Development Appraisals

Question 1

What is the difference between a development appraisal and a residual valuation

Answer 1

A residual valuation uses inputs based on the market to find market value of a site but a development appraisal can include inputs based on a particular client’s circumstances/objectives and can assume a site value or calculate a site value

Question 2

What are development appraisals used for?

Answer 2

To test viability, profitability and establish a residual site value

Question 3

What are the main development costs?

Answer 3

Land acquisition costs
Site preparation/abnormals
Planning fees and contributions
Build costs including prelims and external works + contingency
Professional fees which include VAT
Marketing
Warranty if resi
Developer’s profit
Disposal costs - sales/letting/legal
Finance

Question 4

Swap rate

Answer 4

The market interest rate for fixed rate, fixed term loans

Question 5

Overage

Answer 5

Arrangement for sharing any extra receipts received over and above the profit originally expected from a development. Typically between vendor of land and developer

Question 6

Profit erosion period

Answer 6

Length of time it will take for all development profit to be eroded due to holding cost following completion of a scheme due to interest charges

Question 7

Limitations of residuals

Answer 7

Importance of accurate information and inputs
Very sensitive to minor adjustments
Concept of negative value not realistic

Question 8

How has SDLT changed recently?

Answer 8

Nil threshold increased from £125,000 to £250,000 for first time buyers this has increased from £300,000 to £425,000

Question 9

What are the drawbacks of using BCIS

Answer 9

There is a lag with the data so it is behind live pricing. It is just an estimate based on averages so typically adopt a higher contingency when using these costs

Question 10

What are they points covered in Valuation of development property 2019

Answer 10

Clarifying the basis of value and any special assumptions
Best practice of cross checking between comparable and residual methods
Best practice requires risk analysis
Assume 100% borrowing in appraisals
DCF might be best for complex or lengthy schemes

Question 11

For what purposes might a valuation of development property be required?

Answer 11

Establishing viability, loan security, financial reporting, acquisition, litigation

Question 12

What was the assumed specification for the scheme?

Answer 12

Layout open plan kitchen/dining/living for smaller units and separate living for 3 beds
Cloakroom and en-suite to master
Driveway for 3 beds / on street parking for smaller units / courtyard for flats
Integrated fridge/freezer and dishwasher with space for washing machine

Question 13

What else did you learn during your Argus Developer training

Answer 13

How to run sensitivity analysis, how to check the finance payments in the cash flow, how to change the distribution of costs and revenue

Question 14

What are the pros and cons of using Argus Developer

Answer 14

Pros
Consistency across the industry as opposed to if different firms all used their own models
Less opportunity for human error

Cons
Not as explicit - aren’t able to amend the actual formulas behind it
Not as good for complex/lengthy schemes

Question 15

How do you determine the finance rate

Answer 15

There are people within my firm who are in communication with banks to understand what margins they are applying. With current interbank 3 year swap rate around 4.7% and margins at 1.5% to 2.00% I would apply a minimum of 6.50% up to 7.00% depending on the risk of the development

Question 16

What has happened to construction costs

Answer 16

Reached a 40 year high in November 2021. BCIS said general build costs y-o-y increase of 10% Jan 21 to 22 and 17% expected by end 2022