Subs: Development Appraisals Flashcards
What is the difference between a development appraisal and a residual valuation?
- Development appraisal: establish the viability/profitability of a proposed development using a client’s inputs
- Residual valuation: establish the market value of a site using market inputs
What is the methodology for calculating residual site value?
Gross development value (GDV) - Total development costs (TDC) = Gross site value
Gross site value - purchasers’ costs = Residual site vale
What costs would you allow for as part of total development costs?
Site preparation
Planning costs
Building costs
Professional fees + VAT
Contingency
Marketing costs & fees
Finance costs
Developers profit
What would be included in your estimate for site preparation costs and how would you estimate them?
Demolition, remediation works, landfill tax, site clearance, levelling and fencing
Obtain a contractor’s estimate for these works
What would be included in your estimate for planning costs?
- Section 106 payments under the Town and Country Planning Act 1990
- Community Infrastructure Levy (CIL) charged by most Local Planning Authorities
- Required percentage of affordable housing for a new residential development in the form of social, intermediate and key worker housing
- Section 278 payments for highway works
- Planning application and building regulation fees
- Costs of planning consultants
- Cost of any specialist reports required by the LPA (e.g. Environmental Assessment)
How would you estimate the building costs?
Internal information
Quantity Surveyor estimate / bill of quantities / cost estimate
Building Surveyor estimate
RICS Building Cost Information Service (BCIS)
What would you typically estimate for contingency costs?
5-10% of total construction costs (depending on the level of risk and likely movements in building costs)
What would you typically estimate for developers profit?
15-20% of total construction costs or GDV (GDV more frequently used as a base for residential use)
Consented sites will typically have a profit on cost of 15-20%. Non-consented sites will have 20-25%, depending on how it complies to local policies and whether they’d had a positive pre-application
How should you verify the output of a development appraisal?
Cross check site value with comparable site sales if possible
When conducting a residual site valuation, what date should the inputs be taken from?
Taken at the date of valuation
What are the limitations of the residual valuation methodology?
- Dependent on accurate information and inputs
- Does not consider timing of cash inflows
- Very sensitive to minor adjustments
- Implicit assumptions hidden and not explicit
- Assumes 100% debt finance
What financing rate would you typically assume when running a residual valuation?
Depends on the risks associated with the site. Typically this would be around 5.5% but are likely to increase to 6% or more given the current uncertainties in the debt market
What is GDV?
Gross development value (GDV) is the estimated contract price or Market Value of the completed development. States gross as it is prior to any marketing fees being deducted
What do developers consider the greatest risk when undertaking a development?
Planning permission
What would be included in your estimate for professional fees and how would you estimate them?
- Architects, M&E consultants, project managers, structural engineers, quantity surveyors
- Typically 10-15% (plus VAT) of total construction costs
- Can vary them depending on the complexity of the project e.g. lower architects fees required for an industrial warehouse than a high-rise residential building
