Development Appraisals Flashcards
1
Q
What is a development appraisal?
A
- An objective financial viability test of the ability of a development project to meet its costs including the
cost of its planning obligations, whilst ensuring an appropriate site value for the landowner and a
market risk adjusted return to the developer in delivering the project.
2
Q
What is the residual method?
A
- The residual method recognises that the value of the scheme is a function of many different elements.
- A valuer will seek to check the valuation against any market evidence where available.
- A valuer can assess the level of return generated from the proposed project and also establish the
residual site value by inputting pre-determined levels of returns. - Where a planning obligation reduces the site value to the landowner and return to the developer below
an appropriate level, land will not be released or development will not take place so a development
appraisal is of pivotal importance.
3
Q
When is a development appraisal useful?
A
- To establish the level of affordable housing.
- To assess the level and nature of planning obligation contributions.
- Reviewing land uses.
- To inform a potential purchaser prior to acquisition of the site.
4
Q
What are the key stages of the residual method?
A
- Establish the development or redevelopment potential within the market for that parcel of real estate in
that location. - Assess the value of the completed scheme.
- Assess all of the development costs, including an amount for normal profit, allowing for risks and
timing of the project, and for the finance costs and interest charges on the capital needed to fund the
whole of the scheme. - Deduct the costs from value to arrive at an estimate of the land value.
5
Q
What is a sensitivity analysis?
A
- Sensitivity analysis is where you re-calculate the appraisal with different assumptions on inputs, for
example an increase in build costs or a decrease in gross development value to identify what effect this
has on the potential profit and residual land value.
6
Q
How would you calculate the sum of money available to purchase the
land?
A
- The sum of money available for the purchase of land can be calculated from the value of the completed
development (GDV) minus the costs of the development process (including profit).
7
Q
What are the key components of a site acquisition strategy?
A
- Instruction of land agents to identify new sites or investigate the possibility of acquiring existing sites for
future development. - Undertake market research to ascertain the surrounding population mix of potential sites, their
adjoining owners, adjoining uses, comparable rents, any interested parties and the potential for
obtaining planning consent. - Carry out a development appraisal options analysis to select the most suitable site for development.
- Select the site that best meets the development criteria.
- Obtain the developer’s approval to engage in negotiation with the existing landowner.
- Commence negotiations with the landowner regarding purchase.
- Acquire or take out an option to purchase the land and or existing buildings for development.
- Confirm the development agreement with the landowners, investors & stakeholders.
8
Q
What are the main inputs required to complete a development
appraisal using the Residual Valuation method?
A
- Completed Development Value – This is the market capital value of the completed development
which would be calculated using the comparison or investment method as appropriate depending on
the type of property. - Development Costs including:
o Construction Costs.
o Site Acquisition Costs and Fees.
o Finance Costs.
o Land Costs.
o Developers Risk & Profit. - The Development Costs are deducted from the Completed Development Value to arrive at the
Residual Value that could be paid for the existing site or property.
9
Q
What are some of the disadvantages of the Residual Valuation
Method?
A
- Inflexibility in dealing with the precise timings of costs and revenue results in inaccuracies.
- Single best estimates hide uncertainty and the main variables cannot always be estimated with accuracy.
- Small changes in some of the variables can have a significant impact on the final residual value.
10
Q
How much would it cost to build an office, industrial and retail building?
A
- Office £2,500/m2-£5,000/m depending on specification and location.
- Retail Warehouse £1,100/m2-£3,500/m2 depending on specification and location.
- Industrial £1,100/m2-£2,500/m2 depending on specification and location.
- Retail Shop £3,500/m2-£7,500/m depending on specification and location.
11
Q
What key market conditions would you highlight when providing
Development Appraisal advice to a client?
A
- I would highlight the importance of considering current rising interest rates and high levels of inflation
that result in the following:
o Rising borrowing costs depending on the financing model being adopted for the development
could mean a lower level of return.
o Falling demand for commercial office space following the impact of Covid-19 and a shift
towards home working could result in lower levels of rental income, longer void periods and a
reduction in the Gross Development Value.
o There has been recent pull back of borrowing products from specialist lenders who are
withdrawing competitive borrowing rates and being much more selective.
o High levels of inflation and a strong demand for specialist labour and building products has
resulted in building costs remaining high resulting in increased build costs and lower levels of
return for developers.
12
Q
What are the key stages of a typical development programme?
A
- Pre-Construction comprising:
o Site Identification.
o Financial Modelling & Viability.
o Development Appraisal.
o Site negotiation & Acquisition.
o Design.
o Financing.
o Planning.
o Contractor selection.
o Contract Agreement. - Construction:
o Site enabling works.
o Main Construction of sub-structure, superstructure & external works. - Post Construction
o Building Handover.
o Identification of tenants and letting of building.
13
Q
Please explain the difference between a Development Appraisal and a
Residual Valuation?
A
- A residual land valuation considers the potential Gross Development Value of the site less all associated
costs of the development including the accepted level of developers profit in order to arrive at a
residual land value that the site can be purchased for (GDV minus Build Costs, Fees, Finance,
Developers Profit = Residual Land Value). - A development appraisal considers the potential Gross Development Value of the site less all
associated costs including the land purchase value in order to determine the level of developers profit
that remains (GDV minus Build Costs, Land Purchase Value, Fees, Finance = Developers Profit).
14
Q
What would you deem to be an acceptable level of profit for a
Developer?
A
- In reasonable market conditions, I would expect the majority of developers would target a Gross margin of around 15%-25% expressed as a percentage of the Gross Development Value.
15
Q
What Development Appraisal Software have you used previously?
A
- I have used Argus Developer which allows the development appraisal to be compiled using a series of
input screens. - It also allows for sensitivity testing to be carried out by adjusting variables such as build cost, finance
costs and development timescales. - Different scenarios can be presented to the client in a customised report so they can assess the financial
viability of the development against their expected level of return and any project specific risks.
