Development Appraisal Flashcards
What is a development appraisal?
An objective financial viability test of the ability of a development project to meet its costs.
This includes the cost of its planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer in delivering the project.
What is the residual method?
A valuation method that can assess the level of return generated from the proposed project and also establish the residual site value by inputting pre-determined levels of returns.
Gross Development Value deducting the costs to build the development and Developers Profit to reach the Residual Land Value.
When is a development appraisal useful?
- To establish the level of affordable housing.
- To assess the level and nature of planning obligation contributions.
- Reviewing land uses.
- To inform a potential purchaser prior to acquisition of the site.
What is a sensitivity analysis?
- Sensitivity analysis is where you re-calculate the appraisal with different assumptions on inputs.
for example an increase in build costs or a decrease in gross development value to identify what effect this has on the potential profit and residual land value.
How would you calculate the sum of money available to purchase the land?
The sum of money available for the purchase of land can be calculated from the value of the completed development (GDV) minus the costs of the development process (including profit).
What are some of the disadvantages of the Residual Valuation
Method?
- Inflexibility in dealing with the precise timings of costs and revenue results in inaccuracies.
- Single best estimates hide uncertainty and the main variables cannot always be estimated with accuracy.
- Small changes in some of the variables can have a significant impact on the final residual value.
How much would it cost to build an office, industrial and retail building?
This would depend on the specification and location of the property - prices on average would be:
- Office £2,500/m2-£5,000/m
- Retail Warehouse £1,100/m2-£3,500/m2
- Industrial £1,100/m2-£2,500/m2
- Retail Shop £3,500/m2-£7,500/m2
What key market conditions would you highlight when providing
Development Appraisal advice to a client?
o Rising borrowing costs depending on the financing model being adopted for the development could mean a lower level of return.
o 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.
o There has been recent pull back of borrowing products from specialist lenders who are withdrawing competitive borrowing rates and being much more selective.
o 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.
What are the key stages of a typical development programme?
- Pre-Construction:
o Site Identification.
o Financial Modelling & Viability.
o Development Appraisal.
o Site negotiation & Acquisition.
o Design.
o Financing.
o Planning.
o Contractor selection.
o Contract Agreement. - Construction:
o Site enabling works.
o Main Construction of sub-structure, superstructure & external works. - Post Construction:
o Building Handover.
o Identification of tenants and letting of building.
Please explain the difference between a Development Appraisal and a Residual Valuation?
- A residual land valuation considers the potential Gross Development Value of the site less all associated costs of the development including the accepted level of developers profit in order to arrive at a residual land value that the site can be purchased for.
(GDV minus Build Costs, Fees, Finance, Developers Profit = Residual Land Value). - A development appraisal considers the potential Gross Development Value of the site less all associated costs including the land purchase value in order to determine the level of developers profit that remains.
(GDV minus Build Costs, Land Purchase Value, Fees, Finance = Developers Profit).
What would you deem to be an acceptable level of profit for a
Developer?
Either a percentage of total costs (20% to 25%)
or a percentage of gross development value (15% to 20%)
What Development Appraisal Software have you used previously?
I am aware of Argus Developer as I have undergone training sessions on the use of the system, various inputs and sensitivity testing that can be carried out. However, I have not used this in the development appraisals I have carried out.
Please explain your understanding of the term ‘Placemaking’?
- Placemaking is a wholistic approach to the development of public spaces that considers planning, design, implementation and management.
- This aims to deliver public spaces that offer unique value to their occupants such as:-
o A greater sense of belonging.
o Increased security.
o A unique atmosphere.
o Inspiration and experience.
o A sense of pride in community. - The concept is thought to result in an improved quality of life to occupants, greater happiness, better
work productivity and a possible increase in property values.
What is the community infrastructure levy?
The Community Infrastructure Levy is a charge which can be applied by local authorities on new developments in their area that involve the creation of new dwellings, residential and warehouse developments.
CIL is charged at a flat rate per square metre with rates set out in the CIL charging schedule.
MCC do not currently charge CIL to developers.
What is your understanding of the term ‘Right of Light’?
In England and Wales, a ‘right to light’ is an easement that gives landowners the right to receive light through defined apertures , such as windows, in buildings on their land.
- Landowners cannot disrupt their neighbours’ rights to light. For example, they can’t erect a building in a way that blocks the light, without their neighbours’ prior consent.
- Right to light applies to all properties that have received natural daylight for more than 20 years.
- It guarantees landowners their qualifying buildings will continue to receive natural light.
- If not they will be awarded compensation for their buildings’ loss of light.
