Development Appraisals Flashcards
“What is the difference between a development appraisal and a residual valuation?”
Development appraisal: establish the viability/profitability of a proposed development using a client’s inputs & Purchase price
Residual valuation: establish the market value of a site using market inputs
What is the methodology for calculating residual site value?
Determines the market value of a completed development on todays valuation date.
Comparable method of valuation to determine yields & rent. ARY / Implicit yield used
Gross development value (GDV) - Total development costs (TDC) = Gross site value
Residual site value - purchasers’ costs & profit = Net Residual value
What costs would you allow for as part of TDC
Site preparation
Planning costs
Building costs
Professional fees + VAT
Contingency
Marketing costs & fees
Finance costs
Developers profit
“What would be included in your estimate for site preparation costs and how would you estimate them?”
“Demolition, remediation works, landfill tax, site clearance, levelling and fencing
Obtain a contractor’s estimate for these works”
What would be included in your estimate for planning costs?
“Section 106 payments
CIL charged by most Local Planning Authorities
Section 278 payments for highway works
Planning application and building regulation fees
Costs of planning consultants
Cost of any specialist reports required by the LPA (e.g. Environmental Assessment)”
How would you estimate the building costs?
“Client information
Quantity Surveyor estimate / bill of quantities / cost estimate
Building Surveyor estimate
BCIS
“What basis are the cost on BCIS usually expressed?
Where does RICS obtain the information from?”
Usually based on a GEA basis. SQM metric
Obtain monthly updates from Quantity Surveyors / Building Surveyors and recent contract prices / tenders agreed”
“What would be included in your estimate for professional
fees and how would you estimate them?”
“Architects, M&E consultants, project managers, structural engineers, quantity surveyors
Typically 10-15% (plus VAT) of total construction costs
Can vary them depending on the complexity of the project e.g. lower architects fees required for an industrial warehouse than a high-rise residential building”
What would you typically estimate for contingency costs?
5-10%
“What would be included in your estimate for marketing costs
and fees and how would you estimate them?”
“Marketing budget (use evidence/quotes):
* Cost of an EPC
* Sales fee: 1-2% GDV
* Letting fee: 15% of initial annual rent”
How would you estimate the interest rate?
Either clients finance rate
SONIA (Sterling Overnight Index Average). Replaced Libor in 2021
Bank of England base rate + premium.
What would a developer require finance for (3)
“Site purchase + purchaser’s costs: compound interest
Total construction costs + fees: based on an s-curve taking hold of the costs over the length of the build programme
Holding over costs to cover voids until the disposal of the scheme: compound interest (straight-line basis)”
“What capital stack does the development appraisal
process assume?”
100% debt
What is the s- curve
“Assumes that total constructions costs + fees are paid over half the time period.
Reflects when monies tend to be drawn down - lower levels of expenditure at the beginning and end of projects”
What would you typically estimate for developers profit
15-20% of total construction costs or 5% GDV.
Bloom use MOIC at 1.5x
What are swaps and how are they used?
“Form of derivative hedging for interest rates. Swap rate will be the
market rate for a fixed rate, fixed term loan”
What is overage?
“An overage is an agreement that the buyer will pay extra, on top of
the original purchase price, if and when certain events happen.
Such as planning permission
What is the profit erosion period?
“Length of time it takes for the development profit to be completely eroded,
Due to empty rates, service charges and interest costs, following the completion of the scheme”
PC to full occupation (when developers profit is usually paid out)
What are the limitations of the residual valuation methodology?
“Dependent on accurate information and inputs.
Does not consider timing of cash inflows
Very sensitive to minor adjustments
Assumes 100% debt finance “
What guidance did the RICS release on valuing development property?
RICS Valuation of development property, 2019
“How is development property defined in RICS
Valuation of development property, 2019?”
“Interests where redevelopment is required to achieve the highest and
best use or where improvements are either being contemplated or are in progress at the valuation date”
“What method does the RICS Valuation of development property state should be used for complex and/or lengthy development schemes?”
“Discounted cash flow (DCF) technique.
Simple residual method can be used in other cases”
Why is profit on cost a more reliable method of measuring developers profit than profit on GDV?
GDV subject to more variation
How did you use special assumptions in your residual valuation approach?
“GDV was the aggregate market value of the proposed development,
assessed on the special assumption that the development is complete on the date of valuation in the market prevailing conditions”
What is a development appraisal
A calculation or series of calculations to establish the value/viability/profitability or suitability of a proposed development.
What is Senior Debt?
First level of borrowing which takes precedence.
What is Mezzanine debt
Additional funding for money. Usually at a higher interest rate
What is Hope value?
The value arising from any expectation that future circumstances affecting the property may change.
ie future planning permission or marriage value
What is the current SDLT for non-commercial buildings?
£0 -£150k = 0%
£150k - £250k - 2%
+£250k = 5%
