Development Appraisal Flashcards
What is the purpose of a development appraisal?
- It is a tool to financially assess the viability of a development scheme
- Used to assess profitability of a proposed scheme and sensitivity to changing inputs
- It can assume a site value or calculate a site value
What is the GDV?
- Market value of completed development at current date
- MR/ARY use comparables to find these
- Purchaser’s costs deducted
What is the process of a development appraisal?
- Calculate the GDV
- Less site price, planning, construction costs, professional fees, marketing and agent’s costs, finance and purchaser’s costs
What is included in development costs?
- Site Prep - demolition / remedial cost plan
- Planning costs - S106/CIL/affordable housing
- Building Cost Information Service - BCIS index
- Professional fees - 10-15% of construction costs (architects largest)
- Contingency - 5-10% of total construction costs
- Marketing costs
- Agents fees - 1% for sale, 10% for letting
- Developers profit (on cost/GDV - 15-20%)
How do you calculate finance?
- Bank of England Base Rate plus a Premium (4.5% + premium)
- Rate at which the developer can borrow money
What is an opportunity cost of capital?
Interest on finance is rolled up, compound basis, interest starts low and then builds up
What are the 3 elements for finance?
- Site purchase - compound rolled up - straight line
- Total construction costs - S curve
- Holding costs - cover voids - straight line
Why are construction costs S curved?
S curve adopts profile of payment of construction fees
What are the two types of development finance?
- Debt Finance - lending money from a bank or lending institution
- Equity Finance - selling shares in a company or a JV or own money
What is a typical loan to value ratio?
Typically 60% but varies amongst assets
What is senior debt finance?
First level of debt - takes precedent
What is mezzanine funding?
Additional funding over normal LTV
What are swaps?
- They are a form of derivative hedging rate for interest rates
- A swap rate is the market interest rate for fixed rate/term loans
What is a joint venture?
Where 2 or more parties join to develop
What are forward sales?
Where completed schemes are forward sold
What is profit erosion?
Length of time profit is eroded by holding charges following completion until profit has been completely drawn down
What are the 3 types of sensitvity analysis?
- Simple analysis - key variables - GDV, build costs, finance rate
- Scenario analysis - timing, costs, phasing
- Monte Carlo Simulation - probability theory with software
What are the key limitations of using Argus?
Key assumptions and calculations remain hidden - user reliant on information being put in being correct
What is s106 used for?
Affordable housing, infrastructure, school, agreed between local authorities and developers
What is CIL?
Community Infrastructure Levy based on the net additional floorspace of a new development set by the Local Planning Authority
Planning Act 2008
What is overage?
Arrangement made for sharing any extra receipts received over and above profits expected in pre-agreed formula ‘claw back’
What does the RICS Professional Standard Valuation of Development Land 2019 state?
- Special assumptions must be clearly stated in the valuation report
- Best practice - not rely on one approach
What does S278 Highways state?
What sustainability costs do you include?
- £1,500 per dwelling to reflect EV charging and part L of the Building Regulations
- Market facing evidence
