Development Appraisals (Level 2) Flashcards
Tell me about a development appraisal you have carried out.
Mixed-Use Development, Winchester
- Residual development appraisal to assess the viability of a mixed use development opportunity
Determined the following inputs
o GDV – used the investment method
o Construction Costs – used BCIS and consulted with pre-construction team to
account for abnormal costs
o Affordable housing provision – reviewed local planning policy to assess affordable
rental levels
o Professional Fees – typically between 10-20% of construction cost, assumed 6-8%
because of in house knowledge
o Historical and archaeological interest – increased contingency fees, increased
surveys an remediation works to account for this
- Undertook sensitivity analysis using scenario modelling
- Determined the site was unviable as it did not meet the return requirements for Linkcity
Development Appraisal - Mixed Use Development, Winchester
How did you use the investment method to determine GDV?
- Assessed the market rent for the proposed development by reviewing comparable
evidence - Applied a capitalisation rate based on NIY’s of recent transactions
Development Appraisal - Mixed Use Development, Winchester
What is BCIS and how did it give you an indication of construction costs?
- BCIS = Building Cost Information Service
- Provides cost and price data for the UK Construction Industry
- Used the TPI index = all in tender price index which provides cost of procuring built assets (inclusive of contractor’s margin)
Development Appraisal - Mixed Use Development, Winchester
What type of affordable rents did you need to use?
- Inputted social rents and intermediate rents based off guidance contained in local planning policy
Development Appraisal - Mixed Use Development, Winchester
What professional fee assumptions did you use and why?
- Assumed professional fees at 8% of construction cost
- Aware that professional fees are typically between 10-20% of construction cost however this is reduced at Linkcity because of in house expertise
- I did increase this assumption from the normal 6% to account for the potential cost of bringing in house experts to deal with the archaeological and historical interest in the site
Development Appraisal - Mixed Use Development, Winchester
How sensitive were the IRR and the viability?
- Very sensitive – given the increased construction costs any changes in incomes reduced the IRR significantly
- Winchester not a very high value area for residential
Development Appraisal - Mixed Use Development, Winchester
How did you choose an appropriate developer’s profit?
- Linkcity typically assume a development management fee of between 4-6%
- Also assumed a portion of the developer’s profit leftover dependent on the funding structure with private equity partners
Development Appraisal - Mixed Use Development, Winchester
Is GDV an input or an output?
- Input
- Outputs in development appraisals are IRR, Profit on Cost, Developer’s Profit, Profit on GDV
Tell me about a development appraisal you have carried out.
Mixed-Use Development, Birmingham
- Residual development appraisal to assess profitability of residential development with supermarket on ground floor
Determined the following inputs:
o GDV – reviewed comparable commercial rental data and residential sales estimations, capitalised income using All Risks Yield
o Construction Cost – consulted in-house construction team
o Unit Sizes – reduced average unit floor plate and increased number of units
Mixed-Use Development, Birmingham
Did you use a DCF model? Why or why not?
- I did not use a DCF model
- I was modelling straightforward assumptions without the need to input explicit timings and client requirements
Mixed-Use Development, Birmingham
What are the advantages and disadvantages of using a DCF?
Advantages:
- Able to model complex assumptions e.g specific client or funding requirements and development timings
- Growth explicit you can apply your own specific growth rate to a DCF model
- Increased accuracy as they tend to be less generic
Disadvantages:
- Very sensitive to changes in assumptions
- Requires a large number of assumptions
- Time consuming
- Not always needed on straightforward project structures
Mixed-Use Development, Birmingham
What is an all risks yield?
All Risks Yield provide an indication of the likely risks apparent in a particular investment, and involves a holistic assessment of the condition of the property market
Mixed-Use Development, Birmingham
How did you assure your internal construction cost advice?
- Sense check against BCIS
- If still unsure will seek the advice of external cost consultant
Mixed-Use Development, Birmingham
Why do you think the units were so big?
- Architect wanted to maximise design quality rather than income
