Development Appraisals - Level 3 (Ready) Flashcards
When might you use Profit on Cost vs Profit on GDV
- McLaren have always used profit on cost as their metric
- Profit on cost is typically more predictable than GDV
- GDV tends to be more susceptible to changes
What is IRR? What are the benefits of this against other metrics?
Internal rate of return
- Allows you to assess the return of a project over a period of time
- Can assess the performance of your equity
What are the various benefits of Argus vs Excel?
- Argus allows for more detailed financial modelling
What is the difference between development appraisal and residual valuation?
- Development appraisal is based on client inputs
- Residual appraisal is carried out on market inputs
Talk me through your BTR NDV calculation?
- Assessed the rental income of each unit type
- Capitalised this at a yield of 4%
- Deducted operating costs to arrive at GDV
- Deducted Purchasers costs to arrive at NDV
Did you assume any additional costs when you compared to a BTS scheme?
- Yes, purchasers costs
- Operating costs
Are there other types of sensitivity analysis that you could have undertaken?
- Simple or probability / Monte-Carlo
How did you forward fund assumptions differ from a development appraisal?
- Forward fund assumptions would assume interest rate in line with yield
- Forward funded assumes McLaren only require equity input until the point the project if forward funded
Did you adjust your finance calculation?
Yes, the interest rate is adjusted to the rate of the yield
- This is a commonly adopted approach that I have confirmed with investment agents
Why did you assume 20% profit on cost for a forward funding? This seems high compared to the previous example
- My Board felt that given the size of the deal and risk associated with letting such a quantum of bedrooms, they would require 20% profit on cost
Talk me through a student appraisal
- Run this on the investment method
- Establish rental value of student bedrooms
- Deduct operating costs
- Capitalise net operating income
- Deduct build costs, planning costs, professional fees, marketing costs, finance costs
- Deduct profit and arrive at NDV
Did you include affordable PBSA?
- No
- There is policy within London
- 35% at an affordable rent which is linked to 55% of maintenance loan
- Published by the Mayor of London
What is the hierarchy of evidence?
- Certain types of evidence take precedence over others, hierarchy of evidence sets this out into three categories
- Category A - Direct Comparables
- Category B - General market Data
- Category C - Other sources
How do you apply the Hierarchy of Evidence to a PBSA appraisal?
- Look for directly comparable student schemes
- ## Look at average rents in an area
How did you establish an appropriate yield for your BTR appraisal?
- Through comparable investment transactions
- Through discussions with investment agents
Talk me through the competing schemes in MK?
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Are there additional risks associated with FF structure that aren’t present in senior debt?
- Yield agreed at the outset, risk of losing potential value if yield compression occurs during development phase
- Total return usually lower to reflect the additional risk that the funder is taking
How did you calculate your your affordable for BTR?
- Local plan policy dictated that it is required to be at a level of between 65% to 80% of market rent
Why could you pay more on a BTS basis than BTR?
- Because investors typically like to see a discount on OMV to reflect the risk associated with occupying the building
- Typical discount to “break up value” is around 10%
How would your affordable tenures differ from BTR to BTS?
- This depends on the local planning requirements, but in some instances the affordable element of a BTR scheme will be wholly discounted market rent as opposed to traditional affordable housing
Difference in assumptions between Unconditional and STP?
- Unconditional appraisal would require a higher profit on cost to reflect the increased risk
- STP deal would include an element of time and costs associated with getting planning
- STP deal may also include a different distribution of the land payment
What is the methodology for calculating residual site value?
- Gross development value - Total development costs = Gross site value
Gross site value - purchasers costs = Residual site value
What costs would you allow for as part of total development costs
- Site preparation
- Planning
- Construction
- Contingencies
- Professional Fees + VAT
- Marketing
- Finance
- Developers profit
What is included within site preparation costs?
- Remediation
- Demolition
- Site clearance
