Development Appraisals (L3C) Flashcards
What is viability?
Viability is defined in the PPG 010 as ‘Looking at whether the value generated by a development is more than the cost of developing it. This includes looking at the key elements of GDV, costs, land value, landowner premium and developer return.
- If FVA shows landowner and developer returns are not enough to satisfy the benchmarks, the development typology is unviable at the level of developer contributions being tested.
- Residual land value compared to benchmark
- Assess whether new use is more valuable than EUV
Name some key documents for development
- RICS Valuation of Development Property (1st ed, 2019) Guidance Note
- RICS Financial Viability in Planning: Conduct and Reporting (1st ed, May 2019) Professional Statement
- RICS Guidance Note: Assessing Viability in Planning under the NPPF 2019 for England (1st ed, March 2021)
What is the definition of Development Property?
The IVS defines development property as an “interest where redevelopment is required to obtain highest and best use or where improvements are being contemplated or in progress at the valuation date”.
What is the definition of Development?
“The carrying out of building, engineering, mining or other opportunity in, on, over or under land, or the making of any material change in the use of any building or other land”
In what instance would you use a development appraisal?
When need to calculate the profit of a client’s proposed development, or offer advice on a proposed development, or for viability purposes.
What is the difference between a residual valuation and a development appraisal?
A residual valuation = start with profit target, finding residual land value, based on market inputs to establish site value.
Development Appraisal = start with fixed land cost, working out the profit. Assessing the profitability of a scheme, based on client inputs and market assumptions
How is residual land value calculated?
GDV - (build costs and profit) = Residualised Land Value
What are the main costs in a residual valuation?
- Build costs
- Professional fees
- Statutory costs
- Marketing costs
- Legal costs
- Purchasers’ costs
- Agency fees
- Contingency
What is typically included in professional fees
- input as a % of construction costs
- Architect (usually highest proportion of fees)
- Quantity surveyor
- Structural engineer
- Mechanical/electrical engineer
- Project manager
- VAT is always payable on professional fees
What are the main components of a residual valuation?
- GDV
- Build cost
- Professional fees
- Statutory costs
- Marketing costs
- Legal costs
- Purchasers’ costs
- Agents fees
- Contingency
- Profit
- Residual land value
- Timescales
- Sensitivity analysis
What is the profit erosion?
The period within which the profit from the development is eroded after completion due to holding charges (i.e. interest charges, building insurance, security, utility charges)
What is IRR?
A time-weighted measure of return
- The annual rate of growth an investment is expected to generate
- The higher the IRR the better. If you wanted the improve the IRR, reduce timescales
- IRR for a small site - typically 30%
- The larger the site, the lower the IRR as far away from getting the money and being in a positive position.
What is an S-curve?
- Pattern of cash flow I assume the construction costs follow within Argus Appraisal
- Represents assumption of how costs are spread across the construction period, with the majority expected during the middle of the construction period
- Purpose = to reflect when monies will be spent
- The interest is expected to follow the same pattern across this period.
What are limitations of residual valuations?
- The use of assumptions, not real costs
- Assume 100% debt finance - not realistic
- Small changes to inputs can have a large impact on profit / residual land value
- RICS Guidance Note: Valuation of Development Property 2019: you should cross-check with the comparable method.
How would you determine build costs?
- Using BCIS all in tender indices
- BCIS uses GIA as basis of measurement, excludes VAT, contingency, fees, external works and facilitating works
- Consult a building surveyor to find an up-to-date estimate of costs.
How could I make build costs more specific using BCIS?
- Rebase to county instead of LPA
What are weaknesses of BCIS?
- Often taken from public sector development - reduced spec
- 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
- Limited data
- Time lag
What is a sensitivity analysis and what are the different types?
- A risk analysis technique, used to present potential outcomes in changes to key variables
3 types:
- Simple sensitivity analysis of key variables i.e. sales values, construction costs (upwards and downwards increments)
- Scenario analysis: changes scenarios for the development content i.e. changing the phasing of the scheme or its design
- Monte Carlo simulation: using probability theory using software such as ‘Crystal Ball’
How are outputs shown from sensitivity analyses?
Effect on land value or profit amount
Where would you enter CIL/S106 costs into an appraisal?
- Statutory/LA section of Argus Developer. Also enter in accordance with CIL Liabiltiy notice (CIL typically paid at commencement of development) and S106 agreement (in line with triggers)
What length of warranty do new build properties typically have?
10 years
What is NHBC?
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. faulty products
- Years 3-10 = structural insurance period
What assumption do you usually make for development finance?
It depends, but typically I put 6% debt finance into my appraisals. I assume 100% of finance will be debt finance and generate a general market facing finance rate to allow for comparison purposes and not accounting for developer-specific discounts
What are the main methods of finance?
- Debt finance - taking a loan
- Equity finance - selling shares, JV or own money
What are the main forms of developer finance?
- Senior debt - first level of borrowing (takes precedent over mezzanine funding)
- Mezzanine finance - additional money required over normal LTV - private equity)
When could a developer borrow at a lower rate?
If have a finance agreement with banks or the development is lower risk, therefore they may be offered a lower interest rate.
How do you input affordable housing in your appraisals?
- In cash flow, typically use ‘golden brick’ method to reflect typical income flow from the RP where usually expect a % of the receipt to be paid up front at the start of construction, sometimes with an element in the middle of the construction period (depending on length of development period) and the remainder on practical completion.
How would you calculate finance for borrowing for a site purchase?
On a straight line basis, using compound interest over length of development period
How would you calculate finance for borrowing for a construction?
Assume total construction costs (incl. fees) using S-curve calculation
How would you calculate finance for borrowing for holding costs?
On a straight line basis, using compound interest from completion of construction until disposal
Do you typically use profit on cost or profit on GDV?
Profit on cost - this is reflective of the risks associated with the development and a market facing input I would typically expect given the requirements of developers on similar development projects.
This is less variable than GDV, making it easier to draw comparisons.
What level do you usually put your contingency in at?
- It depends, 5% reflects an average level of risk and a buffer for unknown costs.
- I would increase this if the development presented higher risk eg shortage of materials, or speculative/in early stages of planning.
- Smaller scheme might have slightly higher % due to not translating into as much as a larger scheme.
What are some typical site abnormals?
- Ground contamination
- Ground retention required
- Piled foundations required
- Allowances for flooding
What is the benchmark land value?
EUV + premium (typically 10%-15% to incentivise development)
What finance rate do you usually apply?
Typically, 6% - includes Bank of England Base Rate (0.1%), cost of borrowing and arrangement fees.
(Base rate, entry fees, exit fees & risk - what the bank want to get in return for lending)
What are different ways of calculating the finance rate?
3 ways:
- Bank of England Base Rate plus premium
- Might be provided in client’s loan terms
- The LIBOR (London Inter Bank Offer Rate) plus premium (variable lending rate between banks for a 3 month borrowing term)
What are the main reasons a developer needs finance for?
- Site purchase
- Construction costs & associated costs
- Holding costs to cover void until site disposed of
What is the loan to value ratio?
- Ratio expressing value of the loan in proportion to the value of the property
- Typically LTVs are 60% of value
What is a new build premium?
Typically 10-15% to account for a property being brand new and never been lived in and the fact it has a NHBC Warranty for 10 years.
How do Land Registry record new build prices?
On a net price, as developers often add incentives such as kitchen appliances/carpets etc for free.
- Developers need to complete disclosure of incentives form to Land Reg.
What unit values did you enter into your appraisal for Trinity School, Hartford?
- 2 beds at £300psf
- 3 beds at £325psf
What did you put in for the build costs for your case study?
I put in £160psf all in for all of the units. I knew there would be a slight discount for the conversion units, but I wanted to be more on the conservative side.
How did you find your comparable evidence for Trinity School?
- Spoke to local agents
- New build and second hand comps (Rightmove and LandInsight)
- Applied premium to reflect increase in property prices over past year - Land Registry House Price Index and Halifax House Price index for the area.
Do you know how Land Registry records new build prices?
- Land Registry report on the NET sales price – often with developers they will through in incentives such as free kitchen appliance etc
- Complete a disclosure of incentives form to Land Reg
Why do new builds gain premium prices?
To reflect the fact they’re brand new and haven’t been lived in before (typically 10-15% premium)
What is the Red Book definition of GDV?
- There is no red book definition
- Defined in RICS Valuation of Development Property (1st edition October 2019)
- The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.
Why do you compare land on an Open Market Plot basis?
- Simple way of drawing comparison between sites
- Each borough has a different level of affordable housing
- More consistent plot value rate
- The private plots is where the money really is – so more of a like for like basis
What were your professional fees for Trinity School?
5% - this is lower than normal to reflect the fact full planning permission has been granted.
What neighbouring uses could cause issues for a development site?
Industrial
what is net developable area?
- The area that can be developed – typically 65%
* If not stated, can often gauge from masterplan
What does net developable area include?
The net developable area includes those access roads within the site, private garden space, car parking areas, incidental open space and landscaping and children’s play areas (where these are to be provided).
