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Development appraisal > General subs and dev app > Flashcards

General subs and dev app Flashcards

1
Q

When might you undertake a development appraisal?

A

To assess the financial viability of a development scheme, to establish a residual site value, to assess sensitivity to changing inputs or viability of different uses, rents etc.

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2
Q

What are the key variables to be inputted into a development appraisal?

A
  1. Gross development value
  2. Site preparation costs
  3. Planning costs - CIL & s106 costs, specialist reports may be required
  4. Building costs
  5. Professional fees - inc architects, M&E, PM, structural
  6. Marketing - should be based on evidence/ quotes
  7. Other fees - EPC costs, NHBC warranty
  8. Sale fee
  9. Letting fee
  10. Finance
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3
Q

Which professional fee are usually the largest proportion of total fees?

A

Architects

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4
Q

How to calculate finance?

A

Assume 100% debt finance over 3 elements:
1. Site purchase - calculated on a straight line basis - compound interest
2. Construction period and associated costs - based on an s curve taking half the costs over the length of the build programme
3. Holding costs - cover void until the disposal of the scheme (e.g. empty rates, service charges, interest charges) - compound interest on a straight line basis

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5
Q

What are the two main methods of development funding?

A

Debt finance - lending money from a bank or other institution
Equity finance - selling shares in a company or own money

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6
Q

What is a typical loan to value ratio?

A

50-70% - 60% typical

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7
Q

What is senior debt?

A

The first level of borrowing - this takes precedence over secondary and mezzanine funding

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8
Q

What is mezzanine funding?

A

Additional funding for money required over the LTV lending

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9
Q

What is a swap?

A

A form of derivative hedging rate for interest rates, a swap rate is the market interest rate for a fixed term, fixed rate loan, it reflects the market expectations of the future direction of interest rates at central banks - can be 2 year, 5 year, 10 year

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10
Q

What is the current SONIA swap rate?

A

Around 4.5%

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11
Q

When and why is an S curve used in the calculation of finance costs?

A

Reflects when money is actually being drawn down, used to calculate finance costs over the construction period.

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12
Q

What is a typical developers profit?

A

15-20% of build costs
GDV can also be used, particularly for residential schemes but higher risk

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13
Q

Why might developers profit vary?

A

Risk-based, on costs or on GDV

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14
Q

What external factors impact development appraisals?

A

Build costs + labour market
finance costs
property market
land values

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15
Q

Why use a sensitivity analysis?

A

To assess the impact of changing external factors on the viability of a development

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16
Q

What are typical finance costs?

A

Currently using 7-8%

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17
Q

What’s a typical developer’s contingency?

A

5 - 10%

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18
Q

What are typical sales and letting fees?

A

Sales - 1-2% GDV, Letting - 10% initial annual rent

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19
Q

How do you undertake a sensitivity analysis?

A

Make incremental changes to the factors being tested to test the outcomes, usually done on valuation software such as ARGUS developer

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20
Q

What is the relevance of the 1990 Town & Country Planning Act to valuations?

A

Introduced s106 contributions

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21
Q

What is s106 of the 1990 Town & Country Planning Act?

A

A legal agreement for planning obligations to gain consent - these provide a way to address matters needed to make a development acceptable in planning terms - can relate to infrastructure, health, affordable housing

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22
Q

What is a CIL?

A

Community Infrastructure Levy - charged by most LPA (local planning authorities)

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23
Q

Where is the % of affordable housing usually set out?

A

Local planning policy

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24
Q

What other obligations could planning policy require?

A

Financial contributions to local services, provision of open spaces

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25
Q

What is a section 278?

A

Dictated by the Highways Act 1980 - allows developers to enter an agreement with the council to make alterations and improvements to highways as part of a planning application

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26
Q

What are limitations of a residual valuation and how can these be limited?

A
  1. Need accurate information and inputs, doesn’t consider timing of cash flows
  2. Very sensitive to minor adjustments
  3. Assumptions are implicit

The limitations can be limited by cross checking the site value against comparable evidence

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27
Q

What is the RICS guidance on Development valuation?

A

RICS GN ‘Valuation of a development property’ 2019

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28
Q

What’s the difference between a residual valuation and a development appraisal?

A

Residual valuation calculates the value of the site as it currently is, a development appraisal assesses the viability or profitability of a scheme.
In a development appraisal, profit is an output, in a residual valuation it is an input.

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29
Q

Any recent changes to the key inputs?

A

Dramatic changes to finance costs and build rates

30
Q

What is the advantage of using debt over equity

A

Leveraging, don’t lose control over the company and relationship with lending body ends once debt is repaid, likely that removing equity investors will be more expensive than the money they’ve provided

31
Q

What is SONIA?

A

Sterling Overnight Index Average - run by the bank of England, based on actual transactions - average of interest rates paid by banks borrowing sterling overnight from other financial institutions and institutional investors (swap rate)

32
Q

Can a forward sale be used to fund construction?

A

No - money must be held in escrow until completion

33
Q

Why might BCIS be inappropriate?

A

For an unusual asset

34
Q

What sensitivities did you consider when undertaking your sensitivity analyses?

A

Build costs and sales values

35
Q

How long does planning permission last for?

A

3 year

36
Q

What are the possible costs in planning?

A
  1. s.106 payments under Town & Country Planning Act 1990
  2. CIL (Charged LPA)
  3. Affordable housing contributions
  4. Other planning obligations e.g. infrastructure, public spaces etc
  5. s278 payments for highway works
    Planning application and building reg fees
  6. Costs of a planning consultant
    7.Costs of a specialist report required by the LPA e.g. environmental assessments
37
Q

How would you adjust your appraisal if there was no planning permission?

A

Include assumptions for planning costs and increase developer’s contingency to reflect risk

38
Q

What is the impact of time delays on development?

A

Time delays can reduce profitability due to hold costs, finance costs etc

39
Q

What is a mortgage lender?

A

Financial institution or mortgage bank that offers and underwrites home loans, specific guidelines to verify credit and ability to repay and set terms, interest rates, repayment schedule and other aspects the mortgage

40
Q

What are the key types of mortgage lender

A
  1. Traditional lenders
  2. Bridging finance lenders
  3. Alternative lenders - peer-to-peer and online lenders
  4. Commercial and specialist lenders - invoice finance and asset finance
41
Q

What are traditional lenders?

A

e.g. High street banks - acquire funds from depositors and investors and then make available as interest-bearing loans subject to under-writing requirements - security or credit depending on the size of the loan.

Typically have robust requirements which can be expensive to fulfil and result in slow access to cash but typically charge the lowest interest rates.

42
Q

What are bridging finance lenders?

A

This finance may also be offered by traditional lenders - can borrow to cover short term cash flow problems but with higher interest rates

43
Q

What are alternative lenders?

A

Offer loans outside the normal banking system and often aren’t subject to as much regulation as traditional lenders, can provide short term credit and may not require security:
1. Peer to peer - borrowing from investor rather than a bank, usually through a platform that allows parties to bypass banks - often more flexible and less strict - can access cash more quickly but interest often high
2.Online Lenders - fully online, easy to be approved than a traditional bank, less info required, people can get loans who otherwise wouldn’t qualify - high interest

44
Q

What are commercial and specialist lenders?

A

Invoice finance - lender buys outstanding invoices and therefore can release money owed by the customer - this is split into factoring (lender manages sales and collects money directly from customers) and discounting (lenders release funds and you pay back the outstanding balance as the customer pays invoices) - quicker to obtain than traditional loans but can be more expensive - cost usually as service or discount charge
Asset finance - finance provides funds for borrower to purchase essential assets for their business, lending against the assets - 3 types - asset finance and leasing agreements (lender buys assets and leases back to your company at a set amount), hire purchase asset (business pays deposit + monthly installments for an agreement period and owns assets at the end of the term), refinancing agreements (lends buys equipment from you and leases it back, releasing capital tied up in the assets)

45
Q

What is a mortgage broker?

A

Intermediary between borrower and lender - often independent so can look for the best deals by considering several lenders

46
Q

You say, ‘I included for a possible profit erosion’, what does that mean?

A

In my report, I included the time scale at which profit would fall below the 20% profit on cost I had allowed, this showed the impact of delays on the viability of the scheme

47
Q

What is the relevance of the purpose being loan security?

A

Needed to consider factors which posed a risk to value, e.g. profit erosion, external factors and whether small changes would mean the property did not provide a suitable security

48
Q

How do pre-lets reduce risk and how would you build this into an appraisal?

A

Pre-lets reduce risk as an income is secured, the date and amount is fixed, this reduces risks around delays and associated costs, I would reduce contingency to reflect the reduced risk, in some cases you could also reduce profit %, I would include the pre-lets in my cash flow.

49
Q

What’s the base rate?

A

5.25%

50
Q

What’s SONIA?

A

5.19%

51
Q

What were the base rate and SONIA a year ago?

A

Base rate - 3.5%
SONIA - 2.2%

52
Q

Development finance - what would you call the additional interest v the base rate?

A

Premium - usually 2.5% but based on risk

53
Q

What are the 3 key inputs into a development appraisal?

A

Gross Development Value
Land Cost
Build Cost

54
Q

Where do you get planning costs from?

A

-Developer, market evidence, planning consultancy
-Look at planning permission for s106
-CIL rate from local authority website
-Planning consultancy fees
-Discharging conditions of consent
-Cost of application to LPA, cost of pre-app

55
Q

What is a section 106?

A
  • Developer contribution or ‘planning gain’
56
Q

What goes into a s106?

A

-Social housing contribution
-Contributions towards public amenity spaces and infrastructure (not covered by CIL)
-Contributions towards requirements e.g. education, medical etc

57
Q

What is affordable housing?

A

Housing for those whose needs are not met by the market

58
Q

What are affordable housing targets?

A

NPPF - over 0.5 hectares should have 10%, however there are variable targets in local plans - LPA dictates

59
Q

What are the 3 main tenures of affordable housing?

A
  • Low cost rented - divided into social rent and affordable rent
  • Intermediate
60
Q

What is social rent?

A

Main low cost rented housing pre 2011, let on ASTs at rents based on ‘national rent regime’

61
Q

What is affordable rent?

A

Main low cost rented product post-2010
Based on up to 80% of the value of affordable housing
Let on a fixed term basis

62
Q

What is intermediate rent?

A

Number of tenures including shared ownership, discounted market sale, intermediate rent
Based on eligibility criteria - outside of London this is a £80k household income, in London it’s £90k
- Rent products are based on 80% MR

63
Q

What’s the key guidance on valuing affordable housing?

A

RICS GN: Valuation of land for affordable housing 2016

64
Q

How would you value affordable housing?

A

Discount of 30-50% on MV - making a bigger discount for social/ affordable rent than intermediate

65
Q

What other charge would be associated with finance other than the interest rate?

A

Administrative charge – 0.75-1% of the loan

66
Q

What would you consider typical time scales to be?

A

Very much dependent on the scheme but would consider 12m planning, 12m construction, 4m post construction to be typical

67
Q

When valuing development land, how do you account for timescales in your valuation?

A

Land value is deferred until the end of the appraisal - so don’t account for voids for planning etc in appraisal
But do account for voids associated with RF using NPV

68
Q

How do pre-lets work?

A

-Tends to be for an agreement for lease
-Contract between parties to enter a lease – contractual obligation to enter into a lease at a fixed date, usually subject to the satisfaction of conditions set out in the agreement

69
Q

What do you need to be careful about with profit erosion?

A

Provisions such as stepped rents can distort profit erosion

70
Q

Fulham – why so high – 12.5%?

A

-12.5% is still very high
-Scheme had been halted halfway through – based on loan security purpose need to consider that a purchaser looking at a half completed scheme – uncertainty around the costs, can be issues around warranties
-Based on the advice of more senior and experienced colleagues
- build cost inflation

71
Q

What is the swap rate?

A

Fixed interest rate received for a set period - lenders use this to reduce their exposure to interest fluctuations

Development appraisal (1 decks)

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