Development Appraisals

Question 1

What is a Development Appraisal?

Answer 1

It is a tool to financially assess the viability of a development scheme.

Question 2

What is the purpose of a Development Appraisal?

Answer 2

The purpose of a development appraisal is that is a tool used to establish the:

• Value
• Viability
• Profitability
• Suitability

A DA can also be used to assess the proposed scheme’s sensitivity to changing inputs.

Question 3

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

Answer 3

A development appraisal uses the residual method of valuation to find the profitability / viability of a scheme.

A residual valuation uses the residual method of valuation to find the residual land value.

Question 4

What is a Residual Valuation?

Answer 4

A Residual Valuation is a specific calculation to establish the residual value of a development.

The valuation assumes a number of key variable and is undertaken at a particular point in time, using current costs and values.

Question 5

What is Viability?

Answer 5

If something is viable – it means that the value generated form the development excessed the costs of undertaking the development.

Question 6

What is a financial viability assessment (FVA)? When would one be carried out?

Answer 6

It is the process of assessing whether a site is financially viability by looking at whether the value generated by a development is more than the cost of developing it.

It is carried out to help strike the balance between the aspirations of developers (in terms of returns against risk) and the aims of the planning system (to secure maximum benefits in the public interest through the granting of planning permission).

Question 7

Who might submit a FVA?

Answer 7

• Applicant
• Reviewer
• Area-wide viability assessment or
• As part of proof of evidence before/during an appeal or high court case.

Question 8

When might a development appraisal be used for planning?

Answer 8

When negotiating S106 payment viability assessment are carried out to ensure the cumulative impact of planning obligations does not impact the deliverability of the scheme.

Question 9

What are the main elements included in the development appraisal?

Answer 9

• GDV – the capital value of the completed scheme.
• Total Development Costs – site prep, build costs, fees, planning, contingency, marketing, finance.
• Developers Profit

Question 10

What would a developers profit normally be expressed as a % of?

Answer 10

% of GDV

or

% of total development costs

Question 11

When is profit on GDV usually used? What is the usual desired return?

Answer 11

• GDV is more frequently used as a base for residual use.
• Usually 20-25% profit on GDV but depends upon risk.

Question 12

When if profit on costs is usually? What is the usual desired return?

Answer 12

Profit on Costs is usually used for commercial developments and desired returns are 15%-20% depending upon risk e.g. if a scheme is pre-let/pre-sold a lower return may be required

Question 13

Apart from developers profit, what other metrics can you produce from a development appraisal?

Answer 13

• Site Value
• Any planning contributions
• Capital value (using goal seek)
• Return on capital employed

Question 14

What due diligence would you undertake when doing a development appraisal?

Answer 14

• Environmental impacts (flooding etc)
• Legal title and tenure (easements, rights of way etc)
• Topography
• Availability of services
• Road network etc
• Ground conditions

Question 15

What sources of information do you use when undertaking a development appraisal?

Answer 15

• Comparable schedules
• Online databases (Rightmove / EPC register)
• Ringing agents to find GDV etc.
• Using BCIS / QS for build cost estimate
• Use planning portal / LPA websites to check planning status.
• Land Reg to find title information
• Flood Map to see if there are any issues which may adversely impact value

Question 16

How do you calculate project timescales?

Answer 16

Asking colleagues and quantity surveyors who have had experience in certain projects.

Question 17

What is GDV in relation to development appraisals?

Answer 17

GDV is the capital value of the completed scheme.

Question 18

Tell me about your understanding of incorporating affordable housing into development appraisals?

Answer 18

Local planning polices will set out the required % of affordable housing required for a new residential development.

This often includes the sales values the developer has to sell to an RP. This is factored into the GDV.

Question 19

How do you calculate GDV?

Answer 19

The GDV of a new development can be obtained gaining comparable evidence of recent sales and/or letting transactions.

The scheme would be broken up into private and affordable dwellings and this would make up the GDV.

Question 20

What is BCIS?

Answer 20

The RICS building cost information service obtains monthly updated information from QS sources and recent contract prices/tenders agreed.

Question 21

What is the floor area method?

Answer 21

BCIS uses the Cost per square metre and works on GIA.

Question 22

What are preliminary costs?

Answer 22

Prelims are a collection of estimated costs for preparatory work and materials for a constructions project as well as ongoing costs.

Question 23

What does BCIS include?

Answer 23

Preliminary costs

Question 24

What are disadvantages of BCIS?

Answer 24

Uses preliminary costs – need to be aware of this – larger area / size / premilims will be higher.

Are well as need to be careful on the sample size – ask ST.

Doesn’t account for economy’s of scale?

Doesn’t incorporate specification.

Doesn’t look at external works.

Question 25

Tell me about planning costs in relation to a development appraisal?

Answer 25

• Town and Country planning Act (1990) Section 106 payments – a legal agreement for planning obligations (e.g. affordable housing, infrastructure costs, new school etc) to gain a planning consent.
• Community Infrastructure Levy (CIL) is charged by most LPAs (see Planning notes)
• Affordable housing Contribution.
• Section 278 payments for highways works.
• Planning application and building reg fees
• Costs of a planning consultant / other specialised reports required by the LPA (e.g. Environmental Assessment)