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
