Development Appraisals Flashcards
What is the role of development appraisals?
To value properties with development, redevelopment or refurbishment potential,
Used when land value is known and shows profitability of scheme
Name some key inputs?
What are the 3 key components of development finance?
site acquisition, total costs, hold costs
What is the ‘S’ curve?
Costs start low and develop throughout the project
Talk about hold costs?
compounded on a straight-line basis
Talk me through the structure of a development appraisal?
GDV-Costs-site value = profit
What are the sources of finance?
debt - senior and mezzanine (15-20%)
equity / JV
Current base rate?
4.45%
What is SONIA?
Sterling overnight index average
variable rates between banks for a 3 month term, plus a premium to reflect interest
Are there any RICS guidance?
RICS valuation of development property 1st Ed (2019)
RICS Valuation - Global standards (2024)
Talk me through the 7 Hugon Road apprisal?
What role does the Building Cost Information Service play in determining build costs?
BCIS owned by RICS, provided costs up-to-date data, helps determine build costs
m2
How do market conditions and client-specific considerations affect appraisal inputs?
Market conditions at the moment particular are very influential on appraisals, very sensitive for example a change in the interest rate can have large implications.
How are interest rates benchmarked in the context of development finance?
Borrowing rate is based on the interest rate currently 4.45%, a percentage is then added onto this for example my client as a pre-agreed lending facility with a bank where they can borrow 2% above the base rate and to a max of 30% value of the portfolio.
Why didn’t the 7 Hugon Road scheme appear financially viable when you ran the appraisal in Argus?
The scheme wasn’t financially via as the book value was 1.35m and the GDV was only significantly increased to 1.65. Given the poor state of the flats and the E rating EPC, the redevelopment works were extensive. Costing 500k this coming out at a loss already without accounting for professional fees. However, the motive was to increase the EPC to ensure they were compliant with MEES in the near future.
What factors did you consider when preparing the appraisals for the 7 Hugon Road project
Firstly understanding the site, looking at what could be feasible based on other consented schemes. What surveys were needed, I knew the site was near the river so a flood risk survey was needed. Client’s inputs of BC, finance etc
What was the rental income assumption you made for the commercial element in the development appraisal for 198 Wandsworth Bridge Road?
I assumed a rental income of £20,000 this was based on advise I got from a local agent, this figure was capitalised at an exit yield of 7.5%
I also checked CoStar
What were the BC for 198?
BC, I applied £100 for commercial and £250 for resi to reflect the work.
This was multiplied by GIA
What factors did you take into account while calculating the professional fees and additional costs of the mixed-use development on Wandsworth Bridge Road?
Since the site did not have planning I factored in a greater percentage for architects fees to reflect this, 6%. Further fees included QS, structural engineer, planning consultant, project manager
Other costs: Compensation for the commercial tenant 1xRV £24k (under 14 years)
CIL payment
Was there any requirement for affordable housing contributions in the Wandsworth Bridge Road development?
None, the scheme did not trigger the affordable housing mark 10 of more houses, 50% affordable
What was your advice to the client regarding the profitability of the 198 Wandsworth Bridge Road scheme?
Profit on costs just below 5%, profit erosion was 11 months and given this was very low, the scheme was just on the cusp of being profitable, so I advised we would be better of to gain planning and sell the block with consent.
How did you verify the initial GDV breakdown provided in the marketing particulars for the potential acquisition of 98-96 King Street?
GDV was provided on the particulars, I checked this by valuing the resi via comparable and commercial investment method.
What were the appraisal results for the 98-96 King Street mixed-use development, and how did they compare to the client’s hurdle rate?
14% profit on GDV, slightly below the clients target of 15% - considering the large capital needed for this project I advised it was too risky
Can you explain the sensitivity analysis you ran for 98-96 King Street and how it impacted your advisory response?
Build costs and interest rate, once the sensitivity analysis was run this heighten the risk exposure
PS Valuation of Development Properties 2019 explain the content
This standard aims to guide the valuer in the approach to development property valuations.
Definition, this is where redevelopment is required to achieve best use involving construction, infrastructure, redevelopment, improvement and development for planning
What is S106?
Definition, this is a planning obligation as a legal agreement between a LA and a developer and aims to mitigate negative impacts of a development
2 – Used to pay for site infrastructure including affordable housing
What is CIL?
1 – Definition, this is a planning obligation used to fund infrastructure through planning changes and within the local plan
2 – A tax charged on developments of over 100 sq m by multiplying floor space by a CIL charging area
Explain difference between project feasibility and viability?
1 – Project feasibility assesses the practicality and technical possibility of a project
2 – Project viability examines whether the project is financially sustainable and worth pursuing.
What measure does BCIS use?
m2
1 – GIA for commercial property £/m^2
2 – GEA for residential property £/m^2
CIL amounts?
MCIL 2 £80
Local resi £400, commercial £0
Talk me through the figures for 7 hugon?
GDV 1.65m
site 1.3m
BC £450
Fees 100k
EPC C = (400,000)
EPC B = (460,000)
Talk me through 198 figures?
GDV 2m
site 1.2m
BC 500k
Fees 50k
RV £23k
Finance £15
Profit £90k
profit on costs 4.85%
11 month profit erosion
What are the key metrics to development appraisals?
IRR
Profit on GDV (15%)
Profit on BC (20%)
Profit erosion
?
Talk me through Kings Street
large mixed use scheme with planning for sale £5m
GDV £11m
Site purchase £5m
BC £3m
CIL 250k
Fees 6%
Agent fees
Finance
Profit £1.5m
Profit on costs 16%
Profit on GDV 14%
IRR 24%
Profit erosion 1y11m
Advised too risky and slightly too large for the client
SDLT Commerical
£0 - £150,000 = 0%
£150,001 - £250,000 = 2%
£250,000 + = 5%
SDLT Resi
£0 - £125,000 = 0%
£125,001 - £250,000 = 2%
£250,000 - £925,000 = 5%
£925,001 - £1.5 = 10%
£.5 + = 12%
What profit metrics are you aware of?
-initial yield on costs
-cash-on-cash (equity yield)
-interest on capital employed-
-ROCE
How to you calculate?
GDV - costs - site value = profit
RICS Guidance Note: “Valuation of Development Property” (1st edition, October 2019 what does it state?
purpose, approach, key inputs, red book compliance, professional judgement
