Development Appraisal Flashcards
What is the difference between a development appraisal and a residual valuation?
A development appraisal is a tool used to assess the viability of a development scheme, while a residual valuation determines the market value of land based. A residual will therefore use market led costs, based on valuer inputs.
Whereas, a development appraisal will use client inputs.
How do you work out your contingency rate?
Typically a contingency rate would be between 5-10% of the construction costs but this would depend on the level of risk of the development.
What is contingency?
A future event or circumstance that cannot be predicted with certainty, i.e. additional construction
How do you estimate the total construction cost for a scheme?
In order to assess the construction cost of a scheme, I would look to use the BCIS, to ascertain what cost levels are on nearby schemes in the area. I would check this level against what my firm’s building surveyors felt was an appropriate level of costs to account for.
Where would you typically get your finance rate for a development appraisal from?
Firstly check with your client as they may have a specific loan facility and be able to borrow money at a certain rate, I would then use that.
I would also look at comparable scheme to see what finance rate had been used. However the best way of working out the best level of finance achievable for the scheme would be to talk to the developer, and find out what finance arrangements he has been able to find on recent projects, and compare the market conditions then with the current market.
A typical market finance rate would be 6%.
Interest should also be calculated to cover the time period from the purchase of the land, the construction of the building and any projected letting / sale void upon completion of construction.
When do you need most of your costs for a development? What is an S -Curve?
Typically developers do not need access to all the capital at once due to the S Curve nature of costs within a development scheme, that allow for costs to start at a low level, and rise through the construction process.
The interest on the finance will normally be on a rolled up, compound interest basis, that will provide for the full amount of financing needed throughout the development.
As not all of the money will not need to be drawn down on at once the interest rate payable will start low and will increase with the more borrowing. During site preliminaries there aren’t many outgoing costs and therefore your borrowing will be low. As time progresses into the construction phase your costs will increase particularly when the frame of your building is being put up etc. This may mean that the increase in borrowing is quite steep. Once your development is near complete and it is just the marketing your costs of finance will the tail off until you have sold your development and paid off your loan.
Talk me through how you would do a development appraisal?
- GDV (Rent * Yield)
- Less purchasers costs = NDV
- Subtract Site Costs – They already owned the site – price £X.
- Subtract Total costs – planning, professional fees including structural engineers, CDM contractor, M&E consultants 10% - 15%
- Subtract Contingency – 5% of total construction costs.
- Subtract Marketing costs
- Less Finance Costs – 6%.
GIVES YOU:
Profit on cost of X%
Why would you use a profit on cost as opposed to profit on GDV?
A POC approach is more accurate than based on GDV as the calculation of the GDV is more subjective.
Also accurate construction costs may have been provided by the client
What is a sensitivity analysis?
A method used to determine how changes in variables impact an outcome
will provide different scenarios to the client
E.g. construction costs, yield and rent
What software do you use to undertake development appraisals and what are the limitations to this?
Argus Developer
Need for robust data input to ensure accurate results.
What are the main weaknesses of a development appraisal?
1) Unstable and extremely sensitive to minor adjustments
2) The method does not take into account the timing of cash flows (unlike the DCF approach). It is growth IMPLICIT rather than growth explicit.
3) High quality of information for the inputs is essential
4) IMPLICIT assumptions remain hidden
Why do you need to deduct purchasers costs?
Costs will need to be put in place if you wanted to buy the land. Agents costs, legal costs and Stamp Duty on buying the land.
What statutory DD would you carry out prior to an inspection?
- Check ground contamination
- Flooding
- Japanese Knotweed
What is a local plan?
Strategic planning doc prepared by LA that outlines:
- Vision and framework for the future development of an area
- Serves as the basis for decisions on planning applications
What are the disadvantages of using Argus Developer?
- User error
- Assumes 100% finance rate
- High cost
- Significant time and expertise required
Why does Argus Developer assume 100% debt financing?
Allows for standardised calculation of developer returns and residual land value
What is S 106 agreement?
Legally binding agreement between LPA and developer
Addresses impact of a development on local area and infrastructure - negotiation
What is CIL?
A charge which can be levied by a LA on new developments
Based on increase in area of the scheme over 100 sq m.
What is a Section 278 agreement?
Legal agreement under the Highways Act 1980
Allows developers to enter agreement with LA to make alterations or improvements to public highway
What is a yield?
A return on interest and reflects risk
Where does information on BCIS come from?
Project tender rates and contractor tender prices
What is massing?
Size of a development
What is density?
The number of people a development can service
What is the profit erosion period?
Relates to the length of time it will take for a development profit to be eroded by holding charges following the completion of the scheme
Due to interest charges
