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APC Revision > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

What is the new Financial Viability Guidance?

A

Additional guidance: Financial Viability in Planning CONDUCT & REPORTING Effective 01 September 2019:
Principles: Professional Statement status. 14 mandatory reporting & process requirements when carrying out FVAs.

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2
Q

Valuation of Development Land Information Paper No.12 (2008) - UK

A

Now withdrawn, but a useful guide of the two approaches available. ‘Development land’: cleared, or greenfield site, or site to be redeveloped by removing all, or substantially all, of the existing buildings.
and constructing new buildings.
- Establish the facts (inspection and site specific info)¬
- Assess the development potential (review current/emerging planning policy, review surrounding uses, consider land assembly options, assess environmental constraints).
- Value by the; 1. Comparison method, 2. residual method
- Assessing the land value (comparables, and residual)
- Reporting the valuation (basis of value, valuation approach, and all assumptions must be stated)

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3
Q

What is the difference between a residual valuation and a development appraisal?

A

Both are sensitive to changing inputs.
Development Appraisal: A calculation used to assess the financial viability of a development scheme. Used to establish the profit on cost %. Assumes a site value/purchase price. POC = (GROSS DEVELOPMENT VALUE) – (TOTAL DEVELOPMENT COST + SITE VALUE)
Residual appraisal: Used to establish the residual value. Typically used for valuations using market inputs to establish residual Market Value, at one date in time. RESIDUAL VALUE = (GROSS DEVELOPMENT VALUE) – (TOTAL DEVELOPMENT COST + PROFIT)

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4
Q

What is the GDV?

A

The MV of the completed proposed development. Use comparable method to determine rent, yield, cap value. ALL RISKS YIELD is used. Purchaser’s Costs are usually deducted for commercial property appraisals.

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5
Q

What is the NDV?

A

GDV less allowance for purchaser’s costs. Reflects the transaction costs that would be incurred if the completed development was sold, again, on the date of valuation.

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6
Q

Where do Purchaser’s Costs appear in appraisals?

A

Acquisition of the land
Disposal (development)
Disposal (units)

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7
Q

What are Purchaser’s Costs made up of?

A

6.5% + VAT / 6.8% incl. VAT
5% SDLT
1% + VAT Agents fees
0.5% + VAT Legal fees

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8
Q

Non Residential SDLT levels

A

includes: commercial property, agricultural land, land or property not used as a residence, 6+ resi units bought in single transaction
NON-RESIDENTIAL:
Up to £150,000 0%
The next £100,000 (the portion from £150,001 to £250,000) 2%
The remaining amount (the portion above £250,000) 5%
When you buy a new non-residential or mixed use leasehold you pay SDLT on both the:
- purchase price of the lease (the ‘lease premium’) using the rates above
- value of the annual rent you pay (the ‘net present value’)
These are calculated separately then added together.

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9
Q

Residential SDLT levels

A

Residential property, for example a house or flat
Up to £125,000 0%
The next £125,000 (the portion from £125,001 to £250,000) 2%
The next £675,000 (the portion from £250,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5 million) 10%
The remaining amount (the portion above £1.5 million) 12%
Relief for First Time Buyers on first £300,000, unless cap value over £500,000.

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10
Q

What costs are deductible from the GDV when using the residual method of valuation?

A

Total development costs and profit.

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11
Q

What are included in the Total Development Costs?

A

Site prep; demo, remediation, site clearance. Obtain a contractor’s estimate.
Planning; Section 106 payments (legal agreement for obligations like new infrastructure, schools, etc that are more specific to the site’s immediate area. LA’s often have a calculator to make an estimation. Called section 106 as that is the section in the Town and Country Planning Act 1990), CIL charges (set charges per sqm pooled for wider LA. Have a 1,2,3 list setting out what the charges will be used for. Only charge on net increase in GIA sqft). Typically S106/CIL are both charged. Section 278 (highways), planning consultants, EIA.
Build Costs: Estimation. Source; QS estimate from client, BS estimate, BCIS (Building Cost Information Service).
Professional Fees: 10%-15% + VAT of construction costs. Architects, Project Managers, Engineers.
Contingency: 5-10% of construction costs.
Marketing & fees: Marketing; based on evidence. Usually 1% of GDV. Sales fee 1-2% GDV. Letting fee 10% of initial annual rent.
Finance: Assumes 100% debt finance. Rate at which client can borrow the money OR Bank of England base plus premium.
- Site purchase finance: straight-line basis using compound interest. For length of development period.
- Construction finance: S-curve, monies drawn-down heavily in first half of construction.
- Holding costs (to cover voids until disposal): on a straight-line basis using compound interest.
- Developer’s profit: % of GDV or construction costs. 15-20% typically depending on risk. A lower return may be required if pre-lot/sold. GDV sometimes used for residential. Recently % return has increased due to market uncertainty.

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12
Q

Do you calculate your costs for a development appraisal on a GIA basis or GEA basis?

A

(links to Code of Measuring Practice)
GEA – construction costs for houses
GIA – construction costs for commercial

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13
Q

What are the weaknesses of a residual valuation?

A

Importance of accurate data on the outcome. V
Unstable/very sensitive to changes in inputs.
Does not consider the timing of cash flows.
Implicit assumptions are hidden and not explicit.
Does not allow growth
Need to cross check with a comparable site valuation if possible.

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14
Q

What are the advantages of using a DCF calculation for the valuation of a development site rather than a residual valuation?

A
  • Allows for the valuer to input any changes in costs or values over the project.
  • It shows the timing of peak cash outlays
  • Shows outstanding debt at any given point
  • Accounts for phasing over the build period that must be reflected in the land value
  • Allows for sensitivity analysis to examine the effect of input changes on the outputs.
  • Allows for off plan sales to be factored in.
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15
Q

What factors affect the sensitivity of an appraisal?

A
  • GDV fluctuations
  • Build cost fluctuations
  • Finance rate
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16
Q

What is a sensitivity analysis?

A

Required for key variables such as GDV, build costs and finance rate in order to show a range of values

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17
Q

What are the main forms of sensitivity analyses?

A

Simple sensitivity: of key variables such as build costs, GDVs, yield, finance rate.
Scenario analysis: changing development scenario, e.g. modify the design
Monte Carlo simulation: using probability theory, software such as Crystal Ball.

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18
Q

When might you be exempt from liability of CIL payments?

A
  • Minor dev exemption – GIA less than 100sqm
  • Charitable relief – mandatory or discretionary
  • Exceptional circumstances relief – if cannot afford
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19
Q

Are conversion costs different to construction costs?

A

Yes – do not have to build the core structure. Conversion costs will be dependent on the building’s condition. Not necessarily less; potential for contamination are severe defects.

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20
Q

Are residual valuations and development appraisals Red Book compliant valuations?

A

Development appraisals – NOT; worth calculation

Residual – can be, but dependent on the instruction

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21
Q

What do you understand about Affordable Housing?

A

Housing for those whose incomes are insufficient to allow them to buy or rent a home on the open market
Local planning policy will set out the required percentage of affordable housing required for new residential development
It can be in the form of social rented, affordable rented and intermediate housing
Social rented – owned by local authorities and private registered providers. Guideline target rents are determined through the national rent regime
Affordable rented - let by local authorities or private registered providers. Rent control of no more than 80% MR
Intermediate – homes for sale and rent provided at a cost above social rent, but below market levels e.g. shared ownership housing.

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22
Q

What are the 2 main methods of development funding:

A

Debt finance – secured lending from a bank or other institution
Equity finance – own money, or selling shares in a company/joint venture

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23
Q

What is the current Loan to Value ratio (LTV)?

A

In region of 60%

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24
Q

What is Senior Debt funding?

A

The first level of debt borrowing and it takes precedent over any secondary/mezzanine funding

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25
Q

What is Mezzanine funding?

A

This is additional funding from another source for the additional monies required over the normal LTV lending

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26
Q

What are Swaps and Swap Rates?

A

Swaps – a form of derivative hedging rate for interest rates

Swap Rate – the market interest rate for fixed rate, fixed term loans

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27
Q

What is overage/claw back?

A

The extra receipts (expenditure) received over and above the profits originally expected
It can be shared between the vendor/landowner and the developer in a pre-arranged apportionment

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28
Q

When is VAT payable?

A

On all professional fees

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29
Q

What is the profit erosion period?

A

The length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme and cause the profit from the scheme to be completely drawn down = loss making!
I.e. interest charges

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30
Q

What are typical profit targets?

A

17.5% commercial
15-20% residential
6% if affordable scheme

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31
Q

What are ‘Rights of Light’?

A

The right to light of a building arises after 20 years uninterrupted enjoyment of light without 3rd party consent
If right to light is infringed, an injunction can be granted or damages awarded

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32
Q

What are three types of development land?

A

Green Field – clear site, no past use, difficult to get planning permission
Brown Field – previously used, may need to clear the site, possible contamination, easier to get planning
Combination of above

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33
Q

What is the difference between outline and full planning permission?

A

Outline – established the principle of development; Reserved Matters for details of it
Full – establishes full details of the scheme

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34
Q

As a developer, what factors would you be sure to consider when considering a development?

A

Property Market – supply and demand, economic cycle
Location
Access & Transport
Amenities
Supply Competition – from other developments

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35
Q

What is the typical development programme?

A

Pre-construction – site assembly, planning, removing covenants and easements, impact reports, investigations
Construction – site preparation and main building period
Post-construction – period of completion until fully let/sale or refinance of completed development

36
Q

What do you need to consider when undertaking the site preparation?

A

Environmental issues, removal of hazards, archaeological investigations, H&S regulations, demolition

37
Q

How do you account for loan to value ratios?

A

Apply 100% debt and then apply an interest rate (circa 6%)

38
Q

What is forward sale?

A

To purchase a development at the end of construction at a fixed price based on today’s yield

39
Q

What is forward funding?

A

The investor provides finance at a lower rate than might be achievable in the current market in return for a softer yield when the investor purchases the development

40
Q

What is an option agreement?

A

The land owner sells the option to develop on the land to a developer who has X amount of years to act upon the option

41
Q

How do you measure a development site?

A

You inspect the perimeter and then use Promap to establish the size (acreage)

42
Q

What are current rates of finance (interest)?

A

Bank of England Base Rate = 0.75%
LIBOR = 1.96% in Oct 2019
Inflation Rate = 1.7% in Sept 2019

43
Q

Why does the finance cost differ from developer to developer?

A

Risk factors, the status of developer (independent vs. large developer), available equity, LTBV ratio

44
Q

How do you account for risk in a development appraisal?

A

Profit on cost – % of GDV or total construction cost
Contingency
*Never in the yield

45
Q

Do you need planning permission for demolition?

A

In most cases you will not need planning permission– unless LA has made an article 4 direction restricting
Need to apply for a formal decision on whether council wishes to approve details of how you wish to demolish
Listed Buildings – no planning application but may need Listed Building Consent
Conservation Areas – may need planning permission

46
Q

What is a ‘deleterious material’?

A

Can degrade with age and cause structural problems to the building i.e. High alumina cement, woodwool shuttering, calcium chloride

47
Q

When inspecting a development site, what would you be looking for?

A

Evidence of contamination – chemicals, oils, oil drums, subsidence, underground tanks, bare ground, dead vegetation, landfill

48
Q

What creatures would you not want to see on a development site?

A

Bats, Great crested newt, badgers, dormice.

49
Q

If your appraisal produced a negative value, would you report this value to your client?

A

Yes.

50
Q

How much does it cost you to submit a planning application?

A

Dependent on location and extent of scheme – use Planning Portal’s online fee calculator

51
Q

What measures of profitability are there?

A

IRR, Profit on Cost, Profit Erosion Period, Rent Cover

52
Q

Industrial Estate, Reading (CBRE GI)

What was the client’s objective?

A

To understand the site’s residual worth for acquisition. Potential to acquire some or all of lots.

53
Q

Industrial Estate, Reading (CBRE GI)

What scheme assumptions did you make?

A

Private: £420/sqft houses, £440/sqft flats
Affordable; 55% MV, 30% compliant provision
Construction: £120/sqft houses, £125/sqft flats
£3/sqft demolition
6% finance
22.5% POC
CIL £120/sqm

54
Q

Industrial Estate, Reading (CBRE GI)

What were the council’s allocation parameters?

A

Residential allocation for min. 60 units (21.5 units per acre).

55
Q

Industrial Estate, Reading (CBRE GI)

How did the consented scheme opposite inform your assumptions?

A

Confirmed density assumptions; (25 units/acre)
Mix of houses and flats; 50/50
Unit sizes from accommodation schedule.

56
Q

Industrial Estate, Reading (CBRE GI)

What is the definition of placemaking?

A

Design-features that improve the sustainability and enjoyment of living there.
Guidance: Placemaking and Value 2016 Information Paper (not current, for info only)

57
Q

Industrial Estate, Reading (CBRE GI)

What is the placemaking guidance that is in place?

A

Placemaking and Value 2016 Information Paper

Not current, for info only

58
Q

Industrial Estate, Reading (CBRE GI)

Can you justify the 5-10% uplift in sales values you applied?

A

The general principle of enhanced value is established in Placemaking and Value 2016 Information Paper case studies. Saw premiums of 5 – 50% in case studies.
Improved design features have a positive impact on end-sales values. Features are subjective; settlement-style layout, green space, high-quality architecture, clear definition between public and private amenity, sustainability, accessibility.
I then saw this in practice in the comparable scheme I analysed which were around 10%.

59
Q

Industrial Estate, Reading (CBRE GI)

What placemaking initiatives did your comps have? How did you analyse this?

A

Certain design features can enhance end-sales values.
Greys Mews: houses and flats, £440/sqt, better location, defined areas of green space, settlement style layout, ‘better’ units architectural design features. This achieved c.10% premiums on average.
Clear uplift against other new build schemes that had limited placemaking initiatives; poor grid-style layouts, standard housebuilder-style architecture, lack of open space.

60
Q

Industrial Estate, Reading (CBRE GI)

Why did you target a 22.5% POC?

A

Client returns requirements.

61
Q

Industrial Estate, Reading (CBRE GI)

Did you benchmark against land values?

A

Yes – comps between £75,000-£100,000 per plot.

Generally at £75,000-£100,000 per plot depending on configuration / placemaking premiums.

62
Q

Development Site, Shepperton

What type of affordable tenure did the council require?

A

Indicated intermediate (Shared Ownership) in pre-application discussions.

63
Q

Development Site, Shepperton

Where would the council negotiate for the increased level of affordable housing?

A

In the Section 106.

64
Q

Development Site, Shepperton

Did you increase the planning cost to reflect potential issues with negotiation?

A

We did; as the scheme could become unviable if market conditions change.

65
Q

Development Site, Shepperton

Why did you apply a 30% discount to reach SO capital values?

A

Took advice from Affordable Housing team. The percentage is dependent on location.

66
Q

Development Site, Shepperton

Why did the change in Affordable have a c.5% impact on POC?

A

Due to an appraisals sensitivity to changes in inputs. Additionally, the small size of the scheme meant that loss of private units disproportionately impacted the POC.

67
Q

Development Site, Shepperton

What were your build costs and GDV’s?

A 
Construction: £130 per sqft
GDV: £550 per sqft
POC 22.5%
Finance 6% 
Sell 4 per month, build 7 per month.
68
Q

Development Site, Shepperton

What was your advice to the client?

A

Overall advice was will the scheme still be profitable with an increased affordable housing provision. Advised that it was, but that the POC would be negatively impacted by c.5% due to the sensitivity of the appraisal to changes and size of the scheme. Also provided sensitivity analysis.

69
Q

Development Site, Shepperton
Did the sensitivity analysis show that adverse market conditions would make the scheme unviable i.e. below the 20% POC min. threshold? What did you advise your client?

A

Yes – advised my client of the risk to the Profit should market conditions change. Advised to negotiate with council for lower affordable provision to provide a suitable buffer.

70
Q

Project Annapurna, Essex

Did you do an existing use appraisal?

A

Discussed with CBRE’s Office Investment and Leasing teams. The Site in its current form would be very unlikely to continue to support large-scale employment uses due to the specialist nature of the existing offices and its distance from the station. Further, the floorplate offered poor sub-division for multi-let.

71
Q

Project Annapurna, Essex

Was the appraisal only inclusive of private units?

A

Private only. No Affordable and no S106 required with PDR.

72
Q

Project Annapurna, Essex

How is a PDR scheme approached differently?

A
  • Timescales shorter
  • GDVs lower
  • Construction costs (likely) lower
  • POC lower; planning risk has been removed
73
Q

Project Annapurna, Essex

Why was an application submitted for the PDR?

A

Prior notification applicatin was required.

74
Q

Project Annapurna, Essex

What are PDR?

A

For some forms of development and change of use, a planning application isn’t required, e.g. offices (B1a) to resi (C3), or shops (a1) to financial services (A2).
Written prior approval is usually required from LA.
Unless; it is a conservation area, an Article 4 direction is in place, or if its current use is sui generis.

75
Q

Project Annapurna, Essex

What must you include in a PDR application under the GPDO? What are the timescales?

A

(a)transport and highways impacts of the development;
(b)contamination risks on the site; and
(c)flooding risks on the site,
After Prior Approval submitted; must respond within a period of 8 weeks.

76
Q

Project Annapurna, Essex

Under what legislation are PDR allowed?

A

The Town and Country Planning (General Permitted Development) (England) Order 2018

77
Q

Project Annapurna, Essex

Do you include CIL in a PDR appraisal?

A

Only for the net increase in GIA.

78
Q

Project Annapurna, Essex

How did you determine an appropriate asbestos treatment cost?

A
  • Quotes from three asbestos removal specialists at £500,000 - £650,000
  • Verified with CBRE BC team
  • Benchmarked at £600,000
79
Q

VAT deductions in residual appraisal?

A

Purchaser’s costs (agent and legal), development costs (on fees), sometimes on S106/CIL

80
Q

[Shepperton] What was on the existing site?

A

[Shepperton] What was on the existing site?

81
Q

Did you look at the profit erosion at the end of the project? Good or bad?

A

Profit erosion: period between PC and (if later) the date when the development is fully let/sold. The latter will trigger payment of the developer’s profit. Until this is triggered, finance interest will continue to accumulate, eroding the amount of the developer’s profit.
3.5 years; within the acceptable range. Wouldn’t want to see it below 2 years.

82
Q

What is a hurdle rate?

A

The minimum rate of return acceptable to the developer. This is usually equal to their cost of equity/debt.

83
Q

What is a NHBC certificate and what cost do you assume?

A

National House Building Council; providing consumer protection for homebuyers through its 10-year Buildmark warranty.
Costs vary based on size and complexity.

84
Q

How do you estimate finance rates?

A

Ask the client the rate at which they can borrow
Bank of England base rate (0.75%) + premium
LIBOR (London Inter Bank Offer Rate) (1.96%) + premium. (average interest rate at which leading banks borrow funds from other banks in the London market. LIBOR is the most widely used global “benchmark” or reference rate for short term interest rates)

85
Q

What 3 elements do you allow finance rate for?

A
  • Site purchase
  • Construction costs & associate development costs
  • Holding costs (to cover voids to disposal)

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