Development Appraisals Flashcards
What is a Development Appraisal?
a calculation to establish the Value, VIABILITY, profitability or suitability of a proposed development based on clients inputs
What is a Residual Valuation?
Uses market inputs to establish site value
Form of development appraisal
Can be simple of DCF
At a point in time
What is the purpose of a development appraisal?
tool to assess financial Viability of a scheme or different uses
Assess profitability
Sensitivity to changing inputs
Establish residual site value
What is Gross Development Value (GDV)?
Market value of completed proposed development TODAY, assuming present value and market conditions
Development appraisal methodology?
uses comparable method to establish inputs (rent, yield, incentives, exit value) or clients inputs
ARY used
Purchasers costs deducted
What is Developers profit?
Usually 15-20% of GDV
Lower risk project = accept lower profit
In current market developers have increased their profit requirements given risker market conditions eg. increased build costs
What is the profit erosion period?
The length of time it takes for development profit to be eroded by hold costs following completion
What is included in the total development costs?
Site preparation cost
Planning costs
Build costs
Professional Fees
Contingency
Marketing costs & fees
Finance costs
What are the site preparation costs?
Demolition
Remediation works
Landfill tax
Provision of services
Site clearance
Levelling and filling
(Come from contractors cost plans)
What are some planning costs?
S.106 Payments
Community Infrastructure Levy (CIL)
S278 payments (for highways)
Planning application and building regulation fees
Planning consultant fees
Any specialist reports required by LPA eg. environmental
What are s.106 payments?
Town& country Planning Act 1990 legal agreement for planning obligations eg. affordable housing, infrastructure, new school etc. as part of planning consent
What is CIL?
Community infrastructure Levy
Charge by most LPAs to developers for impact on infrastructure
Who sets the required percentage of afforable housing?
The LPA
Who provides the estimate of build cost?
Client info
Quantity surveyor
Building surveyor
RICS Building Cost Information Service (BCIS)
What is BCIS?
RICS Building cost information service
Provides estimates of build costs on GIA basis
What are typical professional fees?
10-15% + VAT of total construction costs
Which experts are included in professional fees?
Architects
M&E consultants
Project managers
Structural engineers
What is typical contingency?
5-10%
depends on level of risk and likely movements in build costs (recently increased)
What is included in marketing costs?
Realistic marketing budget
Cost of EPC
NHBC warranty for resi
Sales fees (1-2% of GDV)
Letting fees (10% of inital rent pa.)
What 3 elements of a development does a developer need finance for?
- Site Purchase
- Total construction & associated costs
- Holding costs to cover voids until disposal eg. empty rates, service charge
What choices of interest are there?
- Current SONIA Rate
- BoE Base Rate + premium
- Rate at which developer can borrow money
How are monies drawn down for construction payments?
S-Curve
to reflect timing
What are the limitations of the Residual Valuation methodology?
- Importance of accurate info and inputs
- Does not consider timing of cash flows
- Sensitve to minor adjustments
- Implicit assumptions not explicity
- Need to cross check with comps
What is the purpose of sensitivity analysis?
Allows the sensitivty of the inputs to be assessed and their impact on outputs
Provides a range of values/ outcomes
What are the 3 types of sensitivity analysis?
- Simple Sensitivity Analysis of key variables
- Scenario Analysis eg. changes to phasing or design
- Monte Carlo Simulation - software using probability theory
What is the RICS guidance for development appraisals?
RICS Professional Standard: Valuation of Development Property 2019
What is included in Valuation of Development Property 2019?
Supplements IVS 410 ‘ development property’
Overview of valuation of development property
What advice is in Valuation of Development Property 2019?
Advice relating to:
1. Constuction of buildings
2. Undeveloped land
3. Redevelopment of land
4. Improvement of existing buildings
5. Land allocated for development
6. Land allocated for higher value use or higher density in a statutory plan
How does Valuation of Development Property 2019 define Development property?
Interests where redevelopment is required to achieve the highest and best use or where improvements are in progress at valuation date
What is best practice when valuing development property?
To avoid reliance on a single approach or method
How should you treat assumptions or special assumptions in reporting?
Must be declared in valuation report
What is the common basis of value in a residual valuation?
Market Value
assumption of optimum development timing and consider current economic and planning conditions
What is a Financial Viability Assessment?
Undertake for a planning application and must comply with RICS PS: Financial Viability in planning: conduct and reporting 2019
