Development Appraisal Level 2 Flashcards
What are remediation costs?
Site-remediation is the process of removing polluted or contaminated soil, sediment, surface water, or groundwater, to reduce the impact on people or the environment.
Other than profit on costs, what other metric could you use?
Profit on GDV?
What was your PBSA development, Bristol?
Gas Lane - development appraisal
What was the Market Rent for Gas Lane?
Rents between £260 - £395
For Bristol, what stage of the acquisition were they at?
- Valuing assuming that there is a purchase price agreed
- HOTs had been agreed
- and the client was progressing with the acquisition
What land price were you targeting?
The price that the client had agreed to purchase the land for
What was the comparable evidence process?
- Assessed the location/was it a proven location? (proximity to Universities, amenities, transport connections etc)
- Proposed specification
- Proposed amenity offering
- Typical week length offering
How did you deduce the NDV?
Investment method (special assumption complete and operational
Gross income - outgoings = Net Income
Net Income / Cap rate - purchasers costs
= Net Development Value
How did you deduce the cap rate?
- Unproven location was reflected in the yield
- Considered supply and demand dynamics (strong under supply in Bristol)
- Current investment appetite on Bristol
What yield was used for Gas Lane GDV?
5%
What was BIC at time for Gas Lane?
4.75%
What were strengths of Gas Lane?
Strengths
* Strong unmet demand
* The new University of Bristol Temple Quarter Campus is due to fully open in 2026,
* Upon PC, the scheme will provide modern, high specification best in class PBSA.
* BREEAM Excellent accreditation, which will provide running cost saving and appeal to institutional investors and owner operators.
* Limited HMO stock due to rent regulation
What were the weaknesses of Gas Lane?
Limitations
* The location is currently unproven for PBSA,
* The property is a development and therefore does not have the benefit of an occupancy track record for investors.
* The property will be subject to the same risks as all developments, such as delays and cost overruns.
What were the purchasers costs on GAs Lane GDV?
6.78%
What were purchasers costs made up of?
Stamp duty: 4.98%
Sales agent fees: 1.2%
Legal fees: 0.6%
Did the scheme have planning permission?
Yes, so there was no need for Hope Value
If the scheme did not have planning permission how would that impact value?
- Increased risk - reflected in yield
- Potentially increased planning costs
What are the 5 main development costs?
- Construction costs
- Professional fees (disposal fees)
- Planning fees
- Finance rate
- Developers Contingency
Give some examples of construction costs included in Gas Lane
- Demolition
- Substructure
- Internal finishes etc
Because you have provided the NDV what purchase and sale fees do you have?
Because you have provided a NDV you don’t have any fees to transact that out when its build
but you do have the land purchase costs because you are buying the land
Give some examples of professional costs included in Gas Lane
- Sales Agent Fees (0.60%)
- Sales Legal Fees (0.35%)
- Project manager
- Structural engineers
What finance rate was used in Gas Lane?
6% (blended cost of debt and equity) - based on market view
- Our in house view which is based off working with a number of developers and our market knowledge
- assuming all developers are using some form of senior debt/development finance
But why 6%?
- Needs to be above the UK base rate (cost of debt) at the time
- Cost of equity
What is a typical finance rate for PBSA and what was it made up of?
5%-6%
Made up of LIBOR, margin, entry and exit fee
What was the finance rate for Bristol?
6%
- at the time, that is what were were seeing as the market rate
- and assuming it wasn’t 100% financed
How can you finance a development?
- Bank loan eg senior loan, mezzanine
- Equity
How could you de-risk a development?
- Forward funding arrangement
- Pre-let/ Pre-sold
What is a forward funding arrangement?
The Deal: The investor and developer enter into an agreement where the investor commits to buying the property at a predetermined price upon its completion.
Funding: The investor provides the developer with funds in stages throughout the construction process. These staged payments are often linked to specific milestones in the development.
Is there a need for affordable units with new developments?
No this is only in London in line with the London Plan
What is the finance rate assuming?
- It is a blended rate
- Model assumes that your not going to finance at 100% so the rate is blended
- assume that rates were closer to 8/9% but assume there is some equity so it is a blended rate
What are the benefits of a forward fund to the developer?
Reduced Financial Risk: Secures funding upfront, mitigating the risk of cost overruns or delays in securing traditional financing.
Improved Cash Flow: Provides a steady stream of income throughout the development process.
What are the benefits of a forward fund to the investor?
Potential for Higher Returns: Buying the property at a potentially discounted price compared to its market value upon completion.
Long-Term Investment: Acquires a completed property with a stable income stream.
Reduced Development Risk: Shifts some of the development risk to the developer.
What is the principal of the S curve?
As the payment of construction costs adopts the profile of a ‘S’ shape over the length of the development projects , the usual assumption is to halve the interest that would be borrowed for all of the construction period
Purpose: to reflect accurately when monies are drawn down
What was the profit on cost for the Bristol example?
12.5%
How did you benchmark build costs?
- BCIS data & in-house cost consultancy team
- suggested cost budget was higher
- this was due to high specification of the scheme
- we adopted the clients costs
Why did you benchmark costs?
To ensure they weren’t completely off what we would expect
What was the land value?
£9.85m - provided by the client
What was the developers profit?
c.£8m*
What planning costs did you account for in the Bristol example?
S.106 - £100,000
CIL - £1.2m
What was the Bristol s.106 agreement?
- Fire hydrants contributions
- Traffic order contributions
- Transport infrastructure contributions
why did you run a sensitivity analysis?
To provide an indication of how sensitive it is to changes on construction costs
What was the GDV for Gas Lane?
£52m
What were the total development costs?
£51m*
What costs were included in your Gas Lane example?
- Construction
- Planning
- Finance
- Contingency
- Professional fees
What are some examples of professional fees?
- project monitoring
- sound management
- structural engineers
- project management
What was the Co-living example?
Woking - Project Elva
Why did you use a residual valuation your development appraisal competency?
Because development appraisals have a role in residual valuations of development sites - but they are two different activities
How does a development appraisal play a role in residual valuation?
A development appraisal acts as the core calculation within a residual valuation, essentially determining the potential land value by subtracting estimated development costs (including profit) from the anticipated gross development value (GDV) of a completed project, effectively revealing the “residual” value of the land after development is complete; this is a key tool for assessing the financial viability of a development project before purchasing a site
What is a residual site valuation?
Find the market value of a site based on inputs
- This is a form of development appraisal
Why did you undertake a residual valuation?
To determine the land price/the residual value
How did you review the provided build costs?
Benchmarked against
- Build cost consultancy team
- BCIS data
For an extra layer of benchmarking
What type of sensitivity analysis did you use?
Simple
- changing of key variables
What are the other types of sensitivity analysis?
- Scenario analysis - ie change of scenarios eg modifying design
- Monte Carlo simulation - using probability theory
How did having planning permission impact value?
Did NOT need to consider hope value (associated risk with no planning)
I.e you would discount the land value if planning had not bene approved
Did NOT need to account for additional costs/time for the planning consultants and pre-construction period to reflect uncertain design and programme
What was the planning consent for woking?
Redevelopment of the site to create a shared living building (sui-generis use) which ranges in height from two and three storeys (plus basement), to eight and nine storeys (plus basement), to fourteen to seventeen storeys (plus basement), including commercial floorspace [Use Class E], plant, refuse, bicycle store and associated highway works
How did you conclude the build costs were in line with the market?
Spoke with build cost consultancy team
Checked BCIS data - ‘student residence’ by area
Why did you adopt market level costs?
Because I was providing a market value
What comps did you use for Co-living?
BTR, PBSA and PRS
What are typical build costs per room?
c£100,000 - £200,000 per room
What were the build costs for Woking?
£113,000 per studio
What contingency did you use?
5% of total development costs
When might you have a higher allowance for contingency?
If there was increased risk
- ie no planning
What is contingency?
Allowance for risks of unforeseen costs. It is for additional costs/future needs that may arise.
How might the value change closer to completion?
reduced contingency as less risk of needed pot
What would contingency depend on?
Risk
Planning status
Movement in building costs
if the scheme didnt have planning how would that impact profit?
Larger profit to account for larger risk
What was your debt rate?
6% based on equity and debt
What were the marketing and letting fees?
£500/unit
What are the professional fees?
10%
What are professional fees made up of?
- Project managers
- acoustic/sound management
- project monitoring
- structural engineers
o CDM Principal Designer
What were your lettings and sales costs? And what were they made up of?
These are part of your marketing essentially (disposal of the assets)
- CHECK
What were the agreed planning contributions Woking?
S.106
CIL
What is a S.106?
Legal agreement designed to mitigate the potential negative impacts of a proposed development on the local community
What was the S.106 payment for?
Open space development
What other planning costs could be included?
S.278 (Highways)
How might your finance rate differ today?
- cost of lending has decreased from the time of valuation
- would expect to see a lower rate (c5.75%)
What was the profit on cost?
12.5% (typically between 15-25%)
(£8.5m)
How many units was Woking?
329
What were the disposal fees?
Sales Agent fees: 0.6%
Sales Legal fees: 0.3%
What were the purchasers costs Woking?
6.73%
What is the typical construction period of a PBSA scheme?
typically 18-24 months
What is the typical construction period of a co-living scheme?
typically 12-24 months
What was the land value at Woking?
£16m
(£50,000 per bed)
Roughly what are build costs for Bristol at the moment for PBSA?
- Mean - £69,765 per bedroom
- Median £68,880 per bedroom
- Upper quartile - £76,384 per bedroom
‘Student residences’ adjusted for Bristol
Why might BCIS data be slightly off?
The current high inflationary cost environment has resulted in build costs increasing significantly over a very short period, which is unlikely to be reflected in the backwards
looking BCIS data.
What are some limitations of residual valuations?
- Relies on accurate inputs
- It does not consider timing of cash flows
- Sensitive to minor changes
- Implicit assumptions hidden and not explicit (unlike DCF).
Cross-check with comparable site valuation where possible.
Before accepting a development appraisal instruction what do you do?
- Conflict of interest check
- Terms of Engagement
- Investigation – site inspection, market research, public data
- Understand client requirements (profit they want to achieve, cost of finance, timings)
- If you are developer, what are you targeting? How much do you want to make?
Do build costs vary in different locations?
Yes
- Cost of labour
- Cost of material transportation
Where might CIL be influenced?
It can be waived to encourage development
What can impact the profit of a development appraisal?
- Planning (increased profit margin to reflect risk)
What is the general principal of the S curve?
- small borrowing to start with (pre-planning)
- Steep increase in borrowing during the development phase
- Flattens out before disposal
Does a residual valuation assume 100% finance?
Yes it reflects a market approach
What is the affordable contribution for co-living
= 10% DMR units
- Appraised into the NDV through reduced market rents
What is DMR?
20% below market rent
Why did you adopt 12.5% profit on costs?
- Scheme has planning so it is de-risked
- Land value is bench marked with other land values on a per bed basis?
How did you ascertain 12.5% was a good profit on costs for Woking?
- residual land value per bed was benchmarked and in line with other comparable sites
Was it a Red Book Valuation?
Yes - provided NDV on the special assumption that the scheme was stabilized and operational
and Market Value of the site
- which we deduced was in line with their purchase price
What are the CIL payments for resi in woking city centre?
No CIL payment as co-living is sui generis (C3)
CIL charged on Retail (£100psm)
Why was CIL not charged on Woking resi?
Because the scheme falls outside of the definition of residential development set out in the Council’s CIL Charging schedule and will not therefore attract a CIL liability
What was the S.106 agreement for?
Strategic Access Maintenance and Management (SAMM) to mitigate against the potential recreational pressures of residents of the scheme.
What was the CIL at Woking for?
Contribution towards the provision of a Suitable Alternative Natural Greenspace (SANG)
CIL was for a SANG contribution
Provided a CIL rate on the class E use - c.£100psqm as at planning permission
£400,000
S.106 was for SAMM
£150,000
What were interest rates at the time of development appraisals?
5.25% (Feb 2024)
What are interest rates now?
4.75% as at Dec-24
What was RPI inflation ate at time of valuation?
4.5%
current inflation?
2.5%
What is the use class of Woking?
Sui Generis
What was going to be at the development?
Gym, cinema, co-working, communal kitchens etc
What were the salient points of the GDV in co-living?
GDV - £77.3m (stabilised)
per bed: £235k
NIY: 5%
MR: £350 pw - £400pw on 12 month tenancies
DMR: £278
Running costs: £5,700 per bed
Was there no affordable housing provision on S.106?
No it was accounted for in the DMR within the GDV
At the end of the residual valuation what did you do to benchmark?
Benchmarked with other land values per bed
at the time (£25,000-£50,000 per bedspace)
What was the date of both examples?
March 2024
Why did you deem 5% contingency appropriate?
Confident with the parties involved
Risk was also accounted for in the GDV
What use class was bristol?
Sui Generis
What was the Bristol CIL charges?
Student: £100 psm
Retail: £120 psm
Why are forward funds less risky?
Contractually arrange the buyer
Receive an immediate lump sum, and often lump sums throughout the development
Reducing that cashflow risk
End purchaser is already there
Expect a lower % on profit
What did your sensitivity analysis show?
Small changes in construction costs can have a big impact on profitability
Bristol development market
- It is a good market to develop there due to the strong supply and demand dynamics
- They are viable there
- Near new University Campus
- There is headroom for development
- Room for more stabilized asset
GDV of Bristol?
Special assumption that the scheme is operational and stabilised (partial capital deduction for the first year ie 85% occupancy, due to new scheme)
What is the let up period for Co-living?
Build costs are…?
Contractors costs
What are the stamp duty thresholds for non-residential (PBSA)?
For residential:
£0 - £250,000 nil
£150,001 - £250,000 2%
£250,000+ = 5%
Stamp duty on Elva?
4.93%
Professional fees for Woking?
10-12%
In my example 10%
Why did you not consider a high contingency?
Risk was accounted for in the profit
Contingency is more if your contractor goes bust
Hope value?
Valued on the assumption it has planning then remove 20% (very based on market standard)
What is stated within a CIL schedule?
- What use class CIL is paid on
- What £psm
S.106 basis?
- Aimed to offset the negative impacts of a a development
- Which is why they are decided on a case by case basis
General factors?
S.106
CIL
How would planning costs impact appraisal?
Cost that we would take from development value
Then state an example
How to mitigate risk of development risk in appraisal?
Contingency on constructions costs
How to determine an appropriate contingency?
Market approach
Perception of risk of developer
How do you determine your sales and agent fees?
This is a market facing assumptions that we include
What is stamp duty based on?
Set on the stamp duty thresholds
NDV of the GDV is net of the costs to sell the land (not included in the residual)
Sales and agent fees (disposal fees) are to sell the land and is market facing
What professional fees?
Given professional fee amount in a lump sump (benchmarked)
Cross-checked with market facing assumption
In line with market
What was your approach to profit?
Profit on costs
Why was 12.5% appropriate?
In line with what we would see within PBSA
Had planning so it was considered less risky
Why did you use PoC not profit on GDV?
PoC is taking set profit amount of costs involved
POC is a better reflection of the profit that an incoming developer and investor would look at because development costs have been considered to be more risky of late (prone to more fluctuation)
In house view is that PoC is a more market facing approach to the desirable profit level
Costs are more sensitive to GDV
Did you confirm that it had planning?
Check on planning portal
What would you alter if it did not have planning?
Increased profit allowance to allow for risk
or//
risk adjustment on the land value based on the risk associated ie less adjustment if it was in final round as opposed to the land having permission refused before
What would influence if the CIL attributable?
SIZE (uplift)
- based on new GIA
Did you bench mark residual land value?
Yes other land values per unit
co-liv (looked at BTR, PBSA)
Why do you input an NDV?
Our cashflow already provides an NDV ie purchasers costs have been accounted for in the cashflow
GDV - purchasers costs
What are the other purchasers costs you consider then?
On the land
- Stamp duty
- Sales agent
- legal
On the Who development ie NDV
- sales
- agent
(to sell the whole property at the end)
Sooo.. for Bristol…
Purchasers costs on the land =
- Stamp duty
- Agent Fee
- Legal
Disposal fees
- Sales (0.6%)
- Legal (0.3%)
What is finance made?
Blended rate of the cost of debt and the return on equity
Why do we calculate the NDV on the special assumption that the scheme is operational and stabilized?
- market practise
How do we account for stabilization in PBSA?
We don’t and this is market practise - don’t normally have one because you have a run up and letting period
Don’t assume let up as market practice in the UK
