Development Appraisals Flashcards
What are the fundamental differences between development appraisals and residual valuations?
DA – calculations to establish value/viability/profitability/suitability of proposed development. Proves guidance as to the viability of the proposed development over a time period. Using inputs given to you by your client
RV – Finding a market value of a site based on market inputs and assumptions. It is a snapshot in time, at the valuation date for a particular purpose. Can be based upon a residual valuation or the DCF method
What are the three types of sensitivity analysis?
- Simple – Key variables ie yield, GDV, build costs, finance rate
- Scenario analysis – change scenarios for content/timing.costs. eg. Phasing the scheme
- Monte Carlo simulation – ‘Crystal Ball’ software
What are the costs you incorporate?
- Site preparation – demolition, remediation, clearance, levelling/fencing
- Planning costs
- Building costs
- Professional fees – 10-15% of build costs + VAT
- Contingency allowance – 3/5-10% of build costs plus VAT
- Marketing – 1-2%
- Agents 1%, letting 10% AHL, legal fees (0.75% letting, 0.5% investment)
- PCs
What is a sensitivity analysis?
A method undertaken to show a range of values and how small changes in model inputs can affect the scheme’s outputs. De-risks the appraisal
What is the purpose of a development appraisal?
To understand and advise on the viability of a development.
Why do you undertake sensitivity analysis?
To assess the risk that small changes in the variables can have on a development
What are the 3 elements of finance to be aware of when financing a development appraisal? Developer needs to borrow money for:
- Site purchase (inc. PCs) – Compound interest on straightline basis
- Total construction and costs – Calculation based on S-curve taking half costs over length of build programme
- Holding costs to cover void until disposal – compound interest on straightline basis
What is the ‘S’ Curve?
Principal that the payment of construction costs adopts profile of an ‘S’ shaped curve over length of development projects. Purpose is to reflect when monies are drawn down
What is the GDV?
The capital value of a completed scheme on the special assumption that it is fully let
What are the limitations of a residual appraisal?
Using market assumptions which may be incorrect or may change in time
What is profit on cost?
The percentage increase on costs made by the profits of a scheme
Why do you make a contingency allowance?
To encounter for hidden costs and added risk
What is an IRR?
The rate of return at which all future cashflows must be discounted to produce a NPV of zero.
Why is IRR used?
To assess the total return from an opportunity
How is IRR calculated
- Current market value as negative cashflow
- Input projected rents over holding period as positive value
- Input exit value at end of term
- IRR is the rate which provides an NPV of 0.
In Marylebone, why was an office scheme the most viable option?
The surrounding amenity lends itself best for the repeat of an office scheme, and it provided the most viable scheme from a planning perspective, as change of use was not necessary.
How do you calculate GDV?
Use comparable method to establish market rent, then capitalise at an ARY to get GDV
What type of yield do you use to calculate GDV?
All risks yield (growth implicit)
What are the three types of sensitivity analysis
Simple
Scenario
Monte Carlo
Why are development appraisals/residual appraisals so sensitive to changing inputs?
Because there are so many variables incorporated into the model
What is Net Present Value?
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
What metrics would you typically benchmark when doing sensitivity analysis?
Profit on Cost % / Profit on GDV / IRR / Development Yield / Profit erosion
Battersea – what were the key constraints to the site?
Potential rights of light issues, ground instability, size constraints
What is net operating income?
This is the income following any rent free incentives that have been modelled into the appraisal
Give an example of an unexpected costs in a development?
A dead body, contamination issues
What is planning risk?
A risk that a scheme could be affected by a lack of planning permission, or the compensation shown in assumptions for a scheme that has not achieved planning permission.
What is a Section 106 agreement?
A planning obligation which balances pressure created by the new development with improvements to the surrounding area. Positive contribution to the local area and community. A negotiation rather than an agreed payment.
What is a Community Infrastructure Levy?
A charge that local authorities can set on new development in order to raise funds to help fund the infrastructure, facilities and services - such as schools or transport improvements.
What is SONIA?
Sterling Overnight Interbank Average Rate. Based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.
What is LIBOR?
London Interbank Offered Rate. The British pound sterling LIBOR interest rate is the average interbank interest rate at which a large number of banks on the London money market are prepared to lend one another unsecured funds denominated in British pounds sterling. No longer exists.
What are the main costs in a development appraisal?
Site acquisition
Financing
Build costs
Contingency
Professional fees
Marketing
Agents and disposal costs
What is a limit of using Argus Developer?
It assumes 100% debt financing
If retained by a client to sell a site, and another Savills team tried to acquire it, what would you advise the client?
Seek their informed consent and put in place relevant information barriers.
Where did you source your CIL rate from?
Looked at local CIL rate and MCIL rate. Or, go on BCIS and look at the indexed CIL and project it forward.
What did you vary in your sensitivity analysis?
Residual – how it impacts site value
DA – how it impacts profit
Market Rent, yield applied to GDV, construction costs
What would increase the finance rate for a developer?
Riskier project, no planning permission, lack of track record
What is NOI?
Net Operating Income - Property revenue less all expenses
What is a typical professional fee assumption
12-15% of build cost plus VAT
What is a typical contingency assumption?
3/5% plus VAT of build cost
What is included in build costs?
Site preparation, demolition, remediation, fencing, build costs (GIA), road/site works, S106/CIL, contingency
What is WACC?
Weighted Average Cost of Capital - different interest rates for different levels of funding. Calculated by multiplying costs of each source of capital by relevant weight
What are the costs to knock off?
Land acquisition price
Finance costs
Build costs
Contingency
Professional fees
Marketing
Agents & legal fees
PCs
What are the choices of interest rate you could use to caulculate finance?
SONIA, bank of england base rate + premium, rate at which developer can borrow
Mayfair - talk me through your residual valuation?
Provided with proposed plans for the development
Collated rental and investment comparables to calculate the GDV.
Established build costs of and made assumptions on fees.
Targeting profit on cost
No planning, to reflect this risk I ran at higher level of PoC subject to 2.5% increments.
Marylebone - Talk me through this development appraisal?
Following inspection, I was instructed to assess the scheme’s profitability for a potential acquisition.
Was Battersea a residual valuation or development appraisal
Residual valuation
Was Farringdon a residual valuation or development appraisal
Development Appraisal
Was Mayfair a residual valuation or development appraisal
Residual valuation
With Marylebone, what were the two options for the scheme?
Retail and office
Purely office scheme
What are the other ways to assess profit?
Developer’s profit
Profit on Cost
IRR
Profit on GDV
Tell me about your due diligence when undertaking a development appraisal
Conflict of interest check on land and vendor
What do holding costs typically include?
Council tax, business rates, running costs
What is a Monte Carlo simulation?
A method of sensitivity analysis
What is a Financial Viability Assessment (FVA)?
A report which expands on the findings of a development appraisal to explain the cost implications of purchasing land and building out a scheme.
What is a gilt?
A government bond
What is SONIA?
Sterling Over Night Index Average
Why do you present value money?
To account for the time value of money
When is CIL/S106 paid?
It can be either split, either 1/2 at the beginning or 1/2 thereafer, or in full at beginning/end
WHat is included in professional costs?
Architects costs, M+E contractors, MEP contractors, building surveyors, quantity surveyors
How could you help to de risk an appraisal, other than changing your inputs?
If there was no planning, one could make the offer conditional upon planning permission
