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RICS APC > Development Apprasial > Flashcards

Development Apprasial Flashcards

1
Q

What is a Development Appraisal?

A

A series of calculations to establish:

  • Value
  • Viability
  • Profitability
  • Suitability

Of a proposed scheme based on inputs

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2
Q

What are Development Appraisals used for?

A
  • To establish if a development should proceed given the profit after all the costs
  • Can be used for Affordable Housing Viability
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3
Q

What is the methodology for a Residual Valuation?

A

GROSS DEVELOPMENT VALUE

  • Find the market value of the site, based on market inputs.
    Comparable method used to establish rents and yields.
  • All risk yield is often applied.
    Rent free and voids are to be assumed.

MINUS

TOTAL DEVELOPMENT COSTS

  • Site Preparation:
    Demolition,
    `remediation works,
    services,
    clearance (based on contractors estimates)
  • Planning Costs:
    Section 75’s,
    consultant fee’s
    specialist reports.
  • Buildings costs:
    Total cost of building works
  • Professional Fees:
    10% - 15% of total construction costs. Usually for architects, project managers, engineering consultants.
  • Contingency:
    5% - 10% of total construction costs.
  • Marketing Fees
    Sale fee (1-2%)
    Letting fee (10% of annual rent)
    EPC Costs
  • Purchaser Costs:
    (1%) agents fee,
    (0.5%) legal fee,
    LBTT/Any tax
  • Finance Costs:
    Interest rates (plus 3% premium) costs of borrowing.

MINUS

DEVELOPERS PROFIT

Usually in the region of 20% of GDC

= Site Value

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4
Q

What is the methodology of a Development Appraisal?

(same as residual but with site value)

A

Gross Development Value

Minus

Total Development Costs

Minus

Site Value

= Profitability

Sensitivity Analysis

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5
Q

What is a Residual Valuation used for?

A
  • Used to value a site or land to find the highest and best use of the land
  • Typically used as a Red Book Valuation.
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6
Q

How do you establish GDV?

A
  • Find Market Value of the site based on market inputs
  • Comparable method used to establish rents and yields
  • All Risk Yield often applied
  • Any rent free or voids assumed
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7
Q

What are some Gross Development Costs?

A
  • Site Preparation:
    Demolition 20k,
    remediation works,
    services, clearance (based on contractors estimates)
  • Planning Costs:
    Section 75’s,
    consultant fee’s,
    specialist reports
  • Buildings cost per sq ft
    (Total cost of works)
  • Professional Fees:
    (10-15%) of total construction costs. architects, project managers, engineering consultants.
  • Contingency Fees:
    (5-10%) total construction costs
  • Marketing Fees
    Sale fee (1-2%)
    Letting fee (10% of annual rent)
    EPC Costs
  • Purchaser Costs:
    (1%) agents fee,
    (0.5%) legal fee,
    LBTT/Any tax
  • Finance Costs:
    Interest Rates (%) plus 3% premium
    borrowing costs
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8
Q

What is usually Developers Profit?

A

Usually around 20% of GDC

  • Depends of risk (25% if no planning)
  • Can be on GDV or GDC
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9
Q

What is the difference between a Development Appraisal and a Residual Valuation?

A
  • Development Appraisal gives you the profitability of a site when land value is known

where as

  • Residual valuation gives you the value of the land
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10
Q

What is a sensitivity Analysis ? and what is it used for?

A
  • Analysis of the impact of changing key variables eg)
  • Build costs, GDV, Yields etc
  • Used for risk in terms of how changes of inputs affect profitability or viability of a scheme
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11
Q

What types of Sensitivity Analysis are there?

A
  • 3 Forms
  1. Simple: analysis of key variables
  2. Scenario: changes to development eg) phasing or design changes
  3. Monte Carlo: Probability theory using software like Crystal Ball
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12
Q

What is an S Curve?

A

Reflects the payment of construction costs, shaped over the length of the development.

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13
Q

Define GDV?

A

The market value of the proposed development once completed

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14
Q

What are Developer Contributions?

A
  • Mandatory Requirements that benefit the community paid/contributed to by developers
  • Education, Roads, Affordable housing
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15
Q

What are the limitations to a Residual Valuation?

A
  • Relies on accurate information/inputs
  • BCIS updating
  • Doesn’t consider timing of cash flow
  • Sensitive to minor adjustments
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16
Q

What are the LBTT levels ?

A

Land and Buildings Transaction Tax

  • Up to £150,000 = 0%
  • £150,001 to £250,000 = 1%
  • Above £250,00 = 5%
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17
Q

What is an interest rate?

A

The rate of borrowing which is applied in development appraisals

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18
Q

What is net development value?

A

Gross Development Value
Minus
Assumed sales costs.

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19
Q

When analysing the development potential of a property, a valuer should consider?

A
  • Planning permission
  • Available services
  • Infrastructure
  • Ground conditions
  • Development constraints
  • Accessibility
  • Car parking
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20
Q

What two methods of valuation are usually used in development property ?

A
  • Comparable method
  • Residual method
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21
Q

Talk me through the process of a residual development valuation?

A
  1. Instruction - AML, T+C’s agreed.
  2. Investigation: Inspection, property analysis, market research.
  3. Collection of data: Specific to the development.
  4. Qualification and Verification
  5. Valuation Report
22
Q

Do you base profit on GDC or GDV?

A
  • Typically if commercial development market practice is on GDC
  • Resie is on GDV
  • But it can be clients preference and usually clients dont mind as long as positive NPV
23
Q

What do you know about the RICS Guidance is there for Development Property?

A
  • RICS Guidance Notes Valuation of Development Property 1st Edition 2020
  • It supplements IVS 4 Development Property
  • Use of Assumptions and Special Assumptions
  • Basis of Market Value
24
Q

How can interest rates affect developments?

A
  • This can affect the price of debt on the development
  • Represents the minimum cost of borrowing money
25
Q

What is common finance for a development?

A
  • Debt Finance
  • Lending money from a bank or financial institution
26
Q

What are the two types of Development Finance?

A
  1. Debt Finance: Lending from a bank or funding institution
  2. Equity Finance: Selling Shares, JV’s, own money
  • Mezzanine Finance is additional funding outside of high street banks (15%)
27
Q

Coldrach

Why did you run 3 appraisal scenarios?

A
  • To show a variety of scenarios to the council that the scheme with S75 wasn’t viable
  • Want to take the development on and rebuild a steading development in the National Park
28
Q

What is BCIS and what are the prices based upon?

A
  • Building Cost Information Service
  • QS sources/recent contract prices
  • measured in GIA
  • Run by RICS
  • Can be out of date
29
Q

Madras

You mention Special Assumption, what is this?

A
  • An assumption that is assumed to be true but is not
  • Planning in this case was a fair and reasonable special assumption for this project
30
Q

Madras

How did you assess the rents?

A
  • Looking at market comps for similar spec and size accommodation
  • Limited due to only 2 private schemes so also looked at similar size private flats
  • Looked at similar University Towns
31
Q

Madras

Can you elaborate on the build costs? What components or factors did you consider when estimating construction expenses?

A
  • A cost plan came from the clients architects
  • They had suggested build costs of £95,000 per room
32
Q

Madras

How was your exit yield influenced and what was it?

A
  • Through rationale and market evidence
  • 5.25%
33
Q

Madras

Why was your exit yield high?

A
  • Reflects the evidence
  • Little trading in St Andrews (2 Private schemes)
  • Looked at similar Uni towns
  • Investor demand
34
Q

Madras

How did you calculate your total rent?

A
  • Units x Term x Rent per week + Voids@1.5 + Fees@1.5%
35
Q

Madras

What were the profit that you included in the development appraisal?

A
  • 20% on GDC
36
Q

Madras

Where there any special costs associated with this project?

A
  • Planning
  • Surveys
  • Bank Monitoring
  • Potential s75
  • Scheme Mobilisation
37
Q

Newburgh

At Newburgh, how did you account for the 20% affordable housing requirement in your appraisal?

A
  • This was account for via the Government Incentives given for affordable housing and adopted within then appraisal
38
Q

Coldrach

How did you allow for the S75 in your appraisal?

A
  • The S75 was for affordable housing contributions
  • The contribution was monetary and so was made allowance for in the appraisal
  • To show the scheme would not be viable with this S75 in place
39
Q

How would you calculate development finance?

A
  • Interest rate (5.25%) plus 3%
  • Madras was total 7.5%

Interest rate plus 3% premium

40
Q

What is Overage?

A
  • Arrangement made for the sharing of extra receipts made over original profit expected
  • Pre arranged sharing between developer and seller
41
Q

What is Profit Erosion?

A
  • Length of time it will take for development profit to be eroded by holding charges after schemes completion
  • Usually interest rates or scheme making a loss
42
Q

Coldrach

What were the 3 scenarios you ran?

A
  1. Appraisal assuming 17.5% profit
  2. Reducing profit to 10%
  3. Using Purchase Price of £350,000 which only gave 5.2%
  • Professional fees 10%
  • Contingency at 5%
  • Sales cots 1.5%
  • Finance around 6-7%

Interest rate was only 3% in Nov 2022

43
Q

Coldrach

What profit was used for the first scenario?

A
  • 17.5% on GDC

Smaller development

44
Q

Coldrach

What was the viability outcome of the appraisal?

A
  • The development was only viable when Section 75 Affordable housing contribution wasn’t provided
  • Wanting council flexibility to bring forward development that would allow for the reuse of a vacant steading
45
Q

Coldrach

What were your build costs?

A
  • £1,800 per sqm for the Steading conversion
  • £1,700 per sq m for the new build holiday chalet
46
Q

Newburgh

What was your timescales?

A
  • 24 months Construction
  • 24 months sales

Total: 48 months

47
Q

Newburgh

You mention Professional Fees, what did that include?

A
  • 10-15% of total construction costs
  • Architects fees
  • Project managers
  • Engineering consultants
48
Q

Newburgh

What costs did you apply?

A
  • Professional fees 10%
  • Contingency 5%
  • Profit 20%
  • Finance 5+3%
  • Build costs: £1,450 per sqft
49
Q

Madras

You mention Purpose Built Student Accommodation, what issues did this bring up

A
  • Proximity to residential housing
  • Overhead lines in on the site
50
Q

Where do you get build costs from?

A
  • BCIS
  • Cost plan from clients
  • Liasing with BS team
51
Q

Newburgh

What is this market like?

A
  • Commuter town
  • Good transport links to Dundee and Edinburgh
  • Variety in level of sales

RICS APC (24 decks)

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