Development Appraisals Flashcards
1
Q
What is an FVA and when is it required?
A
- An assessment of a development’s viability. It considers whether or not a development is viable
- Required when not able to provide AH compliant scheme whilst making a fair return
2
Q
What is Benchmark land value
A
- BLV used as the basis of value in a FVA.
- Based on EUV (value of land in its existing use) plus a premium for the landowner.
Minimum return required for a reasonable landowner to make the site available for redevelopment
3
Q
What purpose does BLV surve in FVAs?
A
Used as basis of value in FVAs
This is compared with the RLV. When BLV is higher then the RLV scheme cannot afford any more affordable.
4
Q
What is the EUV?
A
Value of land in its existing use
5
Q
What is the premium?
A
- Provides reaonable incentive for land owner to bring forward land
- Calculated by other BLV premiums / judgement depending on site
6
Q
What is AUV
(alternate use value)
A
- Considers other options for a property to ascertain the highest value and best use for the land
- e.g refurbished building PDO rights if within parameters (but only if reasonable)
7
Q
POC vs IRR?
A
POC = profit relative to cost,
- not considering time value of money
- Good for simple projects
IRR = focuses on rate of return over time,
- considers when cash flow occur and their present value.
- More complex projects
8
Q
What is a target rate of return?
A
- Level of return expected from an investment.
- Accounts for variety of factors (i.e market conditions, constrained site etc).
- Blended TRR accounts for Private (17.5%), AH (5%) and commercial (15%) blended together.
9
Q
What RICS guidance is there when undertaking FVAs?
A
- PS - Financial viability in planning: conduct and reporting (2019) - which is mandatory for all RICS members carrying out financial viability assessments.
- Supplemented by PS - Assessing viability in planning under the NPPF 2019 for England (2021)
10
Q
What are the key points in 2019 Professional Standard “Financial Viability in Planning, Conduct & Reporting”
A
- When providing BLV, RICS members must provide:
1. EUV,
2. Premium,
3. Market evidence,
4. Supporting considerations, assumptions and justifications adopted and
5. AUV if appropriate. - Objectivity, impartiality and reasonableness statement must be included in report.
- Fee statement (no contingent fees/performance related)
- Sensitivity analysis must be provided in all FVA.
11
Q
What are the key points in 2019 Professional Standard “Financial Viability in Planning, Conduct & Reporting”
A
- FVAs in plan-making
- Makes key definitions
12
Q
How would you undertake an FVA?
A
Method 1:
1. Calculate RLV (GDV-GDC-Profit)
2. Calculate BLV (EUV+)
2. If BLV is higher than RLV, the scheme cannot afford any more affordable housing
(can then work back varying the AH in appraisals)
Method 2:
1. Calculate the BLV and incorporate to calculate into development appraisal.
COMPARE IRR TO TARGET IRR
13
Q
How is BLV calculated?
A
EUV+ approach
- Based on Existing Use Value (EUV) – E.g offices with comparables get rents, then apply ARY depending on location, specification and likely tenants.
- Then, plus a premium for the landowner (land comparables).
14
Q
What are key development costs on a project?
A
- Construction costs
- Land acquisition (dev appraisal)
- Planning related costs (CIL, s106)
- Development Management & Contingencies
- Finance costs
15
Q
How do you calculate construction costs?
A
- Internal/External QS to udnertake cost order of cost estimate
- BCIS
16
Q
What are the neagtives about BCIS?
A
BCIS (building cost infromation service)
- Slightly out of date (historical data)
- Data from tenders NOT achieved (competitive?)
- BCIS unable to capture specific designs
17
Q
How do you calculate land acquisiton costs?
A
Use land comparables to establish £ per acrea, and apply that to the size of the site
18
Q
How would you estimate CIL or s106 costs?
A
For FVA, the planning consultant would advise.
CIL = SQM of additional floorspace, multiplied by the borough’s charging schedule
s106 = look at similar s106s in the area on the relevant planning authority’s portal. Apply judgement / pSQM
19
Q
When are developemnt CIL exempt?
A
E.g extensions under 100 square meters that don’t create a new dwelling
20
Q
What is a typical development management fee?
A
3-5% total project costs (depending on complexity of project)
21
Q
What is a DMA (development management agreement)
What would you expect to see in it?
A
Contract between a landowner or investor and development manager to oversee and manage the development process of a property
- Roles and responsibilities
—–> scope of service
—–> level of authority - Fees
- Limitation of liability
22
Q
What is typcial development contingency?
A
5-10% of construction costs (depending on level of risk/build cost fluctuations)
23
Q
What would typical finance cost be?
How would you caculate finance costs?
A
Depends on market - typically 5-12%.
-
Sonia rate over last 3 months (sterling overnight index average) – 4.5%
+ premium for the banks (developer/asset/risk) – 3%
= 7.5% - If 30%/70% Loan to Value, 70* construction costs = chargable amount
FINANCE COSTS = SONIA+premium * chargable amount - Also – arrangement fee and exit fee 1% of the 100million, as well as non-utilisation fee (0.5%?)
24
Q
What is the importanc of sales rates / programme on IRR based appraisals?
A
sales rates impact cash receipts
programme impacts build cost timing
25
What is a development appraisal?
A calculation to establish the value, profitability or suitability of a proposed development of a proposed development
26
What is the difference between a development appraisal and a residual valuation?
**Development appraisal (establish profitability)**
* Profitability/best use/affordable provision
* Not Red Book compliant
* Takes into account timings/phasing
* Based on client inputs
**Residual valuation (calculating market value of land)**
* Market value
* Red book
* Does not take into account timing
* Based on market-led inputs
27
What are 3 key reasons for development appraisals?
1. profitability
2. best use for a site
3. afforable housing provision
28
What are the calculated outputs from a development appraisal?
- Profit on cost
- IRR
29
What is a sensitivity analysis?
A tool used to analyse how key variables such as GDV, build costs, title, planning and finance rate affect residual land value
30
Why is it important to undertake a sensitivity analysis?
Sensitivity of inputs to market fluctuations – which has a significant impact on Profit/iRR
31
How have recent economic circumstances affected the finance rate?
Base rate beginning to drop = drop in finance rate
= projects more viable
32
How often does the Bank of England review the base rate?
33
What is inflation?
- The rate at which prices of goods and services rise.
- Current inflation rate (CPI) is 2.8% (March 25)
34
When can you use your clients build cost assumptions?
- When it has been tendered if Red Book
- Their assumptions are for non-Red Book instruction
35
# Brentford PH2 dev appraisal
How did you calculate the construction costs?
I instructed external QS to undertake cost review, which I had checked internally by Ballymore QS
36
# Brentford PH2 dev appraisal
How did you calculate the GDV? What information was required to do this?
RESIDENTIAL
1. I instructed the internal sales team to value the ph2 residential.
----->They required accommodation schedule, floorplans and CGIs (perspectives)
----> If I were to do it, use Phase 1 sales as benchmark +premium
COMMERCIAL
1. Phase 1 comparables to establish rents
2. Commercial comparables / KF report for yields
3. ARY judging by nearby transactions / KF report
4. Calulcated YP from ARY (1/yield),
5. Multiply YP by effective rent = Commercial GDV
6. Account for rent free & PC for net dev value
37
# Brentford PH2 dev appraisal
What if you were doing a DCF?
Sales velocities to understand timings
38
# Brentford PH2 dev appraisal
How do you account for rent free?
minus rent free value off cap val
1 / (1+yield)^term
i.e a present value to account for lost time
39
# Brentford PH2 dev appraisal
What did you use for the fixed land value/acquisition cost?
Figure provided by land team.
I would use land comparables to establish £ per acre, and apply that to the size of the site
40
What are some key factors when determining target rate of return?
- Location
- Trying anything new? i.e stacked industrial ^ risk
- Abnormal costs? i.e new river wall?
- Scheme length
- Market conditions
- Construction cost inflation
- RP market?
41
Why does profit being between 15-20% mean the scheme is viable?
Industry standard
Represents the return expected reflecting the risk that a developer takes on with a project
42
# UNEX buffer building (coliving)
Why were you doing co-living?
* To improve scheme viability - industrial alone not viable
* Specifically co-living as T&L factory nearby - agent of change - Sui Generis not a "C" residential)
* **Short leases of co-living** means that less likley to complain and force restrictions etc
43
# UNEX buffer building (coliving)
What is sui generis? can you name me another type of sui generis?
Properties not fitting into other classifications (of its own kind)
E.g petrol filling station, landfill sites etc
44
# UNEX buffer building (coliving)
What other implications of it being Sui Generis?
Planning authorities consider each co-living proposal individually, without a pre-defined set of rules
45
# UNEX buffer building (coliving)
What are the building classifications?
Under what act?
- B = industrial
- C = Residential
- E = commercial/business/service
- F = local community/learning
TCPA (2020 amendment)
46
# UNEX buffer building (coliving)
What if you had to do the appraisal not on Argus?
1. Look at rent per unit type (studio, 1-bed)
2. X location = 1600 pm, avg size 20 sqm
3. co-living rental value psf, multiply by sq ft.
4. Assume opex (25-30%). Minus this off rent.
5. Capitalise at a suitable co-living yield, accounting for purchaser’s costs
= Capital Value
47
# UNEX buffer building (coliving)
What would be the key difference between your appraisal and theirs?
- Argus would allow for more detailed timings
- Argus assumed 100% debt finance
48
# UNEX buffer building (coliving)
What is the implication of 100% debt finance?
Would give higher finance costs
Tehrefore, adjust finance rate to lower, as (LTV typically 70/30)
49
# UNEX buffer building (coliving)
What’re the key elements of co-living?
- Flexible leases (minimum 3 months)
- bills typically included (council tax, rent, internet)
- community focus & social interaction - great for attracting young entrepreneurs
50
# UNEX buffer building (coliving)
What is the difference between coliving and BTR?
- Coliving: more flexible leases, higher sense of community, not necessarily located by university
51
# UNEX buffer building (coliving)
How were your inputs used in the appraisal?
- Comparable rents
-----> (comparables)
- Provide indication of Co-living yields and occupancy rates etc from
-----> (market reports as dearth of transactions)
52
# UNEX buffer building (coliving)
What were the levels of amenities required?
How did this impact the appriasal?
- Newham not high level of amenity, though most had gyms
- As you go further into the city and more competition, I’d expect to see higher offering of amenity
We reduced amount of nsa and increased amenity area = reduced income but makes scheme more appealing
53
# UNEX buffer building (coliving)
What are the drawbacks of Argus?
- assumes 100% debt finance (therefore adjust lower rate)
- less flexibility than excel model
54
# UNEX buffer building (coliving)
What would OPEX for a coliving operator be made of?
- Salaries of property managers
- Cost of owning property
- Utilities
55
# UNEX buffer building (coliving)
What is coliving?
A living arrangement where individuals rent private rooms and bathrooms, with shared kitchens and living facilities
56
# UNEX buffer building (coliving)
What are co-living yields in London?
4.75% in this location
4.25% prime
57
# UNEX buffer building (coliving)
Name a recent coliving transaction
Brixton Junction: £20 million (63 beds)
58
# UNEX buffer building (coliving)
Name 2 benefits of coliving
Social interaction
Affordability & flexibility
Ease (of lease)
59
# 14b FVA
Why were the council uninterested in a PIL?
- Made it clear in pre-app that offer would have to significantly outweigh on-site AH
- GLA guidance = **affordable housing should be onsite unless demonstrable benefits** or special case.
60
# 14b FVA
What would have been the benefits of a PIL?
- No separate staircase for AH would improve efficiency
- No risk in finding RP (especially for 24 units)
61
# 14b FVA
What was the implication of reducing retail unit sizes?
- the high vacancy rates on RW, would reduce risk of vacant units and potential excessive LL voids
- However, would decrease commercial capital values
---> but increase to resi revenues significantly outweighed
62
# 14b FVA
Did you look at any other options aside from value engineering?
- Cost and Revneus key components. Conginencies etc. would not move dial enough
- I did not want to increase revenues as they would be unachievable & already optomistic
- Land value was assessed during the 2021 submission, but comparables indicated that the BLV was accurate.
63
How did you research neaby schemes?
LB Newham plnning portal - looked at agreed s106s and the AH contributions they respectively had
64
# Plot L (resi dev appraisal)
What were some of the assumptions that differed from the norm?
- **Land Value assumed as £0**,
------> Appraisal for comparison only
------> given site constraints (Ecology, Refurb, EPC) the land would unlikely have a high value associated
-----> BLV not as relevant, as alghough rent income, in middle of masterplan so other factors
- **Marketing cost assumed 2% rather than 5%**, as sold off plan & tiny scheme.
------> This represented circa £150k saving in cost.
- **Professional fees at 15%**, given the complexity of the buildings (high for Ballymore schemes)
65
What was the benefit of undertaking the sensitivity and analysis?
* To prove that residential = more profitable,
* In favourable scanario (low costs high revenues), ability to generate a strong return
66
Why would the cost and revenues be sensitive?
1. Rough design only, therefore costs and revs less representitive of final prduct
2. As buildings so unique, revenues likely sensitive
67
What inputs were tested in the sensitivity analysis, and what else could you have tested?
- Construction costs and residential revenues
- Finance costs, planning risk
68
What were the risks involved with converting the plot to residential use
- Planning risk – new submission (inc. ecology, sequential test, BNG)
------> cost, programme and uncertainty if pass
- Different product to elsewhere on the site
------> more of an unkown
69
How would you sensitise planning risk?
Use scenario analysis if full submission required:
- increase planning related costs in appraisal
- prolong programme
70
Whata are the three types of sensitivity analysis?
1. **Simple Sensitivity Analysis** - key variables such as Yield, GDV, Build Costs or finance
2. **Scenario Analysis** - change scenarios for development timing/conent/costs - i.e phasing or modifying design
3. **Monte Carlo simulation** - using probability theory (software using crystal ball)
71
What specific factors made you confident that the residential option would be more viable than the commercial scheme
Phase 1 residential was performing much better than commercial
72
What other options were there, other than commercial or residential?
- Could have left the unit being occupied as a car garage & recieving rent
- However, would be next to a cafe & not optimal for placemaking
73
What did you use to inform your assumptions?
- Finance – SONIA + premium (70/30 split)
- CIL – local authority charging schedule
- S106 – what is it per unit on similar schemes
74
What actually is the SONIA rate?
It represents the average rate at which banks lend to each other overnight in Sterling
