Development Appraisals Flashcards
- What are the differences between development appraisals and residual valuations?
- Development Appraisal:
A tool to determine the viability of a scheme
Assess the sensitivity of the scheme by changing inputs
More common to assume a site value - Residual Valuations:
Provide a Market Value of the site depending on the development’s inputs
Used when land is specific
Given on one specific valuation date
- What are the limitations of development appraisals?
- Information accuracy imperative
- No consideration of cash flow
- Sensitive to minor changes
- Assumptions implicit
- What are the details of the RICS Valuation of Development Property 2019?
- Guidance Note
- Provides definitions for key development terminology
- Read in conjunction with the International Valuation Standards
- Can be for new constructions, infrastructure development, refurbishments
- Establish the facts
- What goes into the Total Development Cost?
- Site Preparation
- Site Acquisition Costs
- Planning Costs
- Buildings Costs
- Professional Fees
- Contingency
- Disposal Fees
- Finance
- What are examples of variable and fixed costs for a development?
Fixed costs remain the same regardless of other factors, i.e. if you agree a fixed cost for ground surveys. These can change if more work is required but will be agreed when instructing.
Variable costs include agents charging a % of the Gross Development Value for disposing of the asset. This can fluctuate depending on the value.
- What is CIL and S106?
- S.106 payments = planning costs to gain permission (affordable housing, infrastructure costs)
- Community Infrastructure Levy (CIL) = wider infrastructure
- How would you undertake manual appraisals?
Can be written out on the same basis or created within an Excel spreadsheet with the formulas in place. This can be a way to cross check with Argus software.
- How do you use Argus developer?
- Software to automate the development appraisal
- Much easier to see the impact of inputs on values and KPIs
Main Components:
- Insert property details
- Unit Sales –
o Insert different elements (e.g. apartment types/sizes)
o Insert areas gross and net and number of units
o Insert build rate psf or per unit
o Insert sales rate psf or per unit - Insert different types of fees
- Insert Timescale
- Sensitivity Analysis –
o Presents results in grid showing the profitability at different levels
- How do you undertake sensitivity analysis? Why is it used?
- How sensitive is the development appraisal
- Three Forms:
- Simple Analysis – key variables such as GDV, build cost, finance etc
- Scenario Analysis – change development content, timeframe or phasing
- Monte Carlo Method – probability theory using software such as ‘Crystal Ball’
- What are the inputs to development appraisals?
The main things inputs contribute towards are:
- Gross Development Value:
Capital values of units
Rental values of units
Yields
- Total Development Cost:
Site preparation costs
Planning costs
Building costs
Professional Fees
Contingency
Finance costs - All these inputs can be changed to see how the viability of the development will respond
- What are typical purchaser’s costs?
SDLT at relevant level
Agent Fee 1%
Legal Fees 0.5%
- What are typical planning costs?
S.106 payments = planning costs to gain permission (affordable housing, infrastructure costs)
Community Infrastructure Levy (CIL) = wider infrastructure
S.278 payments = highway costs
Planning application costs
Building regulation fees
Costs of specialist reports
- What are typical professional fees?
Architects, project managers, engineers, consultants
10-15% plus VAT of building costs
* Inc Project Manager 3%
- What are typical disposal fees?
1-2% of GDV and letting fee of c.10% of annual rent
Legal Fee 0.5%
- What are typical development profit levels?
15% GDV mostly for residential
20% TDC mostly for commercial
- How would you use a DCF for a residual valuation?
- Commonly used for multi-let investment valuations
- Could be used as an alternative to residual method by representing the incomings and outgoings (similar to a cash flow)
- Presents residual value/profit at the bottom
- What are the risks of development?
- Project Risks:
- Physical – topography
- Legal – overage agreements
- Market – market forces and changes
- Planning - CIL
- Financial – funding
- What are examples of KPIs in development?
- Benchmarks of performance
- Profit
- Internal Rate of Return = the yield when it is discounted to today’s money and has an NPV of £0.
- Profit Erosion
- What do you know about development finance?
- Main methods:
o Debt Finance
o Equity Finance – selling shares to fund or joint venture
o Forward sales – pre-sale - Loan to Value – typically 60%
- Senior debt is the main layer before secondary and mezzanine debt top-ups
- Mezzanine funding is that above the LTV level
- What is an overage?
- Arrangement to share extra profit over and above anticipated level
- Can be agreed between landowner/vendor and developer
- AKA Claw-back
- What are the key stages of a development?
Initial Concept
Implementation
Construction
Disposal
- What is critical path?
Identify the various stages of development on a timeline with potential delays
Gantt Chart
- What information would clients provide you with?
- Planning consent/proposals
- Elevations and materials
- Floorplans
- Schedule of accommodation
- Site Plan
- Costings and appraisals from client
Can you run me through the whole residual/appriasal process?
Methodology:
- Gross Development Value (GDV) as at Valuation Date
o Rental = capitalise with All Risk Yield
o Assume incentives e.g. voids
o Purchaser’s costs deducted for commercial properties - Total Development Costs (TDC)
o Site Preparation:
Demolition, remediation works, levelling the site
o Site Acquisition Costs (Purchaser’s Costs)
o Planning Costs:
S.106 payments (affordable housing etc)
Community Infrastructure Levy (CIL) (wider infrastructure)
Planning and building regs
Specialist reports
o Buildings Costs:
Rate psf generally – BCIS etc
o Professional Fees:
10-15% plus VAT of building costs
o Contingency:
5-10%
o Disposal Fees:
1-2% of GDV and letting fee of c.10% of annual rent
Legal Fee 0.5%
o Finance:
* Dictated by SONIA
* Bank of England base rate (4.25%) plus premium
* Circa 9% rate
* TDC (S-curve in halves – indicates when money is drawn down)
* Assume 100% finance is debt
o Developer’s Profit:
15% GDV mostly for residential
20% TDC mostly for commercial
- Residual Land Value:
o Deduct the TDC from the GDV to produce residual land value
o Cross check this with market comparables if possible
How long does planning permission last for?
3 years
How do you calculate finance costs on land?
- Site purchase is straight line throughout the term
