LVL 1 Development Appraisal Flashcards
How do external factors affect the appraisal process ?
Development Appraisals are sensitive to many factors, particularly to the variables that are put into the appraisal, such as construction costs, rates of interest, the yield and the rent.
How can planning requirements can be reflected
If I was undertaking a residential appraisal I would take into account an appropriate level of s.106 and CIL costs, that I would find out about from the relevant planning authority, and this would be deducted from the GDV after accounting for construction costs, and a contingency.
How would you use sensitivity analysis in a development appraisal context.
Simple Sensitivity Analysis which look at changes to specific variables include build costs, affordable requirement, sales value etc. Alongside this, a valuer can consider a Scenario Analysis, which consider the impacts to variables based on differing economic conditions. For example, changes in interest rates or rental growth rates.
What are the main varaibles in a development appraisal ?
The main variables contained within appraisals
include the GDV, build costs, profit margin, finance,
timescale and ‘abnormal’ costs such as ground
conditions and planning obligations
Why a S Curve
Most project costs are not spent linearly (or straight-line). You typically start by spending less per period in the earlier months while you’re ramping up construction, spend more per period in the middle months when construction is humming along, and then less per period in the latter months as construction winds down. The result, if you graph the cumulative cash outflows, looks like an ‘S’ tipped on its side. And interestingly enough, if you graph the cash flows by period, the resulting graph is a normal distribution
Where would you typically get your finance rate for a development appraisal from?
Firstly check with your client as they may have a specific loan facility and be able to borrow money at a certain rate, I would then use that.
I would also look at comparable scheme to see what finance rate had been used. However the best way of working out the best level of finance achievable for the scheme would be to talk to the developer, and find out what finance arrangements he has been able to find on recent projects, and compare the market conditions then with the current market.
A typical market finance rate would be 6%.
Interest should also be calculated to cover the time period from the purchase of the land, the construction of the building and any projected letting / sale void upon completion of construction.
