.
Swansea - What was the proposed development in Swansea?
19 residential dwellings
Swansea - What changes did you carry out in your sensitivity analysis?
Changes in build costs and 5% increase and decease in GDV
Swansea - What did your sensitivity analysis show?
That MQ prices lowered land value, 5% GDV increase increased land value, 5% GDV decrease, decreased land value.
Swansea - Why did you consider comparable land sales?
Twin track approach
Swansea - What land sales did you look at?
Land with development potential, planning in place
Swansea – What were your assumptions?
Assumed good title can be shown, no unusual or onerous restrictions, no hazardous material used in the constructed
Swansea – What was your special assumption?
No special assumptions
Swansea – was it in a mining area?
Yes but terms of engagement state that VOA instructed to assume that the property is not at the valuation date, affected by any mining subsidence and will not be affected in the future and that the site is stable and no extraordinary costs with regard to mining subsidence.
Swansea – was it in an area of flooding?
Not an area at potential risk of flooding.
Swansea – what planning application had been made on the site?
Site had planning for 19 dwellings subject to S106 being negotiated
Swansea – what build costs did you adopt and why?
LQ
Swansea - what is a net to gross adjustment? What figure did you adopt and why?
0% as houses
Swansea – What rate did you apply for external works and why?
15% housing development with more landscaping
Swansea – what profit did you adopt and why?
17% as greenfield
Swansea – What site purchase costs did you apply?
1% agent fees, 0.5% legal fees
Swansea – What marketing costs did you apply and timing?
£5,000 RP when construction complete, 1.5% sales fees, £600 per unit legal fees.
Swansea – what legal fees did you apply?
£600 per unit
Swansea – what finance rate did you apply?
7%
Swansea – what professional fee figure did you apply?
6%
Swansea – what contingency rate did you apply and why?
2.5% contingency – lower as number of abnormals and greenfield
Swansea – Where did you get build costs from?
BCIS and VOA quantity surveyors
Swansea – what abnormals did you adopt and what were they? Timings?
Client had provided list of abnormals but I excluded several items such as rainwater gardens and scented gardens, interplanting area. I included site preparation,
Swansea – what s106? Any CIL payments?
£2,000 a unit S106
Swansea – what phasing did you apply?
Year construction, RP purchase at end of construction, sales 3 months after start on site and end 3 months after construction complete
What does RICS Valuation of Land for Affordable Housing say?
2nd edition, April 2016. Guidance note.
It assists in the approach to the valuation of affordable housing development land. It assists in assessing development potential such as looking at planning influences and constraints. Establishing GDV.
Why did you not adopt CIL?
Because the local authority had not adopted it. It is not adopted by many local authorities in Wales.
How did you calculate your benchmark land value?
If they push - The residual land value is then compared to the benchamk land value as defined in the planning policy guidance on viability. Where the residual land value produced from an appraisial of a policy complaint scheme is in excess of the benchmark land value then the scheme is financillay viable. In this case the scheme was viable.
Appraisal can be rearagned to judge viability of scheme in terms of residual prfit which is compared to taget profit. If residual profit higher than target than its viable.
What is benchmark land value?
5 steps
1.existing use value
2. evidence of premiums / benchmark land value in plan study
3. alternative use value
4. residual land value of compliant scheme
5. adjusted market transaction/ comparables of agreed benchmarks
Definitions are found in planning guidance.
Benchmark land value is greater than existing use value
Existing use value of planning purposes is the property/land as it stands (no development potential)
Market transactions are a cross check
The purchase price is not a reason to reduce policy provision
What is an example of an assumption?
That a property is connected to all main services.
What is a example of a special assumption?
Having planning permission in place when it doesn’t
