Development Appraisals Flashcards
What is the National Planning Policy Framework?
Sets out the government’s planning policies for England. Sets out the framework for local plans.
What is a local plan?
Document which sets out a vision and a framework for the future development of an area.
What are S106 agreements?
A legally binding contract between planning authority and developer to address issues that make a development acceptable and mitigate its impact on the local area.
What is an example of a S106 agreement?
Open space contribution
Education contribution
Affordable housing.
What is the community infrastructure levy?
A charge which can be levied by local authorities on new development. Used to help deliver infrastructure.
Name five costs of a development?
Build costs
Advertising
developers profit
agency fees
professional fees
finance costs
What is a development appraisal?
A financial viability test of the ability of a development project to meet its costs.
What is the residual method?
Method of valuation to calculate the value of land with development potential.
When is the residual method used?
To value land where there is potential for development.
Used alongside comparable method as a sense check.
How do you use the residual method?
There are three steps of a residual valuation:
1. calculate gross development value
2. calculate all costs associated with development
3. Deduct cost from GDV to arrive at residual land value.
How would you arrive at GDV?
Comparable method of value to establish sale value for residential houses then multiplied by the number of houses.
How would you arrive at GDV for commercial property?
I would use comparable method to establish rental value and yields in the local area. I would then use investment method to calculate capital value.
In calculating GDV how would you decide what properties are developed?
There can be a specific development plan in place. As in Mona house there wasn’t. I used comparable scheme in the area to arrive at the appropriate number and type of homes.
What is the typical amount for developer’s profit?
Between 15 and 20% of GDV or total construction cost. GDV basis normally for residential use.
When might the developer’s profit be lower?
Smaller scheme or when a high percentage is affordable housing. When there is less risk.
Who would you consult regarding building costs?
Building Cost Information Service (BCIS)
How much would you deduct for professional fees?
10-15% plus vat of total construction costs. Lower percentage for larger projects.
How is finance calculated for the residual method?
Finance is calculated using the estimated borrowing cost over the period of time the finance is required for.
What is S curve finance?
Graphical representation of how costs are distributed over a project. With them starting low at the start, reach a peak in the middle and then taper off at the end.
What is the difference between the residual method and a development appraisal?
Residual provides land value, whereas Dev app determines whether the development is viable considering developers profit required, affordable housing and contributions.
What is the most common purpose of a residual valuation?
Valuation to find the market value of land based of market inputs.
What dates are the inputs of a residual valuation taken at?
The date of valuation.
What do you consider when calculating build costs?
Demolition, site preparation, remedial works. provision of services, fencing
What do you consider when calculating planning costs?
S106 agreements, S278 agreements, CIL, affordable housing, application fees, planning consultant
What would you deduct for contingency fees?
Between 5 and 10% depending on level of risk and building cost instability.
Why might a developer need to borrow money?
Site purchase
Construction costs
How can you check an appraisal?
Comparable evidence. price per acre.
What are the two main methods of funding?
Debt finance - borrowing from bank
Equity finance - selling shares.
Which finance method would you commonly assume?
Debt finance
Is VAT payable on all professional fees?
Yes
What is the profit erosion period?
Relates to the length of time for the development profit to be eroded following completion of a scheme.
What are the limitations of the residual method?
Very sensitive to minor adjustments
Based on many assumptions about future values
What is sensitivity analysis?
Analysis to show how residual values can change based on key inputs such as house prices or build costs.
When is finance interest paid?
End of development.
Can finance costs increase after initial appraisal
Yes - due to void periods or empty properties which increase the duration increasing interest.
What is benchmark land value?
Existing use value plus a premium for land owner.
What are the three forms of sensitivity analysis?
Simple analysis of key variables
Scenario analysis - e.g. timing, costs
Monte Carlo Simulation - using probability theory
What is existing use value?
Value of the land in its existing use
What is a standing investment?
Property that is income producing, usually with a tenant in occupation.
What is a turnkey development?
A development where the property is constructed and fitted out to be fully operational
What is a development property?
An interest where redevelopment is required to achieve the highest and best use.
What is the basis of value for development property?
Market value
Developer’s profit is calculated as a % of what?
Typically as a % of cost, for more complex developments it is a % of GDV
Problems with calculating finance costs in residual method?
Reflected as a simple interest rate percentage on all costs each year until completion of scheme. Financing is much more complex than this which creates a distance between valuation and the market reality.
Main assumption when valuing development property?
That the development is completed as at the valuation date and is using inputs from the current market to assess its prospective value.
Tell me about RICS Guidance note Valuation of Development Property 1st edition 2019?
- Provides guidance on valuing development property
- Should use minimum of two methods of valuation
- Residual for simple developments, DCF for complex
- Risk analysis should be undertaken
What are abnormal costs?
Costs that are specific to the scheme such as need for expensive foundations due to ground conditions.
What is affordable housing?
Affordable housing includes homes for sale or rent and is for people whose needs are not met by the private market.
What types of affordable housing are there?
Social rented, affordable rented, shared ownership
What is social rented?
Housing provided by local authorities and housing associations
What is affordable rented?
Homes let at least 20% below local market rents
What are shared ownership?
Share of a property is bought and rent paid to landlord on the rest.
What is a viability assessment?
process to determine whether a proposed development is financially viable considering planning obligations to meet housing and community needs.
What were the inputs for the development appraisal in Rotherham?
Construction costs - lower quartile from BCIS
Profit - 17.5% for MH 6% for AH to reflect lower risk
Finance - 6.5%
Professional fees - 5% due to larger site
Marketing - 2.5% - larger site more marketing
Agent - 1.5% larger scale agent
Legal costs - £500 per unit
Abnormals - £8,000,000 provided
contingency - 3%
s106 - £1.25m (provided)
CIL - £40/m2 (not including AH)
Value = £3,600,000
What was the difference between this and the residual valuation?
So my residual valuation is based off market inputs to ascertain market value
This is based off some general inputs and provided inputs to calculate residual site value. This was checked to see whether the local council were getting a good deal for the land.
