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RICS APC - EVIE > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

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

A

Residual appraisals are valuations based on market inputs to come to a market value of the site.

Development appraisals are a tool to determine weather a development opportunity is worth pursuing through establishing the viability or profitability.

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2
Q

Are the inputs to a development appraisal market facing ?

A

They can be but some can be chosen by a developer.

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3
Q

What is the process involved in calculating these RV or DA?

A

GDV (revenue of the proposed development)
deduct
Build costs, land acquisition fees, development costs, professional fees, disposal fees and developers profit = Land Value

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4
Q

What is the RICS definition of GDV?

A

The aggregate Market Value of the proposed development on the special assumption that the development is complete at the date of the valuation in the market conditions on that date.

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5
Q

How might you calculate the GDV?

A

Comparable or investment method.

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6
Q

How can inputs be affected by macro-economic factors? What macro-economic factors are affecting development at the moment?

A
  • Interest Rates affect the costs of finance (Truss mini-budget).
  • Brexit - high build cost inflation.
  • Cost of living crisis - Lower absorption rates/ property affordability.
  • Wars - flows of capital from certain places and higher build/labour costs.
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7
Q

What other guidance is available ?

A

RICS Professional Standard: Valuation of Development Property 2019.

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8
Q

What does the RICS Valuation of Development Property 2019 set out?

A

Sets out the main approaches to valuation of development property.
1. Market comparison approach.
2. Residual method.

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9
Q

What is the definition of Development Property?

A

Interests which redevelopment is required to achieve the highest and best use.

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10
Q

Why is sensitivity analysis required?

A

It is required for key variables such as GDV, Build Cost and finance rate to show range of values.

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11
Q

What are the different types of sensitivity analysis ?

A
  1. Simple sensitivity analysis of key variables - build costs, yield and GDV.
  2. Scenario Analysis - change scenarios for the development content/ timing/ costs - phasing a scheme or modifying the design.
  3. Monte Carlo Simulation - using probability theory using software ‘crystal ball’.
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12
Q

What is the different types of sensitivity analysis?

A

Simple sensitivity analysis of key variables - build costs, yield, GDV.

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13
Q

How do you calculate finance rate ?

A
  1. SONIA (Sterling Overnight Index Average).
  2. Bank of England Base Rate plus premium.
  3. Rate at which the client can borrow money.
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14
Q

What are the three elements of finance?

A

The developer needs to borrow money for the site:
1. Site purchase
2. Total construction and associated costs.
3. Holding costs to cover voids until disposal of the scheme.

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15
Q

What is the principle of the S-curve ?

A

To reflect when monies tend to be drawn down.
Calcuate by assuming total costs over half of the time using S-curve.

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16
Q

What is a SONIA rate?

A

Sterling Overnight Index Average - reflects average interest rate that banks pay to borrow sterling overnight from financial institutions.

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17
Q

What did SONIA replace ?

A

LIBOR - London Inter Bank Rate which is the variable lending rate for a three month borrowing term.

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18
Q

What is the current base rate?

A

4.75% as per the 7th November

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19
Q

Why is it bank of england plus a premium?

A

To reflect the risk associated with borrowing money and the risk of the development (covenant of a larger developer vs a smaller developer).

20
Q

What is finance charged against?

A

The site purchase including purchasers costs.

Total construction and associated costs.

Holding costs to cover voids (empty rates, service charge).

21
Q

What are the limitations of a development appraisal?

A

Sensitive to changes in inputs - build cost inflation/house prices drop.
Dependant on the accuracy of inputs.

22
Q

What is the key takeaway from your argus developer session?

A

I learnt how to effectively profile out timescales.

23
Q

What are the limitations of using Argus?

A

Sensitive to inputs
Does not show the full calculations to the client

24
Q

Would a developer typically have 100% debt?

A

Usually they would have a 60% Loan To Value ratio
This would typically comprise senior debt which is the first level of borrowing and then mezzanine funding which is the additional monies required over the LTV ratio.

25
Q

Why would you assume 100% debt

A
  1. To reflect that equity isnt free due to the opportunity cost.
  2. It also reflects the additional fees and interest that would be incurred in borrowing.
  3. It is useful for comparison if a client is comparing developments it is useful to compare like for like.
  4. It is industry standard to use when providing market facing appraisals.
26
Q

What do you mean by opportunity cost?

A

It represents the potential benefits that the investor would miss out on when choosing one option over another.
So in this case they would miss out on investing in something else.

27
Q

What level of developers profit?

A

Usually betwen 15%-20% reflecting risk.

28
Q

What is BICS?

A

Build Cost Information Service
A database of build costs.
Build costs are given in sqm and given in upper, median and lower quartiles.
Shows information from QS and BS tenders.

29
Q

What are the limitations of BCIS ?

A

Can be based on a small sample size.
Not always up-to-date
Don’t account for the site specifics such as ground conditions.

30
Q

What does BCIS exclude?

A

External works, contingency and design fees.

31
Q

How often is BCIS updated ?

A

Every quarter

32
Q

What is S106?

A
  • S106 agreement
  • Introduced under the Town and Country Planning Act 1990.
  • Planning obligations set out in a legally binding agreement enforceable by the LPA and are site specific impact related only.
  • Agreement has to be entered into before the planning consent is granted.
  • Only justifiable to make the development acceptable in planning terms, directly related to the development and reasonable in relation to the scale of the development.
  • Can be used the secure affordable housing on a development.
  • Site specific charge
  • By negotiation.
33
Q

What is CIL ?

A

Community Infrastructure Levy
Used by Local Planning Authorities for off-site payments from developers to raise funds for infrastructure.
Cannot be used to secure affordable housing.
Charging schedule must cover the whole area.
Tariff based charging system based on the increase on floor area of the scheme.

34
Q

What RICS guidance is there for FVAs ?

A

RICS Professional Standard: Financial Viability in Planning: Conduct and Reporting May 2019.

RICS Professional Standard: Assessing Viability in Planning Under the National Planning Policy Framework 2019 for England March 2021.

35
Q

What does the RICS Professional Standard: Financial Viability in Planning Conduct and Reporting May 2019 set out ?

A

Mandatory requirements on conduct and reporting in relation to FVAs for planning in England.

Recognises importance of practicioners acting with impartiality, objectivity and transparency when reporting on such matters.

Ascertaining viability involves making valuation judgements (inputs) which need to be rational, realistic and reasonable, relying on evidence and valuation and excersing judgement.

Practicioners must therefore employ:
- evidence based judgement
- Collaboration
- Transparency
- Consistent, standardised approach.

Must include sensitivity analysis and non-technical summaries

No contingent fees

36
Q

What does the RICS Professional Standard: Assessing Viability in Planning under the NPPF for England 2019, March 2021 set out ?

A

Considers scope and means of undertaking FVAs in accordance with the NPPF and other planning guidance.

FVA methods and inputs and the sensitivity testing of these are explained as are BLV, EUV and AUV.

37
Q

Was there anything in the Autumn budget that impact development?

A
  • Planning reform is at the heart of the governments agenda.
  • Will respond to the NPPF consultation before the end of the year.
  • Impliment legislative change to ensure a simplified and streamlined planning system.
  • £500 million boost to the affordable housing programme.
38
Q

What use IRR in development?

A

To assess the total return from an investment opportunity.

39
Q

What is profit erosion?

A

How long it will take for the developers profit to erode to 0 by holding charges following completion of a scheme.

40
Q

Why should you sense check using land transactions?

A

Under the RICS Professional Standard Valuation of Development Property 2019, you should avoid reliance on a single approach.

41
Q

What is a Financial Viability Assessment ?

A

A Financial Viability Assessment is an analysis used to determine the financial feasibility for a development project, especially in the context of planning applications and policy compliance.

42
Q

How would you assess viability using BLV?

A

Residual Land Value – Benchmark Land Value = Surplu/Deficit
If a deficit is produced, the scheme is not viable.
If a surplus is produced, the scheme is viable.

43
Q

What is the existing use value + premium approach ?

A

THE EUV+ method is based on the existing use value of a site (current use value) plus a premium.

The principle of this approach is that a landowner should receive at least the value of the land in its pre-permission use which would normally be lost when brought forward for development. The premium is added to provide the landowner with incentive to release the land for development.

44
Q

What is landowner premium ?

A

The landowner premium is added to provide the landowner with incentive to release the land for development.

The range is between 0-30% depending on the size and complexity of the scheme.

45
Q

What is the Benchmark Land Value?

A

The minimum amount a landowner is likely to accept for their land when considering whether to sell it for development.

46
Q

How do you calculate BLV?

A

Existing Use + Premium approach
or
Alternative use approach

47
Q

Was you FVA Red Book Global Compliant?

A

No – because it was for negotiation purposes and therefore exempt from RBG under PS1 of the RBG Compliance with standards and practice statements where a written valuation is required.

RICS APC - EVIE (17 decks)

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