Development Appraisals L1

Question 1

Describe the difference between a development appraisal and a residual valuation?

Answer 1

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

Question 2

Describe basic method of residual valuations

Answer 2

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

Question 3

Describe how you would work out the GDV

Answer 3

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

Question 4

What costs make up the total development costs (TDC)

Answer 4

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

Question 5

What is the LIBOR Rate

Answer 5

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

Question 6

What will the LIBOR be replaced with

Answer 6

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

Question 7

Why is finance (loans) required in finance

Answer 7

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)

Question 8

Describe straight line interest (compound)

Answer 8

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.

Question 9

Describe S curves (construction period)

Answer 9

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

Question 10

How to calculate finance on construction period (s curve) if costs were £300,000 and finance rate was 7%

Answer 10

£300,000/2 * 0.07 = £10,500 over construction period

Question 11

Describe two main development finance sources

Answer 11

1. Debt Finance - lending money from back

2. Equity Finance - own money used, selling shares in company

Question 12

What is a loan to value ratio

Answer 12

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

Question 13

Define profit erosion

Answer 13

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

Question 14

Name different types of sensitivity analysis

Answer 14

1. Simple sensitivity analysis of key variables such as yield, GDV, build costs and finance rate
2. Scenario analysis – change scenarios for development content, timing, costs – phasing of the scheme or modifying the design
3. Monte Carlo simulation – using probability theory, using software such as Crystal Ball

Question 15

Name the RICS Guidance Note on Development

Answer 15

RICS GN on Valuation of Development Property, 1st Edition, 2019

Question 16

Describe the status of guidance notes

Answer 16

Guidance notes provides recommendations or an approach for accepted good practice as followed by competent and conscientious surveyors

Question 17

Describe the RICS guidance - main content

Answer 17

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.

Question 18

Describe the different types of planning costs within a residual / appraisal

Answer 18

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

Question 19

What do residuals assume regarding finance

Answer 19

100% debt finance

Question 20

What are the different interest rates that can be used for basing interest rates on

Answer 20

LIBOR Rate / SONIA

BoE base rate plus premium - base rate is 0.1%

Question 21

Define development property as described in GN

Answer 21

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

Question 22

Name international valuation standard relating to development property

Answer 22

IVS 410 - Development Property

Question 23

Describe s106 agreements

Answer 23

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

Question 24

Describe Community Infrastructure Levys (CIL)

Answer 24

Payments from developers to raise funds for infrastructure necessary to support development.
Charging schedule based on sqm of additional floor space

Question 25

Difference between s106 and CIL

Answer 25

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

Question 26

Name the latest guidance note on development

Answer 26

Land measurement for planning and development purposes, Global Guidance Note, 2021

Question 27

What is the purpose of the new guidance note - Land measurement for planning and development purposes, Global Guidance Note, 2021

Answer 27

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

Question 28

What does the new guidance introduce - Land measurement for planning and development purposes, Global Guidance Note, 2021

Answer 28

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