Development Appraisals (L3) Flashcards
When would you use a development appraisal?
When I need to calculate the land value for my client, assuming their appropriate profit margin, enabling me to understand the land value my client can offer.
Talk me through the development programme?
- Site purchase: site, assembly, VP, planning process and tender negotiations.
- Pre-construction period: site preparation, remediation, archaeological works.
- Construction period: construction of the buildings, this might be phased.
- Post construction period: sales period.
Positives and negatives of development appraisals over comparable analysis?
Development appraisals = take longer but much more accurate and are site specific.
Comparable land value analysis = every site is different, however this gives a quick approximate.
What is the Cash Flow used for in a development appraisal?
To allow a developer to understand the interest to be paid each month that the money is borrowed, forecast spend and receipts and record costs to date and income received.
What effect does a longer and shorter construction period and the sales period have on development?
Shorter construction period = means you pay less interest on the development as you are borrowing money for a shorter time period.
Shorter sale period = can pay loan back sooner and accumulate less interest payments.
What is VAT charged on?
VAT = Value Added Tax. Land is exempt from VAT.
VAT is charged on building fees and professional fees.
A landlord can choose to elect a property to charge VAT to recover VAT on their costs expended.
What sales rate did you advise originally on Clapham ?
6 per month
What makes up purchasers costs?
Stamp duty (5%)
Legal fees (0.5%)
Agents fees (1%)
What is included in the total development cost?
Site Preparation (e.g. tree removal & demo)
Planning costs (including Section 106 & CIL)
Building costs
Professional fees 10-15%
Contingency 3%
Overhead 5%
Marketing costs = Marketing budget & Agency fees (2% of GDV for the sale and 0.5% Legal fees on sales)
How do you/ your Commercial team estimate build costs?
They benchmark them against schemes we are currently constructing. As we are geographically focused in London we can gauge a good idea of predicted build costs from our current schemes.
What is actually included within the build costs?
Mainly labour, equipment and materials.
How do you account for market fluctuations in your appraisal?
Higher contingency for rise in build costs.
I would be careful not to over-inflate the predicted sales prices when undertaking the comparable process for deciding the GDV.
How do you assess your level of contingency? How do you cope with continually rising build costs in your development appraisals?
The level depends on the project risk and likely movement in build costs. Assume a higher level of contingency.
What level of contingency do you assume in your development appraisal?
I usually allow a 3% contingency - but it depends on the level of information available and risk associated with the site.
Where do I think build costs are going? Why have they risen so much?
According to BCIS, build costs have risen 20% from 2021 to 2023. There are signs that the rise is beginning to slow, although there is still significant labour shortages.
They have risen due to high material demand and lower supply with the war in Ukraine impacting the supply chain and increasing energy prices.
What is the Bank of England’s interest rate? And how will it impact the housing industry?
Recent increase to 5.25%. This means sales rate is likely to slow as it becomes more expensive to take a mortgage. This means buyers more likely to opt for the rental market.
In terms of development finance, higher interest rates make borrowing costs higher, hence meaning projects could become unviable.
What are the differences between a development appraisal and a residual valuation?
Development appraisal is used to assess the viability & profitability of a proposed development.
Whereas a residual valuation is purely used to calculate the Market Value of land using market inputs.
How do you calculate the Residual Land Value?
GDV - (build costs & developers profit) = RLV
What is not included in BCIS costings?
Contingencies
Professional fees
external works
VAT
What are some of the downfalls of BCIS?
Time lag
Low sample sizes
Costs are site-specific
Its not an ‘all in’ build costs
Outdated
Insufficient data
No all developers submit their tenders
All developers include various costs at various stages and therefore may not be directly comparable.
You showed your sensitivity analysis. Could you explain in a bit more detail how you prepared this? Why might you need to undertake sensitivity analysis?
It is a very reflective way of indicating movements in the market and how this could have an impact on the appraisal.
Why did you choose to use revenue and build costs as your variables for your sensitivity analysis?
To show what a change in build costs or GDV would have on the performance indicators such as development profit & land value.
To see how the variables would change in different market conditions, such as:
- interest rates increasing
- build costs decreasing
- house prices rising
You note that you sought internal and external advice where necessary when reviewing cost and revenue assumptions when undertaking sensitivity analysis - what advice did you seek and why?
I sought specialist advice from my firms sales and marketing team.
And specialist advice from my firm’s estimating team.
You used the BCIS as a benchmarking tool, are there any other ways that you could have checked?
Reviewed against live phases on B01 and C01. Most comparable direct and similar and live costs.
Referring to the development appraisal shown in your presentation could you tell us how;
o The Gross Development Value was calculated?
o The total Land Cost was calculated?
o The affordable housing offer was calculated?
o How the profit margin is calculated?
a) GDV -
i) PFS plot by plot pricing schedule and comps
ii) AHA - detailed at bid stage at the final phase viability test
iii) Market returns
b) Site premium set at MDA (indexed linked to BCIS General Building Cost index)
c) as above
d) Revenue - Costs = Profit / revenue x 100%
What does the legal agreements say about overage?
Developer (CP LLP) retains an actual 16% profit and if amount over 100% priority profit overage in favour of the freeholder MLL. Date of sale of the final market housing on a phase.
You mentioned that you carried out local benchmarking on your Sales & Marketing team’s report. Could you explain how you went about that?
I looked at local and recent new build comparable evidence key examples are Brixton Centric, One Clapham junction and Springfield Place.
One Clapham Junction had a superior location and specification and commanded a £psft of £985
Brixton Centric was similar in locality although a lower level specification. £820
As a superior scheme Clapham Park could command a £psft of roughly £850
How long did you decide your build rate was?
As a general rule of thumb for a quick appraisal:
Houses = 8 months + 1 week for every house.
Flats = 12 months + 1 week for every flat.
Otherwise you refer to the Build Director who will produce a detailed programme
Can you give me an idea of the different levels of SDLT?
For non-residential:
£0 - £150,000 = Nil
£150,001 - £250,000 = 2%
Over £250,000 = 5%
For residential I know it is higher, I would check the governments SDLT calculator.
