Development Appraisals Flashcards
What is a development appraisal?
A development appraisal is a tool to financially assess the viability of a development scheme.
What can you assess with a development appraisal?
- The residual site value
- Assess the profitability of a scheme and its sensitivity to changing inputs
What is a residual valuation?
It is a form of development appraisal. It can calculate the valuation of a property to find the market value at the date of the valuation for a specific purpose.
What is the methodology of a development appraisal?
It is the Gross Development Value (GDV) of a completed scheme take away the total development costs.
What is GDV?
GDV is the Gross Development Value of a completed scheme. It includes the market value of the completed scheme at date of valuation. Use comparable method to calculate rents and yields. All risks yield is used. An allowance of rent free periods, tenant incentives or marketing void can be made. Usually deduct purchasers costs for commercial property valuations.
What might be included in total development costs (TDC)?
Site preparation e.g demolition, remedial works, site clearance.
Planning costs e.g Community infrastructure Levy, planning consultants, Section 106 payments.
Building costs
Professional Fees (10-15%+VAT)
Contingency (5-10%) depending on risk
Marketing costs and sale/letting fees (sale 1-2% GDV Letting 10% of rent)
Finance costs
Developers Profit
What is a Section 106 Payment?
A legal agreement for planning obligations e.g affordable housing, infrastructure costs to gain a planning consent.
What are sources of building costs?
I usually use BCIS
Can also use client information
Quantity or building surveyor estimates
SPONS Architect and Builders Price Book.
I’ll often sense check costs with other recent similar project my colleagues or I have been involved in.
How much is usually charged for professional fees?
10-15% plus VAT of total construction costs.
Includes architects, engineers, project managers etc
What are the 3 elements if finance that a developer needs to borrow money for?
- Site purchase - Compound interest
- Total construction and associated costs - S Curve calculation
- Holding costs (empty rates, service charges and interest charges) until disposal - Compound interest
How is finance calculated?
Assume 100% debt financing
Financing to purchase land is calculated on a straight line basis over development period.
Finance for construction costs are calculated using S curve calculation
On going holding costs are calculated on a straight line basis from completion until disposal
What is the straight line basis of interest?
Compound interest, using the rolled up method of calculation. Interest is recalculated over period as more money is loaned.
What is S Curve calculation?
It is used to calculate the finance required for construction period. To calculate it you assume the total construction costs over half of the construction period. It reflects when the monies tend to be drawn down.
How do you calculate developers profit?
Usually its a percentage of GDV or total construction costs. 15-20% depending on the risk (higher for high risk projects)
GDV more likely used for residential.
Percentage has increased in recent years (COVID) given riskier market conditions.
What are current units costs like and where would you find these out?
What are the two main methods of development finance?
Debt Finance - borrowing from a bank
Equity Finance - Selling shares or using own money
What is loan to value ration?
Usually 60% but in difficult market, lenders may use 60% loan to cost
What are alternative methods for financing?
Joint venture - 2 or more parties
Forward sales - pre selling the completed scheme to investor or developer
What is overage?
An arrangement made for the sharing any extra receipts received above and beyond originally expected as agreed in a pre agreed formula
When is VAT Payable
On all professional fees
What is the profit erosion period?
The length of time it will take for the development profit to be eroded by holding costs and it becomes loss making due to interest charges.
What are limitations of residual valuations?
Relies on accurate information and inputs
Sensitive to minor adjustments
Does not consider timing of cash flows
What are three forms of sensitivity analysis?
Simple analysis of key variables like yield, GDV, Build costs, finance rate
Scenario analysis - changes in timings or design
Monte Carlo simulation - probability theory using software.
What is included in the Guidance Note Valuation of Development Property 2019?
Assumptions must be clearly identified in report
Advises to not avoid reliance on single method of valuation and cross referencing where possible.
Discounted Cash Flow technique might be best for complex or lengthy schemes. Residual otherwise best.
Valuation should be given as a single figure except when there is potential for significant variation (different options/design)
What is development property?
Interests where redevelopment is required to achieve the highest and best use or where improvements are contemplated or in progress. Includes:
Construction of buildings
Redevelopment
Improvements
Land allocated for development or higher value use.
When is stamp duty payable?
On property more than £250k it is 0%
5% up to £925k
10% up to £1.5m
12% above 1.5m
