Development Appraisals L1 Flashcards
Describe the difference between a development appraisal and a residual valuation?
A development appraisal is a tool to financially assess the viability of a development scheme. Can be used to assess the profitability of a proposed scheme and its sensitivity to changing inputs, or assessing the viability of different uses, rents, yields or financial contributions such as s106/CIL, whereas a residual valuation is a calculation to find the market value of the site/land based on market inputs
Describe basic method of residual valuations
GDV – TDC – PROFIT = Development Site Value, having allowed for normal purchasers costs if commercial development
GDV minus the associated costs of the development, on the assumption that the development delivers a desired profit rate
Describe how you would work out the GDV
GDV is the market value of the completed proposed scheme at the valuation date
- development plans are used to work out sizes (GIA)
- Comparable method of valuation used to establish rents / yields or the end residential MV
- All risk yield used (reflects the risks attached with the valuation
- Purchasers costs deducted for commercial property valuations
What costs make up the total development costs (TDC)
a) site preparation costs - demolition, site clearance, levelling, fencing - usually obtained from contractors cost plan for works). 5-10% of construction costs
b) Planning costs
c) Construction costs - estimate from clients build cost estimates from a cost consultant or use RICS Building Cost Information Services (BCIS) - GIA basis
d) Professional Fees - 10% plus VAT of construction costs - architects, project managers, structural engineers (could be lower on larger schemes)
e) Contingency - 5% of construction costs
f) Marketing Costs and fees - 1% for agent fees on GDV / 0.5% for legal fees and 1-1.5% on GDV for marketing
g) Finance - 6.5% interest rate (rate which client can borrow money)
h) 15-20% profit on GDV
Deduction of purchasers costs from development if commercial
What is the LIBOR Rate
London Inter Bank Offer Rate - benchmark interest rate that major banks lend to one another.
Calculated daily based on 5 currencies, US,EU,UK.JY,SF
LIBOR used for caiculating interest rates relating to mortgages, loans
What will the LIBOR be replaced with
other risk free rates, such as Sterling Overnight Index Average (SONIA) benchmark
- reflects average interest rates that banks pay to borrow sterling overnight from other financial institutions
Why is finance (loans) required in finance
1) finance for borrowing money to purchase the site and purchasers costs (compound interests) over the development period
2. Total construction costs - calculated on S-curve
3. Holding costs to cover voids from completion to the disposal - service charge, empty rates, interest charge (compound rate)
Describe straight line interest (compound)
assumes that preliminary costs are incurred at the valuation date and development costs are incurred at equal and regular intervals throughout the development as time progresses.
Describe S curves (construction period)
the payment of construction costs adapts the profile of an S curve over the length of the development project. The usual assumption is to halve the interest over the length of the construction period.
Weighting of build costs maybe incurred early in a scheme
How to calculate finance on construction period (s curve) if costs were £300,000 and finance rate was 7%
£300,000/2 * 0.07 = £10,500 over construction period
Describe two main development finance sources
- Debt Finance - lending money from back
2. Equity Finance - own money used, selling shares in company
What is a loan to value ratio
a LTV is a lending assessment risk ratio which is used to approve loans, currently in the region of 60%
If a LTV was 60%, would assume you have 40% in equity and could get a loan on 60% of the MV
Define profit erosion
term relates to length of time it would take for the development profit to be eroded by charges following the completion of the scheme until the profit has been completely drawn down due to interest charges and the scheme is loss making
Name different types of sensitivity analysis
- Simple sensitivity analysis of key variables such as yield, GDV, build costs and finance rate
- Scenario analysis – change scenarios for development content, timing, costs – phasing of the scheme or modifying the design
- Monte Carlo simulation – using probability theory, using software such as Crystal Ball
Name the RICS Guidance Note on Development
RICS GN on Valuation of Development Property, 1st Edition, 2019
Describe the status of guidance notes
Guidance notes provides recommendations or an approach for accepted good practice as followed by competent and conscientious surveyors
Describe the RICS guidance - main content
Should be read alongside the RICS Valuation - Global Standards 2020. Supplements the IVS 410 Development Property (provides detailed overview of the valuation of development proeprty)
Describes the different methods/approaches (residual/DCF) which can be used to value development property - residual, DCF, comparable and that best practice suggests to use more than one method - market approach and income approach
Describes common basis of value os Market Value, subject to assumptions and special assumptions
Best practice requires risk analysis to be used so that changes to inputs which may impact the valuation can be assessed.
Describe the different types of planning costs within a residual / appraisal
S106 Agreements (TCPA 1990) - legal agreements for planning obligations to gain planning consent (affordable housing, infrastructure costs, new school/community facilities etc)
Community Infrastructure Levy
Local Planning Policy - set affordable housing
s278 for highways works
Planning applications and building regulation fees
What do residuals assume regarding finance
100% debt finance
What are the different interest rates that can be used for basing interest rates on
LIBOR Rate / SONIA
BoE base rate plus premium - base rate is 0.1%
Define development property as described in GN
interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progression at the valuation date
Name international valuation standard relating to development property
IVS 410 - Development Property
Describe s106 agreements
Introduced by TCPA 1990
Planning obligations which set out in a legally binding agreement enforceable by the LPA and are site specific
Agreement has to be entered into before planning consent is granted
Negotiated on case by case basis, no charging schedule
Cost of new school, community facilities or open space, requirements for affordable housing
Describe Community Infrastructure Levys (CIL)
Payments from developers to raise funds for infrastructure necessary to support development.
Charging schedule based on sqm of additional floor space
Difference between s106 and CIL
CIL relates to all infrastructure necessary to develop a local area whereas s106 just covers items if justifiable if they are necessary and directly relatable to the development
Charges for s106 are by negs whereas CILs are fixed fees
Name the latest guidance note on development
Land measurement for planning and development purposes, Global Guidance Note, 2021
What is the purpose of the new guidance note - Land measurement for planning and development purposes, Global Guidance Note, 2021
To remedy a historical lack of clarity and consistency in the way land is measured and describe for development purposes, allowing sites and proposals to be accurately compared and assessed
What does the new guidance introduce - Land measurement for planning and development purposes, Global Guidance Note, 2021
Five core definitions for development land measuring. LOA is a new term and other terms have been around in circulation but no formal definition
- Land ownership Area (new term) - an area of land, which is held in a single legal interest or title by one or more legal owners and may be subject to proposed or actual sale, disposal, valuation or compulsory purchase
- Site area - total land area which development is sought
- Net development area - land area on which one or more buildings can be built
- Plot ratio - ratio of total development floor area to site area
- Site coverage - ratio of ground floor area to SA
