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RICS APC1 > Valuation - Residual Method > Flashcards

Valuation - Residual Method Flashcards

1
Q

What RICS guidance is available for Valuation of Development property?

A

RICS Guidance Note Valuation of Development Property (1st Edition, Oct 2019)

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2
Q

When would you use a Residual land value?

A

Land or property suitable for re(development)

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3
Q

How else could you value devlopment land?

A

Coparison with sale price of land for comparable development (usually active market low devlopment)

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4
Q

How does a RLV differ from a DA?

A

RLV Output is land vaue, DA output is profit

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5
Q

What is the basic process of undetaking a RLV?

A

Gross Development Value (GDV) - Cost - Developers profit = Land Value

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6
Q

What is the basic process of undertaking a Development Apraisal (DA)

A

Gross Devlopment Value (GDV) - Costs - Land Value = Developers profit

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7
Q

What does a devlopment appraisal show?

A

Viability or feasability of a devlopment - you can adjust for devlopers specific inputs

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8
Q

Key things to chec for when inspecting a devlopment site?

A
  1. Extent/devlopable areas
  2. Topography
  3. Flood Risk
  4. Previous land use
  5. Building sizes
  6. Abnormals e.g site conditions, access
  7. Party wall, boundary and right of light
  8. Geothenical conditions
  9. Infastructure
  10. Occupations & other interests
  11. Archaeology
  12. Waste/mineral exraction rights/risk
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9
Q

What are other considerations you should consider for site devlopment?

A
  • Planning framework
  • Premitted devlopment
  • Exisiting development rights
  • Exisiting planning use and any consents
  • Special controls, TPOs, green belt, listed status
  • Environmental concerns
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10
Q

How can you assess development potential?

A
  • What is the highest alternative use
  • What could you obtain planning for
  • What type of space is in demand
  • What is the market likely to do over the next few years
  • What can accomodated on the site
  • Do you need to accquire adjacent land
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11
Q

What is Gross Development Value?

A

Market Value of the proposed devlopment assessed on the special assumption that the devlopment is complete as at the date of valuation in the market conditions prevailing at that date.

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12
Q

What is net devlopment value?

A

Reflects transaction costs incurred if the competed devlopment was sold on the date of valuation

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13
Q

How do you establish GDV?

A

Generally using the comparable or the investment method

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14
Q

What do devlopment costs include?

A
  1. Build costs (Based on GIA)
  2. Professional fees (10-20%)
  3. Site preparation
  4. S106/CIL
  5. Planning and statutory/regulatory obligation costs
  6. Sale agent fees (1-2% GDV)
  7. Letting fee (10%)
  8. Marketing costs
  9. Contingency (3-10% of construction costs)
  10. Finance costs
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15
Q

Where could you source build costs from?

A
  • Client
  • QS
  • Contractors
  • SPONS
  • BCIS
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16
Q

What is included in the devlopment programme?

A

Pre-construction - site assembly, obtaining vacant posession, planning, design and engineering process,ground investigations and works, building contracts, demolition and site prep.

Post -construction- completion until full letting, sale of re-financing, defects liability period

Princial construction - enabling works, main build (could be phased)

17
Q

What is S106?

A

Legally binding private contract between a devloper (or a number of interested parties) and a local planning authority, operating alongside a statutory planning premission.

18
Q

What is Community infastructure Levy (CIL)?

A

Planning charge to help deliver infastructure to support the devlopment of an area

19
Q

What is CIL charged on?

A

Net increase in the Gross Internal Area of devlopment on the site.

20
Q

What are finance costs paid on?

A
  • Site purchase and associated costs
  • Development costs (S-curve)
  • Holding/void costs (straight line basis)
21
Q

What do holding costs typically include?

A
  • Service charge
  • Interest
  • Empty rates
  • Insurance
  • Secuirty
  • Cleaning
22
Q

How is devlopers profit typically calculated in a residual valuation?

A

% OF THE GDV

% of the total devlopment cot incl. interest

23
Q

What other criteria might be assessed in terms of performance measurment?

A
  • Inital yield on cost
  • Cash-on-cash (equity yield)
  • Interest on capital
  • DCF (NPV approach)
  • Equated yield (IRR approach)
  • Amount of cover
  • Return on capital employed
  • Profit erosion
24
Q

Development is inherently risky, how can you assess this risk for a client?

A

Monte Carlo simulation

Scenario analysis

Sensitivity analysis

25
Q

Disadvantages of RLV?

A
  • Needs accurate inputs
  • Doesn’t take into account timing of cash flows
  • Sensitive to minor adjustments
  • Calculations hidden (particually if using software such as Argus)
26
Q

What fees and percentages did you use for your residual valuation of lab space?

A

Professional Fees (7%)

Finance (6% GDC)

Contingency (5%)

Sales & Marketing (3% GDV)

Legal Fees (0.5% GDV)

Profit @ 20%

RICS APC1 (18 decks)

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