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1st part - APC Prep > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

What is the National Planning Policy Framework?

A

Collection of government planning policies for England. Provides the framework for local plans.

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2
Q

What is a local plan?

A

Policy document updated every 5 years which sets out the vision for future development within the local area.

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3
Q

What are S106 agreements?

A

Legal agreements between local authorities and developers, detailing planning obligations and/or contributions required as part of allowing planning permission.

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4
Q

What is community infrastructure levy?

A

Charging schedule published by Local authorities.
Charge that local authorities can set on new developments to raise funds for infrastructure, facilities, and services e.g. schools and transport, that is needed to support the new homes or businesses from the development.
Calculated per square metre (CIL rate x net floor area x indexation)

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5
Q

Name 5 cost of development items

A

Build costs, professional fees, bank fees, sale/letting costs, contingency, finance costs., land value, developers profit, planning obligations

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6
Q

What is the main purpose of a development appraisal?

A

A specific valuation of a property to find the market value of the site based on market inputs.

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7
Q

What is the residual method?

A

Method of valuation used to calculate the land value of a proposed development.

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8
Q

When would you use the residual method?

A

You would use the residual method where there is no comparable sales evidence available, or where the comparable sales evidence deviates greatly from the actual situation.

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9
Q

How would you do a residual valuation?

A

There are three main steps to a residual valuation
· Establishing the gross development value
· Assessing all the development costs inc. developers profit
· Deduct cost from value to leave you with the residual land value

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10
Q

How would you arrive at the GDV?

A

I would use comparable evidence to establish the sales values of houses to be sold on the open market, and to establish the rental values for properties to be retained. These would then be multiplied to reflect the number of properties to be built. Totalling up together the GDV.

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11
Q

In calculating GDV How would you decide what properties are developed?

A

Usually a specific development plan is in place. If there were no plan in place I would consider the surrounding area and use of the properties nearby as well as the local planning policy.

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12
Q

What is the typical amount for developers profit?

A

Between 15 and 20% of GDV or total construction cost, depending on the risk of the development. GDV more frequently used as a base for residential use. Percentage of profit required has risen recently given the riskier market conditions.

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13
Q

When might the developers profit be lower than normal?

A

When the scheme is very small and not many houses are being built or when a high percentage of the properties on the site are affordable housing units. Ultimately, when there is less risk.

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14
Q

Who would you consult regarding building costs?

A

Building costs are taken from the BCIS guide. However, building surveyor advice can be sought to check if these are reasonable.

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15
Q

How much would you deduct for architect, project manager and engineer fees?

A

10-15% plus VAT of total construction costs for architects, M&E consultants, project managers, structural engineers.

A lower % would be appropriate for a large project.

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16
Q

What are M&E consultants?

A

Mechanical and electrical service workers tasked to work on planning, design and development of infrastructure, plant and machinery, heating, ventilation etc…

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17
Q

How is the finance calculated on the residual method?

A

Finance is calculated using the estimated borrowing cost over the period of time the finance is required for. For example, the finance costs for land would probably only be taken for half the period because when the build is halfway through it is generally expected that the development will have started to generate an income.

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18
Q

What is S curve finance?

A

S Curve finance is a finance model which distributes the construction and other costs over the duration of a project. The idea is that the project spend starts off low, this builds up to reach a peak in the middle of the project and then tapers off towards the end of a project. If the spend was plotted on a graph it would make an ‘s’ shape, hence the name.

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19
Q

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

A

A residual gives you the site value whereas a development appraisal advises whether the development is viable given certain factors such as the level of developers profit required, the number of affordable housing and contributions such as S.106 agreements.

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20
Q

What is the most common purpose of a residual valuation?

A

A specific valuation of a property to find the market value of the site based on market inputs.

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21
Q

What date are the inputs taken at?

A

The date of valuation.

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22
Q

What do you consider when calculating the build costs? Name 5

A

Site preparation, demolition, remedial works, landfill tax, provision of services, site clearance, levelling, fencing.

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23
Q

What do you consider when calculating the planning costs? Name 3

A
  • Planning costs, S.106 payments, CIL, planning policy e.g. level of affordable housing, S.278 payments for highway works, planning application fees, building reg fees, planning consultant, environmental impact assessment.
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24
Q

How much would you deduct for contingency fees?

A

5-10% of total construction costs depending on the level of risk and likely movements in building costs.

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25
Q

What are the choice of interest rates when calculating finance?

A
  • London Inter Ban Offer Rate, variable lending rate between banks for a 3-month borrowing term plus a premium
  • Bank of England Base Rate plus a premium rate at which the client can borrow the money
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26
Q

What might the developer need to borrow the money for?

A
  • Site purchase (compound interest on a straight line basis)
  • Total construction costs (calculation based on a S-Curve taking half of the costs over the length of the build programme)
  • Holding costs to cover voids until disposal of the scheme, empty rates, interest charges (compound interest on a straight line basis).
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27
Q

Following an appraisal How can you check the site value?

A

Using comparable evidence. Price per acre

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28
Q

What are the two main methods of funding?

A
  • Debt finance (borrowing money from a bank or another funding institution)
  • Equity finance (selling shares in a company or joint venture partnership or own money used).
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29
Q

Which finance method would you commonly assume?

A

100% debt finance.

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30
Q

Is VAT payable on all professional fees?

A

Yes

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31
Q

What is the profit erosion period?

A

Relates to the length of time it will take for the development profit to be eroded following completion of the scheme. The scheme could eventually be loss making.

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32
Q

What are the limitations of the residual method?

A
  • Very sensitive to minor adjustments
  • Importance of accurate information and inputs
  • Does not take into account the timing of cash flows
  • Implicit assumptions hidden and not explicit (unlike a DCF)
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33
Q

what is sensitivity analysis?

A

Reappraisal where one factor is altered

34
Q

what is scenario analysis?

A

The process of estimated the expected value after a change in key factors such as phasing plan and costs.

35
Q

what is Massing analysis?

A

Analysis based on site density and building heights incorporating matters such as Rights to Light.

36
Q

When is finance interest paid?

A

End of development period using proceeds.

37
Q

is it possible for finance costs to increase in real life from the initial appraisal?

A

Yes – if there are voids or empty properties this will increase the time to raise funds to pay back finance and subsequently more interest will accrue.

38
Q

What are typical land prices for residential development in Birmingham?

A
  • Inner city levels with PP in excess of 1 mill/acre for flat developments
  • Outer areas looking at 300k per acre
39
Q

can you talk me through the appraisal you did for Beaconsfield house?

A

Scheme – properties, type, location
Purpose of valuation – viability, Land value
Basis of Valuation – market value, market rent
Terms of engagement – as per VPS 1
Method used – Development appraisal or Residual valuation
Inputs – Build costs, Professional fees, bank fees, letting/sale costs, contingency, Finance costs, Planning costs, land value, developers profit
Analysis – sensitivity / scenario

1, Mixed use scheme in Lichfield (staffordshire), 28 units mix of 1-2 bed high rise flat building, 0.22 acres
2, Conducted a development appraisal to assess viability
3, market valuation
4, asked to consider financial appraisal submitted by developer considering affordable housing payment of £750k
5, HCA appraisal tool
6, no s106 contributions, build costs based on RICS BCIS Q1 2020 lower quartile rates, 7% of construction costs ,professional fees, finance cost of 6.5% 23 month dev programme, 3% contingency, abnormals 350k, legals £500 per unit, marketing fees 2.5% GDV, developers profit 17.5% resi 15% commercial, SDLT 1.5%
7, £20/sqft commercial unit, 7% yield, 5.6 mill GDV total ,
Deemed viable based on our benchmark land value, their appraisal was not viable.
We proposed a lower land value based on the planning position, landowner premium of 25% instead of 40%

40
Q

can you talk me through the appraisal you did in Newcastle-under-Lyme

A 
Scheme – properties, type, location
Purpose of valuation – Land value
Basis of Valuation – market value
Terms of engagement – as per VPS 1
Method used – Residual valuation
Inputs – Build costs, Professional fees, bank fees, letting/sale costs, contingency, Finance costs, Planning costs, land value, developers profit
conclusion

I did a residual appraisal

1, 133 dwelling scheme major developer project, 2,3,4 bedroom development in Newcastle-under-lyme (Staffordshire near stoke), 12 acres site
2, Conducted a residual appraisal to assess viability of a proposed scheme
3, MV, EUV, Benchmark land value
4, agreed in ToE that we will assess the viability appraisal submitted by the developer, advise on areas of the appraisal we agree with and those we do not, we would advise on impact of any of our proposed changes taking the form of sensitivity tests
5, HCA appraisal tool
6,
GDV £25.2 million
Construction costs 16.5 mill including Abnormals £1.8 mill
Professional fees 6.5% of construction costs
6% finance costs 51 month development period, 3 month lead in, 45 month cons, 48 month sales
Developers profit 18.50% residential, 6% affordable value
Land acquisition allowances/ legal fees at 1.25%
Benchmark land value £2.5 mill based on land value of £250,000/acre
7,
residual land value £1,350,000
deemed not viable

41
Q

what is benchmark land value?

A

Existing use value plus a premium for land owner

42
Q

how long was the valuation report for the appraisal valid for and why?

A

3 months, due to volatility of inputs and assumptions

43
Q

What are the three forms of sensitivity analysis?

A
  • Simple analysis of key variables (as above)
  • Scenario analysis (change scenarios for the development, content, timing, costs such as phasing the scheme)
  • Monte Carlo Simulation- using probability theory.
44
Q

What factors should be considered to establish benchmark land value?

A
  • Based on existing use value
  • Allow for a premium for landowner
  • Reflect the implications of planning I.e. abnormal costs, site infrastructure costs and professional site fees.
45
Q

what is existing use value?

A

value of the land in its existing use. Existing use value is not the price paid and should disregard hope value.

46
Q

how big was the ground floor retail unit in Lichfield?

A

34.50m2 / 371 sqft

47
Q

Site area for the Lichfield site?

A

0.22 acres

48
Q

what abnormals did you use for the Lichfield viability?

A

Demolition costs £160k
Electricity substation £127k
Solar panels 85k
Total £373k

D.E.S.T

49
Q

What benchmark land value did the developers agent propose? Beaconsfield house

A

£617,500

50
Q

when will the affordable housing sum be paid in the Lichfield development?

A

Was not specified but I assumed this being payable on after the sale of the first unit in month 15.

51
Q

what did you assume for developers profit? In Lichfield

A

17.50% for residential
15% for commercial
£960,000

52
Q

what abnormals did you input in Newcastle appraisal?

A 
Remediation
Abnormal Foundations 
Tree Removal & Protection
Gas precaution Measures                         
Import capping & Engineered Fill
SW Attenuation and FW/Pumping
Inc Rising main
Landscape Buffer and POS
Cut/Fill & Retaining Structures
Acoustic Precautions
53
Q

what is a standing investment?

A

Property that is income-producing, usually with a tenant in occupation.

54
Q

what is a turnkey development

A

Where the property is constructed and fitted out by the landlord/owner to a fully operational
standard whereby an operator can commence trading with immediate effect.

It also assumes all necessary licenses or registrations have been obtained.

55
Q

what is development property?

A

An interest where redevelopment is required to achieve the highest and best use

56
Q

Tell me about the basis of value for development property

A

Market value – or market value subject to assumptions/special assumptions – will often be the appropriate basis of valuation.

Market value is the value of the development property assuming optimum development, taking into account current and prospective economic and market circumstances and planning conditions. This may include alternative development solutions for the site.

The valuer may need assistance from other professionals to form a judgement of the optimum development.

IVS 104 and VPS 4 identify several bases of value. The valuer is required to select
the appropriate basis (or bases) for the task.

57
Q

Developer’s profit is calculated as a % of what?

A

typically reflected as a percentage profit on cost for more straightforward or straightforward projects but a profit GDV for long, multi-phase projects with greater complexity.

More sophisticated developers will approach the project on an internal rate of return (IRR) basis rather than a simplistic calculation of a percentage of cost or GDV. In those cases, the IRR for the project is calculated by appraising the project on a discounted cash flow (DCF) basis.

58
Q

What are the problems with calculating finance costs in a residual method?

A

Typically is reflected as a simplistic interest rate percentage on all (100% of) costs each year until completion of the scheme. Usually this is reflected as the same interest rate applied each year.

The reality of such financing in the market is more complex, with arrangement fees, varying interest rates, refinancing of loans on differing terms and amortisation often applied with these loans.

These complexities are often ignored in the residual calculation. This creates a
distance between the results of the residual and the market reality.

59
Q

what is the main special assumption when valuing development property?

A

That the development is completed as at the valuation date and is using inputs from the current market to assess its prospective value.

60
Q

Tell me about Yields used when calculating GDV

A

In the case of an investment property producing a predictable income return each year, an all-risk yield (ARY) is often applied to the expected income stream to determine the asset’s
GDV.

An ARY is used because the asset is assumed to be let at its appropriate market rent when the GDV is calculated.

The valuer applies the appropriate market rent to each space/unit
within the assumed-to-be-completed development. This income is assumed to be rack-rented, not under- or over-rented.

If the income is thus assumed not to vary in the future (as it is at the market level), there is technically no need to use the term and reversion or layer and top slice approaches. The income does not need to be divided into different tranches of income with different risk profiles. The whole income stream is at the market level and has the same risk profile; hence only an ARY is used to value it.

A valuer assessing the GDV for a shopping centre may apply different yields in the GDV to anchor tenants, mini-anchor tenants, typical retail gallery tenants, and food and beverage/leisure tenants to reflect their different risk profiles.

Some valuers apply different yields according to the likely covenant strengths of potential
tenants:
- Those units expected to be leased by national or international retailers, which are
strong covenants, are capitalised at lower yields.
- Those units that the valuer believes will be occupied by local weaker covenants are capitalised at higher yields.

61
Q

Tell me about RICS Guidance note Valuation of Development Property 1st edition 2019.

A
  • Provides a guide to approaching development property valuations on all aspects to consider from onset instruction stage to reporting.
  • Guidance note supplements IVS 410 provides recommendations and good practices such as:
  • The basis of valuation adopted for the valuation of development property must agree with IVS 104 and VPS 4
  • Must use minimum of two methods of valuation - The advice to apply both methods when possible has been endorsed by 2019 amendments to IVS 410
  • In accordance with paragraph 1.4 of PS 2, valuers must only accept instructions to carry out a valuation of development land or property if they have the appropriate technical skills, experience and knowledge of the subject
  • The basic residual valuation might be used for less complex assets or early in the development process to consider optimum development.
  • A discounted cash flow may be used for more complex assets with phased construction or disposal where the timing of events needs to be fully accounted for in the valuation.
  • Risk analysis should be used to evaluate how changes to individual inputs, such as construction cost or sales values, might affect the valuation of development property and to help model various different scenarios.
  • For assets where work on the development has commenced but is not completed, the market comparison approach is unlikely to be the most appropriate approach to the valuation.
62
Q

Tell me about RICS Professional statement Financial Viability in Planning 2019

A

This professional statement sets out mandatory requirements on conduct and reporting in relation to Financial Viability Assessments (FVA).

The effective date of this professional statement is 1st September 2019

This professional statement was produced in recognition of the Mr Justice Holgate’s comments in the Parkhurst Road case (2018) requesting professionals to contribute to a more efficient public administration of planning.

Dissatisfaction has been expressed among some stakeholders in the sector about the standards to which viability assessments are being produced. Questions about objectivity, conflicts of interest, transparency and contingency fees among others have been raised about those working for both the private and public sectors.

Mandatory points include:

  • A statement must be provided confirming that, in preparing a report, no performance related fees have been agreed.
  • All inputs into an appraisal must be reasonably justified
  • Terms of engagement must be set out clearly and should be included in all reports.
  • RICS members must ensure that they have allowed adequate time to produce the work proportionate to the scale of the project.
  • Report must include a statement that RICS members have acted with objectivity, impartially, without interference and with reference to all appropriate sources of information

PITTO
Performance. Inputs. Terms of engagement. Time. Objectivity

Financial viability in planning: conduct and reporting’ comprises fourteen mandatory requirements which chartered surveyors must observe when carrying out financial viability assessments in a planning context.

63
Q

what are the two basic approaches to valuing land in the course of development?

A

the value of the land plus the costs expended (improvements) at the valuation date

the completed development value minus the costs remaining to be expended at the
valuation date.

Detailed in GN Valuation of Development Property 2019

In some cases, both approaches could be employed as a check against the other.

64
Q

tell us about Parkhurst Road Ltd v Secretary of State for Communities and Local Government & Anor [2018]

A

Developer Parkhurst Road is seeking to redevelop the site of a 0.58 hectares former Territorial Army which it paid the Ministry of Defence £13.25m in 2013.

The council argued that Parkhurst Road had overpaid for the site and as a result did not follow its policy of 50% affordable homes

Holgate J said the Royal Institution of Chartered Surveyors’ Professional Guidance: Financial Viability in Planning, issued with the Ministry of Housing, Communities and Local Government and the Royal Town Planning Institute, should address ‘circularity’ by which developers sought to recover excess purchase prices by reducing affordable housing provision.

decision reinforces Islington council’s long standing position that developers should abide by the councils’ planning guidelines – rather than overpaying for land and then trying to bypass our affordable housing requirements.

Decision held in favour of council – cannot bypass AH due to overpaying for land.

65
Q

What do you understand by what abnormal costs are?

A

Costs that are specific and individual to the scheme.

Additional or unusual costs that a developer might face when developing a site. For example, unusual ground conditions may mean that deeper and more expensive foundations are needed. These could even include unusual items like archaeology works.

66
Q

Define what is affordable housing?

A

the NPPF defines affordable housing as: social rented, affordable rented and intermediate housing provided to those eligible people who’s needs are not met by the market.

Eligibility is determined by local incomes and local house prices.

67
Q

What types of affordable housing is there?

A

Social rented, affordable rented, intermediate housing

68
Q

What is social rented?

A

Housing provided by local authorities and housing associations

69
Q

What is intermediate housing?

A

where prices or rents are above those of social rented housing but below market housing prices or rents. This can include equity sharing schemes such as help to buy.

aimed at those who can afford to pay more than social rent but less than market price or market rent. The main types of intermediate tenure products are:

(a) intermediate rent (Note: this will not receive grant funding, but is an affordable product within NPPF definitions) max 80% MV
(b) shared ownership
(c) shared equity

70
Q

tell me about Affordable rent

A

Affordable rent (AR) is the main type of new housing supply and is let by local authorities or registered providers (RPs) of social housing to households who are eligible. AR is subject to rent controls that require a rent of no more than 80% of the local market rent.

Minimum term of 2 years for tenants

71
Q

Professional fees and why for Beaconsfield house?

A

7% of build costs - to reflect the complexity of the scheme, discussed with senior surveyor.

72
Q

Professional fees and why for Newcastle-under-lyme?

A

6.5% of build costs - lower than some other appraisals I’ve done to reflect it being a larger scheme, less complex with a well known national scale housebuilder

73
Q

Professional fees and why for garage appraisal

A

9% of build costs – council had 9.5% in theres, discussion with senior surveyor, 9% more suitable to reflect complexity and risk.

74
Q

what did you input for site purchaser costs?

A

1.5%

1% for agent fees and 0.5% for legal fees

75
Q

Marketing costs for Beaconsfield house?

A

2.5% of GDV

£520 per dwelling

76
Q

Marketing costs for Newcastle-under-lyme?

A

2.3% of GDV

£500 per dwelling

77
Q

Marketing costs for garage appraisal?

A

3% of GDV

Legals £600 per dwelling

78
Q

Finance costs for development cases

A

6% – Persimmon – lower to reflect less risk, large housebuilder good covenant strength over a longer period of time (45 month cons)

6.5% - BH to reflect risk premium, based on previous work, spoke with senior surveyor

7% - garage – based on other work done, smaller loan, not a well known builder

79
Q

GDV for Beaconsfield house

A

5.6million
Flat prices in excess of £220,000
£20/sqft / 7% ARY yield

80
Q

what affordable houses did you have in Newcastle?

A

Intermediate housing – shared ownership

Social rent - Housing provided by local authorities and housing associations

1st part - APC Prep (7 decks)

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