Development appraisals Flashcards
How do you carry out a sensitivity analysis? What variables might you change and why?
Sensitivity analysis is a method of quantifying risk. Changes are made to individual inputs, e.g. build cost or sales values, to see how these affect the profitability or viability of the scheme. This can be used to provide reasoned advice to a client, including the modelling of various scenarios.
What sources of information do you use when undertaking a development appraisal?
How do you calculate developer’s profit?
GDV - (Construction Costs + Land Value + Professional Fees + Letting/Sales costs + Contingency + Finance Costs + Planning obligations) = Developer’s Profit
How do you calculate GDV/NDV/finance costs/project costs/project timescales etc?
Gross Development Value (GDV) - the value of the complete project - comparable method - forecast revenue or sale anticipated from completed development scheme
GDV net of transaction cost (stamp duty, legal fees, valuation, other professional) gives the Net Development Value (NDV)
Finance Costs - bank base rate + return for risk, based on client figures or market rates
What other metrics can you produce from a development appraisal?
What is an S curve?
Typically developers do not need access to all the capital at once due to the S Curve nature of costs within a development scheme, that allow for costs to start at a low level, and rise through the construction process.
The interest on the finance will normally be on a rolled up, compound interest basis, that will provide for the full amount of financing needed throughout the development.
As not all of the money will not need to be drawn down on at once the interest rate payable will start low and will increase with the more borrowing. During site preliminaries there aren’t many outgoing costs and therefore your borrowing will be low. As time progresses into the construction phase your costs will increase particularly when the frame of your building is being put up etc. This may mean that the increase in borrowing is quite steep. Once your development is near complete and it is just the marketing your costs of finance will the tail off until you have sold your development and paid off your loan.
What other metrics can you produce from a development appraisal?
Profit on Cost
Profit on GDV
IRR
What is the difference between a residual valuation and a development appraisal?
Residual valuation calculates the value of land
Development appraisal calculates the viability and profitability of the scheme
Tell me about software you have used.
Estate Master
Argus Developer
Argus Developer Structured Finance
What is profit on cost/profit on GDV?
The developer’s profit in relation to the costs invested (Developer’s profit/Costs)
The developer’s profit in relation to the anticipated GDV (Developer’s profit/GDV)
What is internal rate of return?
IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero. IRR measures profitability of the project after accounting for all projected cashflows and time value of money.
What is viability?
Project Viability - likelihood that the Project can be successfully developed and provide the Product and services required for the specified period.
What are lenders’ current requirements in relation to gearing?
Gearing ratio is a financial ratio that compares owner equity (or capital) to funds borrowed by the company
Debt to Equity - most common
A gearing ratio higher than 50% is typically considered highly levered or geared. As a result, the company would be at greater financial risk, because during times of lower profits and higher interest rates, the company would be more susceptible to loan default and bankruptcy.
A gearing ratio between 25% and 50% is typically considered optimal or normal for well-established companies.
A gearing ratio lower than 25% is typically considered low-risk by both investors and lenders.
Tell me about a development appraisal you have carried out.
Under construction towers in Jebel Ali - calculate profitability of the project as at current stage - calculated on profit on costs, as the project was for 18 months only - static model
Development land in Dubailand - two scenarios - villa community and residential apartment buildings - villa community is more profitable
Tell me about a sensitivity analysis you have carried out.
Adjusted sales rates and construction costs by 5% to assess the impact on the profitability
Tell me about where you source information and data from for development appraisals.
Costs - in-house from cost management team, information provided by the client and stored in the system, research - AECOM publications, Turner and Townsend
