Development Appraisals Flashcards
What are the key components of a project business case and related development aims and objectives in terms of feasibility, viability and desirability.?
viability through analysis of profit, maximum site bid, cost ceilings and break-even point
Viability includes analysis of profit, maximum site bid, cost ceilings, and break-even point.
Define cost in the context of real estate.
Land acquisition costs, professional fees, construction costs, financing costs
Cost is a critical factor in determining the financial feasibility of a project.
What does price refer to in property transactions?
Willing seller / purchaser amount
Price can fluctuate based on negotiations and market conditions.
How is value defined in the property market?
Amount worth in the marketplace
Value can vary based on market demand and other external factors.
What is meant by worth in real estate?
Personal or intrinsic value
Worth is subjective and can differ from the market value.
How different project specific and contextual issues are site constraints and opportunities are reflected
- Planning = Permission if granted = lower risk. Constraints with conditions on height, size etc. and obligations. Reflected in cost and GDV.
- Constraints – contaminated land, enabling works, infrastructure provision, unique features. Costs and GDV,
- Market – demand and interest rates, economic uncertainty, env costs and opps,
Planning permission can lower risk, while constraints like contaminated land can increase costs.
List some site constraints that can affect property valuation.
- Contaminated land
- Enabling works
- Infrastructure provision
- Unique features
These constraints can significantly impact costs and gross development value (GDV).
What is the purpose of property market surveys and evaluations?
Market surveys - current market conditions, trends, and comparable property transactions to estimate GDV and market risk / opportunity.
Evaluation of site - assessing the specific characteristics of a site or property, including its physical condition, location, and potential costs.
These factors help estimate GDV and assess market risk/opportunity.
What is sensitivity analysis in property appraisal?
- Sensitivity analysis of issues can be assessed with non-market factors such as the Building Act storey height amendments, costs, finance rates adjusted to assess viability.
Factors such as building regulations and finance rates can significantly affect viability.
What is forward funding / sale in development finance?
Funding - Agreeing to sell to a financial institution
Sale or pre-let - to the market
This is a common mechanism to secure funding before project completion.
Define retention finance.
Mortgage with a different rate due to lower risk
Retention finance can provide favorable terms for developers.
What distinguishes senior from junior debt? And Mezzanine?
Senior debt has the right to repossession and is the cheapest source; junior debt is higher risk and costlier (Mezzanine finance – top up finance)
The priority of repayment influences the cost of borrowing.
What is a Development Agreement and the contents of one?
- not wishing to acquire the site – agree with landowner to develop it. Agreement that dev puts expertise and some cash and land owner puts it land and they share the profit.
- development mix, quality of design, infa, funding agreements, profit sharing.
This arrangement often involves profit sharing based on contributions from both parties.
What is a residual appraisal?
Used in the early stages. Adv straightforward, quick, land or profit. Disadv – lots of variables, not timing
It is straightforward but may involve many variables.
What is a cash flow model?
Assesses timing of costs and revenues over periods. – calc finance costs. Lending applications, inflation
Useful for calculating finance costs and lending applications.
How does a discounted cash flow analysis work?
Discounts future costs & revenues back to present value.
Used on more complex projects with multiple phases – time vlaue of money, used to determine breakeven (IRR). No debt at time or sum at end of development.
It helps determine profitability while considering the time value of money.
What is Gross Development Value (GDV)?
- It is the capital value the completed property is expected to be worth on the open market if sold/rented to a willing customer.
- The GDV is based on values available at the time the appraisal is carried out and the most efficient use of the site.
- In the case of the project I worked on at Argent, the GDV was calculated on the preferred restaurateur’s rental offer.
GDV is based on market conditions at the time of appraisal.
How is Net Development Value calculated?
GDV less the purchaser’s costs (legals, stamp duty etc).
This provides a more accurate picture of potential profit.
What is IRR?
Internal Rate of Return – time weighted measure of return. Annual rate of growth an investment is expected to generate. Reduce timescales to improve.
- Timing and magnitude of cashflow.
- To retain property or analyse return on investment
It measures the expected annual growth rate of an investment.
What are the three forms of sensitivity analysis?
- Key variables
- Scenario analysis
- Monte Carlo Simulation
These methods help assess risk and variability in project outcomes.
What is the significance of planning requirements in valuations?
They include costs under S.106 or CIL and affect cash flow.
S.106 or CIL costs under ‘statutory’ and cashflow
CIL paid typically at the commencement of development
CIL is typically paid at the commencement of development.
What is the current Bank of England interest rate?
4.5%
Interest rates can significantly impact financing costs.
How can finance rates be calculated?
- Bank of England base rate + premium
- Client’s loan terms
- SONIA + premium
These methods provide different approaches to estimating finance costs.
Level of Debt’s available
Relates to priority in which debt will be repaid. How secure they are and the pricing they need to achieve
Snr – a bank – right to reposs (secured), cheapest source
Junor / Mezzanine – prop reposs and money left given to 2nd, higher cost due to higher risk
Define YP in perpetuity
how many years it’ll take to recoup your investment (inverse of the yield)
Define Discount Rate
- discount future cash flows back to their present value. Both reflect rate of return. Discount all future costs and income to zero so project doesn’t make or lose money from initial outlay.
Define Yield
investors gauge the immediate profitability and compare different investment opportunities. Gross is without operational costs. Net = with op costs.
What’s the relationship between Yield and YPP?
Rental yield is expressed as a percentage.
Years’ purchase is expressed as a multiplier
What is a Discounted Cash Flow?
- A Discounted Cash Flow details future costs & revenues that are discounted back to the present rather than have interest added to give a true estimate of the return on a property according to assumed rates of growth and expected rents over a particular period.
- By using a Net Present Value, this can help produce an end figure for profit / loss according to the expected rate of return.
- This is especially useful if you are paying interest on the finance used on a development as this affects expected returns (NPV would be interest rate).
- sums income and exp every month for value of profit today.
- Cost of interest over the period
How is the discount rate determined?
the real estate’s target or expected rate of return
IRR for a small development site
30% roughly. The larger the site, the lower the IRR as far away from getting the money and being in a positive position.
Level 2 Details - Bridge to Living
- Rental yield –
- Retail - 6% for office due to strong covenant and 10%
- Office of 7.5%
- Cashflow appraisal as an agreed delivery programme
- Sensitivity analysis by varying key factors such as rental voids, costs and yields
- Recco office solution
Level 3 - Angel Central - BTR vs Sales
- List of inputs to calculate the returns, and I requested additional details on Community Infrastructure Levy (CIL) and likely Section 106 contributions from a planning consultant
- a discounted cashflow – discount rate of 10%
- Professional fees I analysed similar projects and calculated as a percentage of the total construction cost – 8 – 15%
- Loss for the BTR option of -0.43%, whereas the sales showed 16.4% profit on GDV with a 19% IRR
- Sensitivity analysis to show the variation in factors such as construction costs, yields and income rates that would impact on the performance outputs
- Recc Sales Option
Level 3 - YEP - Viability Appraisal
- Viability of the project with larger, revised floor areas for the three proposed main uses of data centre, cold store and advanced manufacturing along with an energy centre and research and development facilities
- detailed residual appraisal - Compared and uses ranked - level of information available (delivery programme that would vary finance rates)
- Sensitivity analysis on the structure of rental deals to optimise outputs, including capital incentives and rent-free periods
- Data centre = 13% profit on GDV compared to 9% for manufacturing and cold store respectfully.
- Greatest risks with costs of £95m but highest demand
List the relevant RICS Prof Statements
- RICS Valuation - Global Standards (Red Book) (January 2025).
- Valuation of Development Property (2019)
- Financial Viability in Planning: Conduct and Reporting (2019)
