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HATTIE APC REVISION > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

What is a development appraisal?

A

Defined within RICS Valuation of Development Property Professional Standard (was Guidance Note 2019) as a financial appraisal of a development with the output typically being development profit (on cost or GDV)

A development appraisal will consider:
1. SITE SPECIFIC FACTORS
2. Anticipated revenues (GDV)
3. Costs
to determine the PROJECTS FEASIBILITY FROM A DEVELOPMENT PERSPECTIVE

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2
Q

What are development appraisals used for?

A
  • assessing development to see whether LEVEL OF planning obligations is viable
  • determine the best and highest use value of land and consider different scheme options
  • assess whether a development will be VIABLE or not based on level of profit achieved
  • assess what affordable housing requirements
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3
Q

What is a viability assessment?

A

A viability assessment is the process of assessing whether a site is financially viable, where the value of the completed development would exceed the costs of development

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4
Q

What is the difference between a development appraisal and residual land value?

A

Development appraisal output is a profitability of proposed development
A RLV determines value of land

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5
Q

Why is viability important?

A

Assesses and aims to create a balance between the ASPIRATIONS of land owners / developers in terms of a return against the risk and aims of the planning system to secure maximum benefits in the public interest through granting planning permission

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6
Q

What supporting documents do RICS provide around viability?

A

RICS Financial Viability in Planning: Conduct and Reporting (2019 - Now a professional standard

Sets out what a FVA is
Who might submit one
What the requirements are when submitting one
The planning framework around FVA

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7
Q

Who uses viability assessments?

A
  1. Applications
  2. Receivers (such as LPA)
  3. Area wide viability assessment and representations made before or during a public examination
  4. PART OF A PROOF OF EVIDENCE or EXPERT REPORT before or during appeal at High Court
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8
Q

How is a development appraisal structured?

A

GDV - costs including a fixed land value = profit metric

Can be structured as a DCF when:
1. More complex explicit assumptions
2. Client requirements or timings need to be considered

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9
Q

What is the output of a development appraisal?

A
  1. Profit on GDV or costs
  2. IRR
  3. ROCE
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10
Q

What are Clarions Metrics?

A

Gross profit on private GDV (20% STP, 22% Uncon)
= (Gross profit / private GDV) x 100

IRR
= Internal Rate of Return 15%

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11
Q

What is IRR?

A

The interest rate (expressed as a percentage) at which all future projects cashflows (both positive and negative) will be discounted, in order that the net present value of those cash flows, including the initial investment be equal to zero.

IRR can be assessed both gross and net of finance.

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12
Q

What is ROCE?

A

Assesses a company’s profitability and capital efficiency. Helps to understand how effectively a company generates profits for the capital it uses.
Higher ROCE generally indicates stronger profitability.

EBIT / Capital Employed

where CE = Total assets - current liabilities

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13
Q

What are the requirements of RICS Financial Viability in Planning: Conduct and Reporting?

A
  1. Statement acted Objectively, Impartially, Without interference and Without reference to supporting information
  2. Compliance with PS1 and PS2 of RICS Valuation Global Standards
    - Terms of Engagement. Conflicts of Interest
  3. DOI panning application or planning policy
  4. Market-based rather than Client Specific Information
  5. Publicly available
  6. Sensitives, explanation or risk and return
  7. Non-technical summary
  8. No contingency based fees permitted
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14
Q

What legislation, planning and professional guidance is aviable on FVA

A
  1. Paragraph 58 NPPF
  2. Town and County Planning Act
  3. Plan led system
  4. National Planning Guidance
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15
Q

What is the basis of value in a FVA?

A
  1. Benchmark land value - basis of value in a FVA. EUV plus premium of land owner
  2. Existing use value
  3. Alternative use value - anything other than EUV. Fully acceptable in terms of the development plan
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16
Q

What are the key inputs for a FVA?

A
  1. GDV
  2. Project costs
  3. Developer profit
  4. = Land value
  5. Benchmark - Land + premium for land owner or AUV
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17
Q

What is a provisional sum?

A

A provisional sum is an amount assumed for a cost when there is a lack of detail meaning that this can not be calculated.

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18
Q

What impacts IRR?

A

When payments are made or received in the cashflow

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19
Q

What is the difference between valuation and development appraisals?

A

Valuation is at a
- specific point in time
- following a specific method
- utilising a specific base of value
- for a specific output.

A development appraisal is on going and has multiple outputs such as profitability, IRR and ROCE.

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20
Q

What appraisal tool do your currently use?

A

Bespoke excel based appraisal

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21
Q

How do you calculate CIL?

A

(CIL) is calculated per square metre. The calculation involves multiplying the CIL charging rate by the net chargeable floor area (based on Gross Internal Area)

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22
Q

What yield would you use to calculate a commercial property?

A

All risk yield

23
Q

What is the difference between sensitivity analysis and scenario analysis?

A

Sensitivity changes the key variables- yield, GDV, build cost and finance rate.

Scenario analysis changes the tenure, timing, costs and phasing.

24
Q

What is Clarions interest rate?

How is the interest rat broken down?
- Sterling Overnight Index Average +5%

A

ASK CORY

25
Q

What is a s-curve cost profile and why would you use it?

A

S curve is a mathematically calculated payment profile which shows the cumulative progression of costs during a construction project.

26
Q

What is the NPV method?

A

A method used in discount cashflow analysis to find the sum of money representing the difference between the present value of all the inflows and outflows of cash associated with the project, by discounting each at a specified rate.

27
Q

What would you do differently for a development appraisal that had planning permission vs one which didn’t?

A
  1. Cost- get greater clarity on costs on a scheme with planning and not use assumptions.
  2. Time- set a clearer programme of works
  3. Risk- Can lower the profit margin due to the reduced risk of securing planning
28
Q

What stage would you decide to use a development appraisal and residual valuation ?

A

Residual valuation at the point of purchase or disposal

Development appraisal- carried out throughout the development cycle

29
Q

What is a S278?

A

A section of the Highways Act 1980 that allows developers to enter into a legal agreement with the council to make alterations or improvements to a public highway, as part of planning approval.

30
Q

What is the current bank of England base rate?

A

5.25% April 2024

31
Q

What is a yield?

A

Yield I Capital

Return measure for an investment over a set period of time, expressed as a percentage

32
Q

What are the two methods of funding?

A

Debt finance- lending money from the bank or other funding institution

Equity finance- selling shares in a company or joint venture partnership or own money used

33
Q

What is cash flow?

A

net amount of cash and cash equivalents being transferred in and out of a project.

34
Q

What is the purpose of RICS Valuation of Development Property Guidance Note (2019)

A

Development property - interests where redevelopment is required to achieve the highest and best use or where improvements are either bring contemplated are in progress at the valuation date

Principles apply to the valuation of all development and sets outs the main two methods which are
1. The market comparison approach
2. The residual method
Best practice does not rely on a single method. Ideally both should be used and cross referenced.

Sets out the due diligence required for development property valuations.

35
Q

What is the heirarchy of comparable

A
36
Q

How can development property be valued according to RICS Valuation of Development Property Guidance Note (2019)?

A

Residual or comparable

37
Q

What basis of value should I use?

A

RICS Valuation of Development Property Guidance Note (2019)
- provides clarification on appropriate bases of value as per VPS 4 and IVS 104

The valuer must ensure that the basis of value adopted is appropriate for, and consistent with, the purpose of the valuation.

Market Value is refined as ‘the value of the development property assuming optimum development, taking into account current and prospective economic and market circumstances and planning conditions’.

38
Q

What is a benchmark land value?

A

Benchmark Land Value (BLV)is used as the basis of value in a FVA -based on Existing Use Value (EUV), plus a premium for the landowner. This is also known as EUV plus approach.

39
Q

What is AUV?

A

Alternative Use Value (AUV) can be considered, which is the value of the land for uses other than the existing use. If it is used to assess BLV, however, then it should be limited to those uses which fully comply with up to date development plan policies. If it is assumed that the existing use will be refurbished or redeveloped, then this will be considered as an AUV.

40
Q

What is the NPV?

A

The sum of the discounted cashflows of a net cashflow including all inflows and outflows where each receipt or payment has been discounted to its present value at a specified rate.

When the NPV is zero the discount rate is also the IRR.

41
Q

What is a discounted cashflow?

A

A method of valuation which explicitly sets out all of the cash inflows and outflows of a project/investment

42
Q

What is the discount rate?

A

The rate of interest selected when calculating the present value of future costs / benefits

43
Q

What is the internal rate of return?

A

The rate of interest (expressed as a percentage) AT WHICH all future project cash flows are discounted in order for the net present value of the cash flows including the initial investment to be equal to zero.

44
Q

What is the market comparison approach?

A

Assessment of appraisal inputs and outputs by reference to comparable transaction evidence. Can include land, values and costs.

45
Q

What is the market value?

A

The estimated amount foe which an asset / liability should exchange on a valuation date between a willing buyer and willing seller in an arms length transaction, after a period of proper marketing and where the parties have acted knowledgeably, prudently and without compulsion.

46
Q

What is the NPV?

A

The sum of the discounted values of a net cashflow, including all cash inflows and outflows, where each receipt or payment has been discounted to its present value at a specified discount rate.

Where NPV is 0, the discount rate is also the IRR

47
Q

What is a target or required return?

A

The level of commercially acceptable return, considering the risk of a project, expressed as a periodic rate of return

48
Q

What is the NPV method?

A

A method used in discount cashflow analysis, to find the sum of money representing the difference between the present value of all the cash inflows and outflows associated with the project by discounting each at a specific discount rate

49
Q

What is the net sales area?

A

The GIA of a residential building, subject to certain inclusions and exclusions

50
Q

What is profit on cost?

A

the profit of a project, expressed as a percentage of the total development costs

51
Q

What is profit on value?

A

the profit of a project, expressed as a percentage of the project’s net development value

52
Q

What is the holding cost?

A

Costs involved with owning a site or property - finance, maintenance, taxes payable by land owner.

53
Q

How does the residual method of valuation work?

A

Based on the concept that the value of a property with development potential is derived from:
The value of the property after development (GDV)
Minus cots for undertaking development (development costs, including profit)
= Residual land value

54
Q

What are the two approaches to the residual method to valuation?

A

The Basic Residual Method
GDV - development costs (including developers profit) = land value

The DCF application
A valuation method which sets out assumptions for the timings of cash inflows and outflows over the development period
The approach to a DCF is:
1. Calculate the NPV of the estimated costs and revenues over the duration of the development project.
2. With all costs and revenues accounted for the NPV will be a current estimate of the residual land value
3. In a standard cashflow the profit is represented as a return on capital (IRR) and then assuming the NPV is positive, is the the residual land value

HATTIE APC REVISION (22 decks)

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