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RICS FINAL INTERVIEW > Development Appraisals - Level 3 (Ready) > Flashcards

Development Appraisals - Level 3 (Ready) Flashcards

1
Q

When might you use Profit on Cost vs Profit on GDV

A
  • 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
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2
Q

What is IRR? What are the benefits of this against other metrics?

A

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
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3
Q

What are the various benefits of Argus vs Excel?

A
  • Argus allows for more detailed financial modelling
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4
Q

What is the difference between development appraisal and residual valuation?

A
  • Development appraisal is based on client inputs

- Residual appraisal is carried out on market inputs

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5
Q

Talk me through your BTR NDV calculation?

A
  • 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
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6
Q

Did you assume any additional costs when you compared to a BTS scheme?

A
  • Yes, purchasers costs

- Operating costs

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7
Q

Are there other types of sensitivity analysis that you could have undertaken?

A
  • Simple or probability / Monte-Carlo
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8
Q

How did you forward fund assumptions differ from a development appraisal?

A
  • 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
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9
Q

Did you adjust your finance calculation?

A

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

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10
Q

Why did you assume 20% profit on cost for a forward funding? This seems high compared to the previous example

A
  • 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
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11
Q

Talk me through a student appraisal

A
  • 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
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12
Q

Did you include affordable PBSA?

A
  • 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
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13
Q

What is the hierarchy of evidence?

A
  • 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
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14
Q

How do you apply the Hierarchy of Evidence to a PBSA appraisal?

A
  • Look for directly comparable student schemes
  • ## Look at average rents in an area
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15
Q

How did you establish an appropriate yield for your BTR appraisal?

A
  • Through comparable investment transactions

- Through discussions with investment agents

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16
Q

Talk me through the competing schemes in MK?

A

-

17
Q

Are there additional risks associated with FF structure that aren’t present in senior debt?

A
  • 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
18
Q

How did you calculate your your affordable for BTR?

A
  • Local plan policy dictated that it is required to be at a level of between 65% to 80% of market rent
19
Q

Why could you pay more on a BTS basis than BTR?

A
  • 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%
20
Q

How would your affordable tenures differ from BTR to BTS?

A
  • 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
21
Q

Difference in assumptions between Unconditional and STP?

A
  • 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
22
Q

What is the methodology for calculating residual site value?

A
  • Gross development value - Total development costs = Gross site value
    Gross site value - purchasers costs = Residual site value
23
Q

What costs would you allow for as part of total development costs

A
  • Site preparation
  • Planning
  • Construction
  • Contingencies
  • Professional Fees + VAT
  • Marketing
  • Finance
  • Developers profit
24
Q

What is included within site preparation costs?

A
  • Remediation
  • Demolition
  • Site clearance
25
Q

What would be included in your estimate for planning costs?

A
  • Planning application fee
  • Pre-application engagement
  • Section 106
  • Section 278
  • CIL
  • Building Control
  • Planning Consultant
26
Q

How are build costs on BCIS usually expressed?

A
  • In terms of GIA

- Prices obtained by Quantity Surveyors on a monthly basis

27
Q

What would be included in your estimate for professional fees?

A 
Architect - 3.5%
Project Manager - 1.5%
Quantity Surveyor - 1.5%
Structural Engineer - 1.5%
Mechanical & Electrical Consultant - 1%
Other consultants - 1%

Can vary based on size and complexity of project

28
Q

What would your marketing costs typically include?

A
  • Cost of a show flat
  • Cost of mobilisation
  • Cost of an EPC
  • Cost of marketing team
29
Q

How would you estimate your interest rate?

A
  • Rate at which client can borrow money
  • If uncertain, can use LIBOR + premium
  • Could also use Bank of England Base Rate + Premium
30
Q

What is the current Bank of England Base Rate (May 2021)

A

0.1%

31
Q

What are the three stages for which a developer needs to borrow money?

A 
Land (straight line)
Construction (s-Curve)
Hold period (straight line)
32
Q

What is the concept of an S-Curve?

A
  • Development costs are less intense at the start and end of the construction period
  • Reflects typical drawdown
33
Q

How would you calculate an S-Curve manually?

A
  • Total construction costs over half the time
34
Q

What is an overage?

A

The sharing of any additional profits over and above the expectations, usually agreed in a pre-agreed formula

35
Q

What are the different types of sensitivity analysis?

A

Simple sensitivity analysis - Shifting key variables such as build cost or GDV

Scenario analysis - changing scenarios for the development content/timing/costs such as phasing the scheme or modifying the design

Monte Carlo - Using probability theory with software such as Crystal ball?

36
Q

What do developers perceive to be the greatest risk?

A

Planning permission

37
Q

Can you tell me about the competing schemes in Milton Keynes?

A
  • Solstice apartments

- The Hub

38
Q

Why were you able to pay more on the basis of build to sell?

A
  • Investors typically look for a discount to OMV in their “break up value” relative to the risk
  • Where exit values go above a certain level, BTR values can not compete because rental values do not go up pro-rate
39
Q

What Guidance have the RICS issued with regards to valuing development property?

A

RICS Guidance Note Valuation of Development Property 2019

  • Aims to supplement IVS 410 “Development Property”
  • Suggests a surveyor should use at least two methods of valuation (comparable / residual) etc
  • Establishes that common basis of val is MV
  • Requires you to undertake risk analysis

RICS FINAL INTERVIEW (21 decks)

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