Valuation of development property

Question 1

What are Acquisition/Disposal Costs?

Answer 1

The costs associated with the acquisition or disposal of property, usually including legal and agent fees, as well as any purchases or sales tax.

Question 2

What is a Cash Flow?

Answer 2

A cash flow is the movement of money by way of income, expenditure and capital receipts and payments during the development.

Question 3

What is Interest Rate?

Answer 3

The rate of finance applied in a development appraisal. This can vary within a project for different levels of senior and mezzanine finance

Question 4

What is IRR?

Answer 4

Internal Rate of Return -

The rate of interest at which all future project cash flows will be discounted on order that the net present value of those cashflows, including the initial investment, be equal to zero.

IRR can be assessed on both gross and net of Fiannce.

Question 5

What is a Discounted Cash Flow?

Answer 5

A method of valuation explicitly setting out the inflows and outflows of an investment / development.

Question 6

What are Developer Contributions?

Answer 6

Obligations often tried to the grant of development permissions providing a benefit to the community, either generally or in a particular locality. They are often mandatory requirements that have to be provided in order to undertake a development.

Question 7

What is a Development Appraisal?

Answer 7

A financial appraisal of a development.

This is normally used to calculate either the residual site value or the residual development profit , but it can be used to calculate other outputs.

Question 8

What is Development Profit?

Answer 8

The amount by which (on completion or partial completion of a development), the estimated income of a development exceeds the total outlay. This can be expressed in various forms such as:

Profit on Costs
Profit on GDV

Question 9

What is Development Risk?

Answer 9

The risk associated with the implementation and completion of a development, including post-construction letting and sales.

Question 10

What is Development Yield?

Answer 10

The rental income divided by the actual cost incurred in realising the development. This can be based on either current or future estimates of the rental value of the completed development.

Question 11

What is Initial Development Yield?

Answer 11

The development yield calculated over the entire project. It is defined as the stabilised income divided by the total construction costs (excluding interests and fees).

Question 12

What is a Discount Rate?

Answer 12

The rate of intertest selected when calculating the present value of some future cost of benefit.

Question 13

What is GDV?

Answer 13

Gross Development Value -

The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.

Where an income capitalisation approach
is used to estimate the GDV, normal assumptions should be made within the market sector concerning the treatment of purchaser’s costs.

The GDV should represent the expected contract price.

Question 14

What is Gross External Area?

Answer 14

The aggregate external area of a building
or footprint, taking each floor into account,
measured with reference to the appropriate
code of measuring practice.

Question 15

What is Gross Internal Area?

Answer 15

Measurement of a building on the same
basis as gross external area – but excluding
external wall thicknesses. Net sales area
is the gross internal area of a residential
dwelling subject to certain inclusions and
exclusions.

Question 16

What is Holding Cost?

Answer 16

The costs involved in owning a site or property, which

Question 17

What is Hope Value?

Answer 17

An element of market value in excess of the
existing use value, reflecting the prospect
of some more valuable future use.

Question 18

What is Net Cash Flows?

Answer 18

The cash flow generated by the project. These can be assessed both gross and net of taxes and both gross and net of Fiannce.

Question 19

What is Net Present Value?

Answer 19

The sum of the discounted values of a net cash flow including all inflows and outflows, where each receipt/payment is discounted to its present value at a specified discount rate. Where the NPV is Zero, the discount rate is also the internal rate of return.

Question 20

What is the NPV method?

Answer 20

A method used in discounted cash flow analysis to find the sum of money representing the difference between the present value of all inflows and all outflows of cash associated with the project by discounting each at specified discount rate.

Question 21

What is an Opportunity Cost?

Answer 21

The return or benefit foregone by pursuing an alternative action.

Question 22

What is Optionality?

Answer 22

Often referred to as a real option being the right but not the obligation to pursue a particular course of action, i.e sell, hold/retain or develop a property.

Question 23

What is an Outturn Model?

Answer 23

A development appraisal that has been
adapted to project various inputs, usually
both in respect of values and costs

Question 24

What is Profit on Cost?

Answer 24

The profit of the project expressed as a percentage of the total development costs.

Question 25

What is Profit on Value?

Answer 25

The profit of the project expressed as a percentage of the project’s net development value.

Question 26

What is the Residual Method of Valuation?

Answer 26

A valuation/appraisal of a development based on a deduction of the costs of development from the anticipated proceeds. The residual is normally either development profit or land value.

Question 27

What is Residual Site Value/Residual Land Value?

Answer 27

The amount remaining once the gross development costs of a project is deducted from its gross development value (GDV) and an appropriate return has been deducted.

Question 28

What is Return (on Capital)?

Answer 28

The ratio of annual net income to capital delivered from analysis of a transaction and expressed as a percentage.

Question 29

What is Risk Adjusted Return?

Answer 29

The discount rate as varied to reflect the
perceived risk of the development.

Question 30

What is Sensitivity Analysis?

Answer 30

A series of calculations resulting from the residual appraisal involving one or more variables (rent, sales values, build costs) that are varied to show the differing results.

Question 31

What is Stabilised Income?

Answer 31

The sum of the rental income, additional
rent revenue and turnover rent. It is assessed for one year from the earliest lease start date.

Question 32

What is Target Profit?

Answer 32

The level of acceptable profit considering
the risk of the particular project normally
expressed as an individual sum

Question 33

What is Target/Required Return?

Answer 33

The level of commercially-acceptable return considering the risk of the particular project expressed as a periodic rate of return.

Question 34

What is Tender Price Index?

Answer 34

Index relating to the level of prices likely to be quoted at a given time by contractors tendering for building work.

Question 35

What is Value in Alternative Use?

Answer 35

The market value, or any other appropriate basis, with the special assumption of an alternative use to the existing use or permitted highest and best use.

Question 36

What is a Value in Existing Use?

Answer 36

The market value, or any other appropriate basis, assuming the property continues in its existing use with no expectation of that use changing in the foreseeable future.

Question 37

What is Weighted average cost of capital?

Answer 37

The minimum return a company should
earn in respect of an asset by reference to
relative weight of equity and debt within its
capital structure. This may be stated by the
client.

Question 38

What is a Yield?

Answer 38

Yield can be applied to different commercial elements of a project, for example, office, retail, leisure. It is usually calculated as a year’s rental income as a percentage of the value of the property. Depending on jurisdiction, variations include capitalisation or cap-rate, all-risk yield, equivalent yield, income yield and initial yield.