Development Appraisals

Question 1

• What are the differences between development appraisals and residual valuations?

Answer 1

• 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

Question 2

• What are the limitations of development appraisals?

Answer 2

• Information accuracy imperative
• No consideration of cash flow
• Sensitive to minor changes
• Assumptions implicit

Question 3

• What are the details of the RICS Valuation of Development Property 2019?

Answer 3

• 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

Question 4

• What goes into the Total Development Cost?

Answer 4

• Site Preparation
• Site Acquisition Costs
• Planning Costs
• Buildings Costs
• Professional Fees
• Contingency
• Disposal Fees
• Finance

Question 5

• What are examples of variable and fixed costs for a development?

Answer 5

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.

Question 6

• What is CIL and S106?

Answer 6

• S.106 payments = planning costs to gain permission (affordable housing, infrastructure costs)
• Community Infrastructure Levy (CIL) = wider infrastructure

Question 7

• How would you undertake manual appraisals?

Answer 7

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.

Question 8

• How do you use Argus developer?

Answer 8

• 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

Question 9

• How do you undertake sensitivity analysis? Why is it used?

Answer 9

• 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’

Question 10

• What are the inputs to development appraisals?

Answer 10

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

Question 11

• What are typical purchaser’s costs?

Answer 11

 SDLT at relevant level
 Agent Fee 1%
 Legal Fees 0.5%

Question 12

• What are typical planning costs?

Answer 12

 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

Question 13

• What are typical professional fees?

Answer 13

 Architects, project managers, engineers, consultants
 10-15% plus VAT of building costs
* Inc Project Manager 3%

Question 14

• What are typical disposal fees?

Answer 14

 1-2% of GDV and letting fee of c.10% of annual rent
 Legal Fee 0.5%

Question 15

• What are typical development profit levels?

Answer 15

 15% GDV mostly for residential
 20% TDC mostly for commercial

Question 16

• How would you use a DCF for a residual valuation?

Answer 16

• 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

Question 17

• What are the risks of development?

Answer 17

• Project Risks:
• Physical – topography
• Legal – overage agreements
• Market – market forces and changes
• Planning - CIL
• Financial – funding

Question 18

• What are examples of KPIs in development?

Answer 18

• 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

Question 19

• What do you know about development finance?

Answer 19

• 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

Question 20

• What is an overage?

Answer 20

• Arrangement to share extra profit over and above anticipated level
• Can be agreed between landowner/vendor and developer
• AKA Claw-back

Question 21

• What are the key stages of a development?

Answer 21

 Initial Concept
 Implementation
 Construction
 Disposal

Question 22

• What is critical path?

Answer 22

 Identify the various stages of development on a timeline with potential delays
 Gantt Chart

Question 23

• What information would clients provide you with?

Answer 23

• Planning consent/proposals
• Elevations and materials
• Floorplans
• Schedule of accommodation
• Site Plan
• Costings and appraisals from client

Question 24

Can you run me through the whole residual/appriasal process?

Answer 24

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

Question 25

How long does planning permission last for?

Answer 25

3 years

Question 26

How do you calculate finance costs on land?

Answer 26

• Site purchase is straight line throughout the term