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APC > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

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

A

A residual valuation finds the market value of a site at one moment in time (the valuation date)

Development appraisal is a series of calculations to establish the value/profitability/viability of a proposed development based on the clients inputs

Not all developments have to be valued using the residual method

Sensitivity analysis has to be included in a development appraisal

Residual uses market led costs but development appraisal uses costs provided by the client

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2
Q

What factors influence a site’s profitability/value?

A

• Sustainability
• Physical
• Legal
• Planning
• Construction
• Finance
• Competition

If one factor suddenly isn’t available, the whole scheme can become unviable

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3
Q

What GN is relevant for development appraisals?

A

GN - ‘RICS (2019) Valuation of Development Property, 1st edition’

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4
Q

What does a development appraisal calculate?

A
  • Residual site value
  • Residual development profit
  • Other outputs
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5
Q

What is development risk?

A

The risk associated with the implementation and completion of a development, including post-construction letting and sales

Determined through sensitivity analysis

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6
Q

New sustainability legislation may have what type of impact on development schemes?

A

It may increase the biodiversity provision of new schemes/focus on BREEAM

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7
Q

What physical factors can impact development potential?

A
  • Size
  • Topography
  • Servicing (have to pay to get service infrastructure on site)
  • Ground conditions (can’t just build over redundant coal mine)
  • Aggressive plant species
  • Contamination (costs can be so high it makes scheme unprofitable)
  • Flooding risk
  • Asbestos buried under ground can delay developments
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8
Q

What are some planning considerations you have to make?

A

Must comply with NPPF and local/regional plans (e.g. Manchester currently going through local plan creation)

Planning fees (e.g. pre-applications) have to be included in appraisal

If you breach planning it becomes criminal so you have a duty of care to inform your client

Have nature considerations (trees, flora, fauna)

Locational considerations (national parks, areas of national beauty, listed buildings, conservation areas)

S106 agreements and CIL payments can stop a scheme being viable

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9
Q

How many species of bat are there in the UK?

A

17

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10
Q

How is a residual valuation funded?

A

Assume 100% debt funded

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11
Q

What are some types of development agreement?

A
  • Unconditional purchase agreement
  • Promotion (partnership) agreement… when a landowner hangs onto land whilst developer promotes land to secure planning permission and market it to find a buyer. Landowner sells to buyer and sale proceeds shared
  • Option agreement.. developer agrees to buy land if planning permission is secured
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12
Q

What is overage/clawback?

A

Overage - if a developer can get more units into site than they thought they then pay more

Clawback - a developer can get money back if they can get less units than they thought

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13
Q

What are hard costs/soft costs?

A

Hard costs - directly related to the construction of development (e.g. labour/materials, demolition, s106 costs etc)… can hurt a scheme

Soft costs - not directly related (e.g. marketing/agency fees).. are manageable

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14
Q

What did the case of Stokes v Cambridge Corporation 1961 involve?

A

Relates to ransom strips (an area of land which provides the key to unlock the development potential of adjacent land)

Determined that in a compulsory purchase situation, an owner is entitled to one third of the resulting property value

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15
Q

What are the benefits of a sensitivity analysis?

A
  • Can assess the potential risk of a strategy
  • Can understand the relationship between input variables and the outcome
  • Adds credibility to development model through testing
  • Help find errors in the development model
  • Helps determine the likelihood of an occurrence
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16
Q

What is profit erosion?

A

The time it would take to leave the completed development unsold before the interest payable reduced the development profit to 0

Most lenders don’t want profit erosion to be less than 3 months

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17
Q

What are the 4 key stages of the valuation development process?

(according to the Valuation of Development Property guidance note)

A
  1. Instruction (terms of engagement)
  2. Investigation (inspection/market research)
  3. Data handling (analysing comparables/residual land value/sensitivity analysis)
  4. Reporting (market value/valuation report)
18
Q

What is CIL?

A

Community Infrastructure Levy - money paid to the LPA to help them deal with the increased pressure on infrastructure (schools, roads etc) as a result of increased housing from a scheme

19
Q

What is the typical Loan to Value ratio?

A

60%

20
Q

What is debt finance?

A

Lending money from the bank

21
Q

What is equity finance?

A

Your own money/selling shares in a company etc

22
Q

What is senior debt?

A

The first level of borrowing (takes precedence to pay back)

Mezzanine funding is additional funding

23
Q

What are S106 costs?

A

Legal agreements for planning obligations (e.g. affordable housing provision)

24
Q

What is the contingency rate?

A

The amount of money you add to base costs to cover potential deviations from expected cost

5-10% based on level of risk/movements in build costs

25
Q

What are professional fees?

A

10-15% of total construction costs

For architects, engineers etc

Higher for complex schemes (e.g. mixed use regeneration scheme) or when more professional services are needed (e.g. listed buildings)

26
Q

What do developers need to borrow money for?

A
  • Site purchase
  • Total construction/associated costs
  • Holding costs to cover voids until disposal of the scheme
27
Q

How are construction costs spread out over a development timeline?

A

On an S curve

Money is drawn down at different points of the development timeline

28
Q

What is typical developers profit?

A

Percentage of GDV/costs

15-20% typically

Lower risk schemes have lower returns requested

Percentage of profit has risen recently due to riskier market conditions

29
Q

How do you do a residual valuation?

A

Establish GDV from comps

Deduct construction costs, contingency, professional fees, planning costs, finance costs, profit

Gives a residual value

Based on concept that the value of a property with development potential is derived from the value of the property after development minus cost of undertaking development

30
Q

How do you establish your finance rate?

A

The Bank of England base rate + a risk premium

31
Q

What is SONIA?

A

Sterling Overnight Index Average

Gives benchmark for interest rates (based on actual transactions)

32
Q

What is SOFR?

A

Secured Overnight Financing Rate

A broad measure of the cost of borrowing

33
Q

What is escrow?

A

A legal arrangement where a third party holds money until a development completes

E.g. off plan sales - illegal to use this money

34
Q

How do you price affordable housing?

A

Depends on the tenure

Bigger discount for social rent than intermediate

35
Q

What kind of discount would you expect for affordable housing?

A

30-50%

36
Q

How are S106 obligations determined?

A

By negotiation between council and developer

Social benefits - Straight payment or inclusion of affordable provision?

37
Q

What is mayoral CIL?

A

An additional charge in London that was introduced in 2012 to help finance Crossrail

There is a higher rate for the boroughs that benefit from crossrail more

38
Q

What is a sensitivity analysis?

A

Used to evaluate how changes to individual inputs might affect the valuation

39
Q

What outputs can be determined by a development appraisal?

A

Profit on cost
Profit on gdv
Profit erosion
IRR
Rent cover

Need to determine which of these is most appropriate to outline feasibility

40
Q

What is rent cover?

A

A ratio indicating the level of risk

The profit divided by total rent (expected that profit will be 2 x total rent)

APC (9 decks)

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