Development Appraisals (L3)

Question 1

When would you use a development appraisal?

Answer 1

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.

Question 2

Talk me through the development programme?

Answer 2

1. Site purchase: site, assembly, VP, planning process and tender negotiations.
2. Pre-construction period: site preparation, remediation, archaeological works.
3. Construction period: construction of the buildings, this might be phased.
4. Post construction period: sales period.

Question 3

Positives and negatives of development appraisals over comparable analysis?

Answer 3

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.

Question 4

What is the Cash Flow used for in a development appraisal?

Answer 4

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.

Question 5

What effect does a longer and shorter construction period and the sales period have on development?

Answer 5

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.

Question 6

What is VAT charged on?

Answer 6

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.

Question 7

What sales rate did you advise originally on Clapham ?

Answer 7

6 per month

Question 8

What makes up purchasers costs?

Answer 8

Stamp duty (5%)
Legal fees (0.5%)
Agents fees (1%)

Question 9

What is included in the total development cost?

Answer 9

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)

Question 10

How do you/ your Commercial team estimate build costs?

Answer 10

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.

Question 11

What is actually included within the build costs?

Answer 11

Mainly labour, equipment and materials.

Question 12

How do you account for market fluctuations in your appraisal?

Answer 12

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.

Question 13

How do you assess your level of contingency? How do you cope with continually rising build costs in your development appraisals?

Answer 13

The level depends on the project risk and likely movement in build costs. Assume a higher level of contingency.

Question 14

What level of contingency do you assume in your development appraisal?

Answer 14

I usually allow a 3% contingency - but it depends on the level of information available and risk associated with the site.

Question 15

Where do I think build costs are going? Why have they risen so much?

Answer 15

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.

Question 16

What is the Bank of England’s interest rate? And how will it impact the housing industry?

Answer 16

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.

Question 17

What are the differences between a development appraisal and a residual valuation?

Answer 17

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.

Question 18

How do you calculate the Residual Land Value?

Answer 18

GDV - (build costs & developers profit) = RLV

Question 19

What is not included in BCIS costings?

Answer 19

Contingencies
Professional fees
external works
VAT

Question 20

What are some of the downfalls of BCIS?

Answer 20

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.

Question 21

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?

Answer 21

It is a very reflective way of indicating movements in the market and how this could have an impact on the appraisal.

Question 22

Why did you choose to use revenue and build costs as your variables for your sensitivity analysis?

Answer 22

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

Question 23

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?

Answer 23

I sought specialist advice from my firms sales and marketing team.

And specialist advice from my firm’s estimating team.

Question 24

You used the BCIS as a benchmarking tool, are there any other ways that you could have checked?

Answer 24

Reviewed against live phases on B01 and C01. Most comparable direct and similar and live costs.

Question 25

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?

Answer 25

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%

Question 26

What does the legal agreements say about overage?

Answer 26

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.

Question 27

You mentioned that you carried out local benchmarking on your Sales & Marketing team’s report. Could you explain how you went about that?

Answer 27

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

Question 28

How long did you decide your build rate was?

Answer 28

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

Question 29

Can you give me an idea of the different levels of SDLT?

Answer 29

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.

Question 30

You explain the importance of ROCE to your client. Could you explain how you calculated this? How would you expect a reduction in build cost to affect this calculation?

Answer 30

Set out in my firm's business plan and set as a key priority for the group ROCE is calculated as adjusted operating profit divided by average capital employed Adjusted Operating Profit - Statutory operating profit excluding exceptional expenses and amortisation of acquired intangible assets plus the Group’s share of joint ventures’ operating profit Capital Employed - Statutory net assets less goodwill, intangible assets, net (debt)/cash, retirement benefit asset and fire safety provision - Cumulative Funds A reduction in ROCE is an indication that your capital efficiency has decreased either as a result of reduce operating profit or increase capital employed.

Question 31

How would MTVH improved their affordable housing offer? And what grant funding / public subsidy would they be able to utilise?

Answer 31

The Mayor has secured £4bn from Government to deliver affordable homes in London under the new Homes for Londoners: Affordable Homes Programme 2021-2026. Following the confirmation of the approved programme with existing contracted partners in July 2023, the programme is now open to new bids via Continuous Market Engagement (CME). Please discuss any proposed projects with the GLA before submitting. The priorities for the remaining programme are: 1. Estate Regeneration projects, particularly those offering high levels of additionality (new homes over and above those being replaced) 2. Increasing the proportion of social rented homes in the programme to meet London’s most acute need 3. Homes that can start in 2023/24 to accelerate the programme 4. Supported and specialist provision for vulnerable Londoners. Change in tenure mix to favour social rented homes or specialist provision for Affordable rented (capped at 80% of OMR)

Question 32

What grant funding was available to the RP in Bracknell how was this applied for?

Answer 32

Homes England grant funding. Proposals submitted through the Continuous Market Engagement Route (CME) is open for funding applications, while funding remains available. The Affordable Homes Programme provides grant funding to support the capital costs of developing affordable housing for rent or sale. As the government's housing accelerator, Homes England will be making available £7.39 billion from April 2021 to deliver up to 130,000 affordable homes by March 2026 – outside of London.

Question 33

How did you communicate an erosion of profit margin in place of improved ROCE to the LLP effectively?

Answer 33

This needed to be endorsed by both LLP partners before executive approval was received from MTVH and Countryside boards. Countryside were content as it met their desired ROCE and provided a viable delivery strategy. To enable accelerated delivery of the scheme and shortened programme MTVH were content with accepting a reduction in profit margin as they retained their land value.

Question 34

How have you reduced GIA in your case study but are incorporating second staircases?

Answer 34

only introducing a second stair to two of the cores C and F as other cores are interconnected ensuring there is a sufficient escape route in the event of a fire. Reduction in circulation space and shrinkage of units resulting in a c. 5% total reduction in GIA

Question 35

Can you give me an idea of the £/sqft build cost?

Answer 35

Permitted - £293 Optimised - £279 (5% improvement)

Question 36

10% increase to the former assumed build cost? At what stage was this?

Answer 36

When the initial LLP Business Plan was endorsed in 2021.

Question 37

What is the purpose of having contingency in build budget?

Answer 37

To mitigate against unforeseen risk.

Question 38

Why can you realise income quicker? What is the sales rate?

Answer 38

Partner sale forward fund agreement. Renegotiate payment terms of an affordable housing or PRS partner. At Clapham Park a sales rate of c. 6 per month.

Question 39

Build optimisation or Value Engineering what are the considerations?

Answer 39

Ethical and sustainability consideration. When faced with ethical decisions I would refer to the RICS ethics decision tree. Would I be comfortable if my advice where to be made public.

Question 40

How would you carry out a viability appraisal in regards to planning applications and S106/CIL Contributions?

Answer 40

RICS Professional Standard ‘Assessing viability in planning under the NPPF for England’ 1st edition, March 2021. Ascertaining the viability of a development involves making valuation judgements e.g. in the inputs and outcomes of an appraisal. These need to be rational realistic and reasonable in the circumstances, relying on evidence and valuation, and exercising judgement therein. Practitioners must therefore employ:  Evidence based judgement  Collaboration  Transparency  A consistent, standardised approach  As well as confirming that FVAs are based upon transparency, objectivity and justified opinion, Chartered Surveyors must include sensitivity analysis and non-technical summaries in their report.  No contingent fees are permissible for such FVAs. Note when undertaking a Financial Viability Assessment for a planning application (or in reviewing one), practitioners must comply with the RICS Professional Standard ‘RICS Professional Standard – Financial Viability in planning: conduct and reporting, 2019).

Question 41

How would you go about calculating the land value of an unconsented site with no planning history and unknown potential?

Answer 41

I would consult specialist advice from a planning consultant. To determine an appropriate route forwards.

Question 42

What did you include for professional fees? How have assessed professional fees in your development appraisal?

Answer 42

Architect Engineers Quantity surveyor Pro rata against achieved fees for live phase.

Question 43

How might you expect development finance to influence your appraisal?

Answer 43

Higher finance rates = higher costs negatively influencing profit margin.

Question 44

Where might you look to understand the planning history of a site you are appraising?

Answer 44

I would use my land stack search tool that is linked the land registry and LPA information to understanding the planning history.

Question 45

How do you sense check the information you are being provided by your firm?

Answer 45

BCIS benchmarking Discuss with Agents and carry out my own market research.

Question 46

You have been asked to carry out a development appraisal on a site, but your client needs it within a few hours and the site is a long way away from you. What are your considerations?

Answer 46

In accordance with Part 3 RICS Professional Standard PS 2 I would need to consider if I was acting in accordance with the RICS ROC. Am I providing a good quality diligent and competent service? Am I following the sixteen step principles Do I have the necessary facts? In accordance with VPS3 Preliminary valuation can be given, but must be marked as a draft, for internal purposes only, cannot be relied on

Question 47

Explain your understanding of Discounted Cash Flow?

Answer 47

The approach of a discounted cash flow is to calculate the net present value (NPV) of the estimated costs and revenues over the duration of the development project. With all other costs and revenues accounted for, the NPV will be a current estimate of the residual land value. The NPV model is set out in numerous corporate finance and investment appraisal texts. In a standard cash flow, profit is represented as a return on capital (IRR) and the NPV, assuming that it is positive, is then the residual land value. Figure 2 identifies the basic structure of the model.

Question 48

You mention the slowdown of the UK housing market. How might you expect this to influence your appraisal?

Answer 48

Reduced sales rate extending programme and carrying higher finance costs. Downward pressure on sales market impact sales values. Higher interest rates = lower PRS offers

Question 49

What variables would you expect to most influence your appraisal?

Answer 49

Build costs GDV assumptions

Question 50

How might you gain confidence in the output of a development appraisal?

Answer 50

Carry out sensitivities. Ensure your inputs are accurate and up to date by cross referencing them against other schemes Hold a higher level of contingency to mitigate risk

Question 51

Explain your understanding of Net Present Value?

Answer 51

The sum of the discounted values of a net cash flow including all inflows and outflows, where each receipt/payment is discounted to its present value at a specified discount rate. Where the NPV is zero, the discount rate is also the internal rate of return (IRR).

Question 52

What is the ‘S-curve’ in development finance?

Answer 52

With development costs plotted on a graph, the S curve shows how the cumulative costs of construction rise (in an S shape). This can also be shown in a case flow and then enables a developer to calculate the interest they need every month.

Question 53

What do you understand by the term Hope Value?

Answer 53

An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.

Question 54

What is meant by Loan to Gross Development Value?

Answer 54

Typical Loan to Value ration is 60%. 60% is loan, and 40% is Equity Finance

Question 55

Difference in senior debt and mezzaine debt funding?

Answer 55

Senior debt is the first level of borrowing that takes precedence. Senior debt is debt and obligations which are prioritized for repayment

Question 56

Where might you look for guidance on development appraisals?

Answer 56

RICS Guidance Note – Valuation of Development Property (1st Edition, Effective from Feb 2020). Principles apply to all valuations of development property and should be read in conjunction with the RICS Valuation – Global Standard 2017 (Red Book Global Standards) – incorporating the International Valuation Standards (IVS 410)

Question 57

What is development finance required for? Are you aware of sources and types of development finance?

Answer 57

Finance is required for 3 elements: Site purchase (including purchases costs) Construction and other associated costs Holding costs until the scheme is disposed

Question 58

Two main types of methods of development finance funding?

Answer 58

* Debt Finance (i.e bank loan) * Equity Finance (i.e own money, sell shares, or LLP funding)

Question 59

What is the difference between feasibility, viability and desirability?

Answer 59

Desirability – is a need that the user have to use a product. Viability – is a commercial value of releasing a product. Feasibility – is practical and technical constraints of creating a product.

Question 60

What is the distinction between cost, price, value and worth?

Answer 60

Worth - the value of an asset to an owner for investment or operational objectives Value - the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’. cost of your product or service is the amount you spend to produce it. price is your financial reward for providing the product or service. value is what your customer believes the product or service is worth to them.

Question 61

How do you reduce risk on a development appraisal?

Answer 61

Spend more time making my assumptions as accurate as possible rather than estimating them. Also apply a higher contingency or advise a higher margin.

Question 62

What abnormal costs can occur in a development?

Answer 62

Ground contamination Piled foundations if necessary Allowances for flooding Ecological surveys

Question 63

What is the basis of measurement for BCIS?

Answer 63

GIA (Building Cost Information Services)

Question 64

Why do some developers use profit on cost rather than profit on GDV?

Answer 64

Profit on GDV is slightly less accurate as its purely based off sale value assumptions. Whereas developers typically have more of an idea of what their build costs will be hence why profit on cost is used more.

Question 65

What is your monthly drawdown process and how do you ensure the information you are providing is accurate for your client?

Answer 65

Reporting spend to date and forecasted income through a consolidated cashflow. Invoices ledgers and cost reports are provided as supporting information.

Question 66

What guidance would you refer to if you were carrying out a development appraisal?

Answer 66

RICS Guidance Note – Valuation of Development Property (1st Edition, Effective from Feb 2020) A development property is defined in IVS 410 as: ‘Interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date and include: a the construction of buildings, b previously undeveloped land, which is being provided with infrastructure, c the redevelopment of previously developed land, d the improvement or alteration of existing buildings or structures, e land allocated for development in a statutory plan, and

Question 67

What is a financial viability assessment (FVA)?

Answer 67

Viability assessment allows a developer to assess if a site is viable (i.e. generates required profit?). If expected profits are shown to be below 20%, the developer can negotiate for the number of affordable dwellings to be knocked down.

Question 68

What is Damp Course Membrane? What is Ground floor slab?

Answer 68

acts as a barrier against opposing moisture to prevent rising dampness from developing in your home. It is often used under concrete flooring due to the high risk of moisture. reinforced cast concrete that sits above pile caps

Question 69

What do you mean by drawing down the site?

Answer 69

Entering into a 990 year headlease from the freeholder.

Question 70

What impact did an early land parcel sale have on the profitability of your scheme in Aldershot.

Answer 70

Measuring both Profit and ROCE Significantly improved ROCE. Reduced costs (site had level constraints)

Question 71

Tell me about software you have used in DA’s?

Answer 71

I have previously used ANAPLAN to upload Development appraisals, whereas my firm is transitioning into using a new software COINS. I continue to provide monthly updates using my firm's excel DA and load data into COINS once internal sign off has been received.

Question 72

What is viability?

Answer 72

Viability assessment determines whether the value generated by a development is more than the cost of developing it.

Question 73

How did you calculate the value of the commercial unit at Bracknell.

Answer 73

> £17.50 PSF Rent > 6.5% Yield > 12 Month RF/Void Investment Method