Development Appraisal

Question 1

What’s the difference between a development appraisal and residual appraisals?

Answer 1

A development appraisal seeks to understand profit, and often involves inputs from the client.

A Residual valuation uses market assumptions/inputs and seeks to understand the land value of a development site.

Question 2

What costs would you allow for within an appraisal?

Answer 2

Build costs
Demolition
Contingency
Professional fees
Finance
Market & sale fees
Developer profit
CIL/MCIL/S106 (sometimes called planning costs)

Question 3

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

Answer 3

Demolition.
Remediation works.
Landfill tax.
Site clearance.
Levelling.
Fencing.
I would obtain a contractors estimate for these works.

Question 3

What is a Section 106?

Answer 3

A planning obligation agreed with the local planning authority. Could be in the form of affordable housing, new school, payment of money etc

Question 4

What is a Section 278 payment?

Answer 4

A payment made for highway works.

Question 5

What is CIL?

Answer 5

Community infrastructure levy. Based on a formula that relates to size of a development/net gain of space

Question 6

What can a developer not be charged?

Answer 6

Any double counting on S.106 and CIL.

Question 7

What is the difference between an easement and a restrictive covenant?

Answer 7

An easement allows access to the use of land for a specific purpose. Covenants place certain restrictions or impose obligations on it.

Question 8

What are the different ways for estimating building costs?

Answer 8

Client information.
RICS Building Cost Information Service (BCIS).
Building surveyor/quantity surveyor estimate.

Question 9

How are BCIS costs usually expressed?

Answer 9

£/m2 GIA

Question 10

Where does the BCIS obtain its information from?

Answer 10

Monthly updates from quantity and building surveyors. Recent contract prices/tenders agreed.

Question 11

What are the disadvantages of BCIS?

Answer 11

Small sample size and based on smaller developments. Run by the RICS. GIA basis only.

Question 12

What would be included in your estimate of professional fees?

Answer 12

Architects.
M&E consultants.
Project managers.
Structural engineers.
Quantity surveyors.

Question 13

What is the typical amount of professional fees?

Answer 13

10-15% of total construction costs + VAT. This can be higher or lower depending on the complexity of a project.

Question 14

How much would you architect fees be?

Answer 14

4% of construction costs.

Question 15

What would you typically estimate for contingency costs?

Answer 15

5-10% of total construction costs (depending on level of risk and likely movements in building costs).

Question 16

What would be included in your estimate for marketing costs?

Answer 16

EPC
Sales fee (1-2% of GDV)
Letting fee (10-15% of annual rent)

Question 17

How much does an EPC cost?

Answer 17

£35 to £120

Question 18

How could you estimate the interest rate?

Answer 18

SONIA + premium or Bank if England + premium or rate at which the client can actually borrow the money.

Question 19

What are the three reasons a developer needs to borrow money?

Answer 19

Site purchase
Total construction costs.
Holding over costs for voids etc for the disposal of the scheme.

Question 20

How would you calculate the finance required to purchase a site?

Answer 20

Calculate on a straight-line basis over the length of the development period – rolled up method (compound interest - paid at the end).

Question 21

Explain the concept of the s-curve and why it is applicable?

Answer 21

Reflects when finance tends to be drawn down - lower levels of expenditure at the beginning, most in the middle, and lower at the end.

Interest only paid on the drawn down money

Question 22

What are the two main methods of development finance?

Answer 22

Debt finance
Equity finance

Question 23

What is an overage?

Answer 23

The arrangement made for the sharing any uplift received and above the profits originally excepted, as agreed in a pre-agreed formula.
(to the original site owner)

Question 24

What is a profit erosion period?

Answer 24

The length of time it takes for the development profit to be eroded by holding charges following the completion of a scheme until the profit of the scheme has been completely drawn down, due to interest, unsold units.

Question 25

What is a hurdle rate?

Answer 25

It’s a rate of return
Minimum required rate of return that investors require for a project

Question 26

What is the return on equity formula?

Answer 26

Developers’ profit/developers equity.

Question 27

What is sensitivity analysis?

Answer 27

A way to understand how sensitive the project is to inputs

i.e how is residual/profit impacted by changes to inputs e.g. build costs, interest rates, rent/yield/GDV

Typically look at changes in build costs and GDV in 5% increments

Question 28

When inspecting a development site, what should you be looking for?

Answer 28

Signs of contamination, protected species such as bats and badgers.

Question 29

What are some benefits to using Argus Developer?

Answer 29

1. Scenario analysis.
2. Easy to put in inputs.
3. Less errors.
4. Allows phasing.

Question 30

What is a shortfall of using Argus developer?

Answer 30

Human error in entering the metrics into Argus Developer.
Its an expensive piece of software.
Lacks flexibility compared to Excel.
Can cant see the formulas.

Question 31

What are some shortfalls of the BCIS system?

Answer 31

sample sizes
complexity of projects
lack of detail e.g. specification

Question 32

What is IVS 410?

Answer 32

The international valuations standards that specifically address development property. Includes the residual method, market approach, and income approach. Ensures valuers consider construction costs, market supply and demand dynamics, planning permissions and timeline.