Development Apprasial Flashcards
What is a Development Appraisal?
A series of calculations to establish:
- Value
- Viability
- Profitability
- Suitability
Of a proposed scheme based on inputs
What are Development Appraisals used for?
- To establish if a development should proceed given the profit after all the costs
- Can be used for Affordable Housing Viability
What is the methodology for a Residual Valuation?
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
What is the methodology of a Development Appraisal?
(same as residual but with site value)
Gross Development Value
Minus
Total Development Costs
Minus
Site Value
= Profitability
Sensitivity Analysis
What is a Residual Valuation used for?
- Used to value a site or land to find the highest and best use of the land
- Typically used as a Red Book Valuation.
How do you establish GDV?
- 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
What are some Gross Development Costs?
- 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
What is usually Developers Profit?
Usually around 20% of GDC
- Depends of risk (25% if no planning)
- Can be on GDV or GDC
What is the difference between a Development Appraisal and a Residual Valuation?
- 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
What is a sensitivity Analysis ? and what is it used for?
- 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
What types of Sensitivity Analysis are there?
- 3 Forms
- Simple: analysis of key variables
- Scenario: changes to development eg) phasing or design changes
- Monte Carlo: Probability theory using software like Crystal Ball
What is an S Curve?
Reflects the payment of construction costs, shaped over the length of the development.
Define GDV?
The market value of the proposed development once completed
What are Developer Contributions?
- Mandatory Requirements that benefit the community paid/contributed to by developers
- Education, Roads, Affordable housing
What are the limitations to a Residual Valuation?
- Relies on accurate information/inputs
- BCIS updating
- Doesn’t consider timing of cash flow
- Sensitive to minor adjustments
What are the LBTT levels ?
Land and Buildings Transaction Tax
- Up to £150,000 = 0%
- £150,001 to £250,000 = 1%
- Above £250,00 = 5%
What is an interest rate?
The rate of borrowing which is applied in development appraisals
What is net development value?
Gross Development Value
Minus
Assumed sales costs.
When analysing the development potential of a property, a valuer should consider?
- Planning permission
- Available services
- Infrastructure
- Ground conditions
- Development constraints
- Accessibility
- Car parking
What two methods of valuation are usually used in development property ?
- Comparable method
- Residual method
Talk me through the process of a residual development valuation?
- Instruction - AML, T+C’s agreed.
- Investigation: Inspection, property analysis, market research.
- Collection of data: Specific to the development.
- Qualification and Verification
- Valuation Report
Do you base profit on GDC or GDV?
- 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
What do you know about the RICS Guidance is there for Development Property?
- 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
How can interest rates affect developments?
- This can affect the price of debt on the development
- Represents the minimum cost of borrowing money
What is common finance for a development?
- Debt Finance
- Lending money from a bank or financial institution
What are the two types of Development Finance?
- Debt Finance: Lending from a bank or funding institution
- Equity Finance: Selling Shares, JV’s, own money
- Mezzanine Finance is additional funding outside of high street banks (15%)
Coldrach
Why did you run 3 appraisal scenarios?
- 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
What is BCIS and what are the prices based upon?
- Building Cost Information Service
- QS sources/recent contract prices
- measured in GIA
- Run by RICS
- Can be out of date
Madras
You mention Special Assumption, what is this?
- 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
Madras
How did you assess the rents?
- 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
Madras
Can you elaborate on the build costs? What components or factors did you consider when estimating construction expenses?
- A cost plan came from the clients architects
- They had suggested build costs of £95,000 per room
Madras
How was your exit yield influenced and what was it?
- Through rationale and market evidence
- 5.25%
Madras
Why was your exit yield high?
- Reflects the evidence
- Little trading in St Andrews (2 Private schemes)
- Looked at similar Uni towns
- Investor demand
Madras
How did you calculate your total rent?
- Units x Term x Rent per week + Voids@1.5 + Fees@1.5%
Madras
What were the profit that you included in the development appraisal?
- 20% on GDC
Madras
Where there any special costs associated with this project?
- Planning
- Surveys
- Bank Monitoring
- Potential s75
- Scheme Mobilisation
Newburgh
At Newburgh, how did you account for the 20% affordable housing requirement in your appraisal?
- This was account for via the Government Incentives given for affordable housing and adopted within then appraisal
Coldrach
How did you allow for the S75 in your appraisal?
- 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
How would you calculate development finance?
- Interest rate (5.25%) plus 3%
- Madras was total 7.5%
Interest rate plus 3% premium
What is Overage?
- Arrangement made for the sharing of extra receipts made over original profit expected
- Pre arranged sharing between developer and seller
What is Profit Erosion?
- 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
Coldrach
What were the 3 scenarios you ran?
- Appraisal assuming 17.5% profit
- Reducing profit to 10%
- 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
Coldrach
What profit was used for the first scenario?
- 17.5% on GDC
Smaller development
Coldrach
What was the viability outcome of the appraisal?
- 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
Coldrach
What were your build costs?
- £1,800 per sqm for the Steading conversion
- £1,700 per sq m for the new build holiday chalet
Newburgh
What was your timescales?
- 24 months Construction
- 24 months sales
Total: 48 months
Newburgh
You mention Professional Fees, what did that include?
- 10-15% of total construction costs
- Architects fees
- Project managers
- Engineering consultants
Newburgh
What costs did you apply?
- Professional fees 10%
- Contingency 5%
- Profit 20%
- Finance 5+3%
- Build costs: £1,450 per sqft
Madras
You mention Purpose Built Student Accommodation, what issues did this bring up
- Proximity to residential housing
- Overhead lines in on the site
Where do you get build costs from?
- BCIS
- Cost plan from clients
- Liasing with BS team
Newburgh
What is this market like?
- Commuter town
- Good transport links to Dundee and Edinburgh
- Variety in level of sales
