Valuation - Residual / Devt. Appraisal 2 Flashcards
Marketing costs & fees
Assume a realistic marketing budget (use evidence/quotes)
Cost of an EPC
NHBC warranty (for residential schemes)
Num at to and 8-28% GOV & nomal leting te around 10% of initial annual rent
Example sentence: Marketing costs and fees are an important consideration in the development budget.
Calculation of finance
Choice of interest rate can include:
The current SONIA rate (Sterling Overnight Index Average)
Bank of England Base rate plus premium
Rate at which the developer can borrow the money
Additional information: Calculation of finance involves considering various interest rate options.
Method of calculation
Assumes 100% debt finance
Finance for borrowing the money to purchase the land is calculated on a straight-line basis using compound interest over the length go the development period
Rolled up method of calculation is used (compound interest)
To calculate the finance required for the construction period, assume total construction costs (including fees) over half of time period using an ‘S’ curve calculation
Example sentence: The method of calculation for finance is crucial in determining the project budget.
Developers Profit
Percentage of GDV or total construction cost - say around 15%-20% depending upon risk
GDV more frequently used as a base for residential use
If scheme low risk (or pre-let/sold) a lower return may be required
The percentage of profit required has recently risen given the current riskier market conditions
Example sentence: Developers profit margin is an important factor in project feasibility.
Development Finance
TWO main methods of funding are:
Debt finance - lending money from a bank or other funding institution
Equity finance - selling shares in a company or joint venture partnership or own money used
Additional information: Development finance involves securing funds through debt or equity.
Profit erosion period
This term relates to the length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme until the profit from the scheme has been completely drawn down, due to interest charges, and the scheme is loss making
Loan to value ratio (LTV) is typically in the region of 60% but in difficult markets, lenders may adopt a Loan to cost (LTC) ratio (e.g. of 60%)
Interest is calculated on a rolled-up basis - i.e. added to the loan as the project proceeds
Example sentence: Understanding the profit erosion period is crucial for financial planning.
Limitations of residual valuation methodology and financial modelling
Importance of accurate information and inputs
A residual valuation does not consider timing of cash flows
Very sensitive to minor adjustments
Implicit assumptions hidden and not explicit (unlike a DCF)
Always cross-check with a comparable site valuation if possible
Additional information: Residual valuation methodology has its limitations in financial modeling.
Sensitivity analysis
Required for key variables such as GDV, build costs and the finance rate, to show range of values
THREE forms of sensitivity analysis:
Example sentence: Sensitivity analysis helps in understanding the impact of key variables on project outcomes.
Overage
This is the arrangement made for the sharing of any extra receipts received over and above the profits originally expected as agreed in a pre-agreed formula
It can be shared between the vendor/landowner and developer in a pre-arranged apportionment
Also known as a ‘claw back’
Example sentence: Overage agreements are common in real estate development projects.
What is a pre-agreed formula?
It can be shared between the vendor/landowner and developer in a pre-arranged apportionment
Also known as a ‘claw back’
What are the key variables for simple sensitivity analysis?
Yield, GDV, build costs, and finance rate
What is scenario analysis used for?
To change scenarios for the development content/timing/costs, such as phasing the scheme or modifying its design
What is Monte Carlo simulation based on?
Probability theory, using software such as ‘Crystal Ball’
What should be remembered about VAT?
VAT is payable on all professional fees
