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RICS SPA > Development Appraisals COPY > Flashcards

Development Appraisals COPY Flashcards

1
Q

Define Development Property?

A

Interest where redevelopment is required to obtain highest and best use or where improvements are being contemplated or are in progress at valuation date.

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2
Q

Define Development?

A

Defined by Town & Country Planning Act 1990:

“the carrying out of building, engineering, mining or other operation in, on, over or under land, or the making of any material change in the use of any building or other land”.

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3
Q

When would you use a Development Appraisal?

A

I would use a development appraisal when I needed to calculate the profit of a client’s proposed development, or offer advice on a proposed development.

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4
Q

Outline the differences between a residual valuation and a development appraisal?

A

Residual = finding residual land value, based on market assumptions.

Appraisal = assessing the profitability of a scheme and are based on client assumptions and market assumptions.

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5
Q

How is residual land value calculated?

A

GDV - (build costs & profit) = Residual Land Value

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6
Q

What are some of the main costs included in a residual?

A 
Build Cost
Professional fees
Statutory costs
Marketing costs
Legal costs 
Purchasers costs
Agents fees
Contingency
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7
Q

What are the professional fees?

A 
Architect (usually highest proportion of fees)
Quantity Surveyor
Structural engineer
Mechanical/electrical engineer
Project manager
C.D. Manager
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8
Q

What are the main components of a residual valuation?

A 
GDV
Build Cost
Professional fees
Statutory costs
Marketing costs
Legal costs 
Purchasers costs
Agents fees
Contingency 
Profit 
Residual Land Value
Timescales 
Sensitivity analysis
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9
Q

What is profit erosion?

A

The period within which the profit from the development is eroded after completion due to holding charges (i.e. interest charges, building insurance, security and utility charges).

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10
Q

What is IRR?

A

Internal rate of return is a time weighted measure of return.

Internal rate of return is the annual rate of growth an investment is expected to generate.

The higher the IRR the better. Reduce timescales to improve.

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11
Q

What is an S-curve?

A

The S-curve is the pattern of cash flow which I assume the construction costs follow within my Argus Residual Appraisal.

It represents the assumption of how costs are spread across the construction period, with the majority expected during the middle of the construction period.

The purpose is to reflect when monies will be spent.

The interest is expected to follow the same pattern across this period.

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12
Q

What are the limitations to the residual method?

A
  1. The use of assumptions and not real costs.
  2. Assumes 100% debt finance which isn’t realistic.
  3. Small changed to inputs can have a large impact on profit/residual land value.

As per the RICS guidance note: Valuation of Development Property 2019 - you should cross check with the comparable method.

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13
Q

What is the basis of measurement used for the calculation of build costs and where would you find an up to date estimate of such costs?

A

GIA
BCIS (Build Cost Information Service)
Consult a building surveyor

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14
Q

What is a sensitivity analysis?

A

It’s a risk analysis technique, used to presented potential outcomes in changes to key variables.

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15
Q

What are the three forms of sensitivity analysis?

A
  1. Simple sensitivity analysis of key variables i.e. GDV and construction costs.
  2. Scenario analysis - changes scenarios for the development content i.e. changing the phasing of the scheme of its design.
  3. Monte Carlo Simulation - using probability theory, using software such as ‘Crystal Ball’.
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16
Q

What inputs would you vary in a simple sensitivity analysis?

A

i.e. upwards and downwards changes in construction costs and sales rates.

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17
Q

What outputs would you expect to show in a sensitivity analysis?

A
  1. Effect on land value

2. Effect on profit amount

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18
Q

How would you reflect planning requirements within your valuation?

A

I would enter any S.106 or CIL costs under ‘statutory’ within my valuation. I would also time the cash flow in accordance with the requirements within the CIL liability notice and the S.106 agreement.

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19
Q

What interest rate do you typically use?

A

Typically within my development valuations I assume the project will be 100% debt financed and generate a general market facing finance rate (to allow for comparison purposes and not accounting for developer specific discounts).

Typically I apply 6.5% which includes the Bank of England base rate (0.1%) cost of borrowing and arrangement fees.

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20
Q

How do you phase affordable housing in a cash flow?

A

Using the ‘golden brick’ method, to reflect the typical income flow from the RP where usually you would expect a percentage of the receipt to be paid up front, sometimes with an element in the middle of the construction period (depending on the length of development) and the remainder on practical completion.

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21
Q

Why have you used profit on cost?

A

Reflective of the risks associated with the development and a market facing input I would typical expect given the requirements of developers on similar development projects.

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22
Q

When would you increase contingency?

A

Typically where the development is speculative and in the early stages of planning and therefore higher risk.

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23
Q

Why did you include 10% contingency in your case study appraisal?

A

This was included within the Building Surveyor’s costings.

Understood that it was due to the current difficulty at the time obtaining building materials and the delays in obtaining them.

Also due to the fact that it was a smaller scheme, so 10% on this scheme does not actually translate to much, in comparison to a larger scheme.

24
Q

What is the likely level of contingency in a development appraisal?

A

Usually 5% to reflect and average level of risk and to provide a buffer for any unknown costs.

25
Q

What abnormal costs can occur in a development?

A
  1. Ground Contamination.
  2. Ground retention needed.
  3. Piled foundations being required.
  4. Allowances for flooding.
26
Q

What is the likely level of finance cost in a development appraisal?

A

Typically, I apply 6.5% which includes the Bank of England base rate (0.1%) cost of borrowing and arrangement fees.

27
Q

What is the likely level of professional fees in a development appraisal?

A

8-10% depending on the stage of the project.

VAT is always payable on professional fees.

28
Q

What is the likely level of required profit in a development appraisal?

A

20% on cost.

29
Q

How would profit vary on a scheme of 100 units and a scheme of 1 unit?

A

Might expect a higher profit given the higher risk of increased numbers of units.

30
Q

How is BCIS information obtained?

A

The BCIS obtains its data from tender cost analysis

31
Q

What does BCIS information exclude?

A

VAT
Contingencies
Fees
External works and facilitating works.

32
Q

What are some of the weaknesses of BCIS information?

A
  • Often taken from public sector development which has a reduced specification.
  • Need to account for exclusions within the data.
  • Offers guidance but specific costs of a project can vary.
  • larger housebuilders tend not to submit data, so costs are inflated.
33
Q

What are the three ways you could calculate the finance rate?

A
  1. Bank of England base rate + premium
  2. Might be provided in client’s loan terms
  3. The LIBOR rate (London Inter Bank Offer Rate) + premium (variable lending rate between banks for a three month borrowing term)

n.b. LIBOR is being replaced with SONIA (Sterling Overnight Index Average) rate by the end of 2021.

34
Q

What are the main reasons a developer needs finance for?

A
  1. Site purchase
  2. Construction costs & associated costs
  3. Holding costs to cover voids until site is disposed
35
Q

What are the two main methods of funding?

A
  1. Debt finance - taking a loan

2. Equity finance - selling shares, JV or own money

36
Q

What is the Loan to Value ratio?

A

A ratio expressing the value of the loan in proportion to the value of the property.

Typically LTVs are 60% of value.

37
Q

What are the forms of finance available?

A
  1. Senior debt - first level of borrowing

2. Mezzanine - additional money required over the LTV

38
Q

If BCIS was limited, how would you deal with this?

A

Rebase to the county instead of LPA.

Consult senior colleagues and a building surveyor

39
Q

What is new build premium?

A

Due to being brand new and never lived in

Apply 10 - 15%

40
Q

How do Land Registry record new build prices?

A

They report on the NET SALES PRICE - as developers will often add incentives such as free kitchen appliances to the sales.

Developers need to complete a disclosure of incentives form to Land Registry.

41
Q

What is a typical IRR for a small development site?

A

30% roughly.

The larger the site, the lower the IRR as far away from getting the money and being in a positive position.

42
Q

Why do you compare land on an open market plot basis?

A
  • boroughs have different level of affordable housing
  • it’s a more consistent plot rate
  • simple way of drawing comparison between sites
43
Q

What do builders offer purchasers?

A

New build typically have a warrantee of 10 years.

44
Q

What is an NHBC warrantee?

A

NHBC is the UK’s leading independent standard-setting body and provider of warranty and insurance for new homes.

Offers:

  • First 2 years = defects insurance period i..e any faulty products
  • Years 3- 10 = structural insurance period
45
Q

What does the finance rate include? Why 6.5%?

A
  1. Base rate of 0.1%
  2. Entry fees
  3. Exit fees
  4. Risk - what the bank what to get in return for lending.
46
Q

What is a viability assessment?

A

Assess whether the new use is more valuable than the existing use

Residual land value is compared to the benchmark

47
Q

Why can some people borrower at a lower rate?

A

If they have finance agreements with banks.

If the development is lower risk, they may be offered a lower interest rate.

48
Q

When is CIL paid?

A

Typically at the commencement of development.

49
Q

How do you calculate the finance for borrowing for the site purchase?

A

On a straight line basis, using compound interest over the length of the development period.

50
Q

How do you calculate the finance for borrowing for the construction?

A

Assume total construction costs (including fees) over half of the time period, using an S-curve calculation

51
Q

How do you calculate the finance for borrowing for the holding costs?

A

On a straight line basis, using compound interest from completion of construction until disposal.

52
Q

How do you calculated a financial viability assessment?

A

Benchmark Land Value - Residual Value

If it’s positive then its viable, if it’s negative then its unviable.

53
Q

How do you calculate a benchmark land value?

A

EUV + Premium (typically 10-15%) to incentivise development .

54
Q

What is golden brick?

A

Golden brick level is reached when there is building “clearly under construction”. In practice, this means that before the sale to the RP, construction work must reach above foundation level (the “golden brick” above foundation level). This is usually when walls begin to be constructed upon the foundations

55
Q

Why do we cash flow affordable payment to golden brick?

A

level of construction a new development needs to reach in order to qualify for zero rating. This enables housing associations (who can’t recover VAT) to purchase land free of VAT

RICS SPA (13 decks)

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