Valuation-Residual Method (Quiz) Flashcards

1
Q

Do the RICS provide any relevant guidance?

A

Yes

e.g. RICS Guidance Note Valuation of Development Property (1st edition, Oct 2019)

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2
Q

When would you use a Residual Land Valuation (RLV)?

A

Land or property suitable for re(development)

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3
Q

How else could you value development land?

A

Comparison with sale price of land for comparable development (usually active market, low density development)

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4
Q

How does a RLV differ from a Development Appraisal (DA)?

A

RLV output is land land value.

DA output is profit.

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5
Q

What is the basic process of undertaking a RLV?

A

Gross Development Value (GDV) - Costs - Developer’s Profit = Land Value

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6
Q

What is the basic process of undertaking a DA?

A

Gross Development Value (GDV) - Costs - Land Value = Developer’s Profit

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7
Q

What does a development appraisal show?

A

Viability or feasibility of a development - you can adjust for the developer’s specific inputs.

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8
Q

What are some of the key things you should look for when inspecting a development site? (12 marks)

A
  1. Extent/developable areas.
  2. Party wall, boundary and right of light issues.
  3. Topography.
  4. Flood risk.
  5. Geotechnical conditions.
  6. Previous land uses (including contamination).
  7. Building sizes, height and efficiency.
  8. Occupational and other interests (whether actual or implied by law).
  9. Archaeology.
  10. Abnormals, e.g. site conditions, access.
  11. Waste/mineral extraction rights/risks.
  12. Infrastructure
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9
Q

What else do you need to consider? (5 marks)

A
  1. Planning framework.
  2. Permitted Development rights
  3. Existing planning use and any consents.
  4. Special controls, e.g. TPOs, green belt, listed status, conservational area.
  5. Environmental concerns/biodiversity/ecology.
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10
Q

How can you assess development potential? (6 marks)

A
  1. What is the highest alternative land use?
  2. What could you obtain planning for?
  3. What type of space is in demand?
  4. What is the market likely to do over the next few years?
  5. What can be accommodated on the site?
  6. Do you need to acquire adjacent land?
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11
Q

What is Gross Development Value (GDV)?

A

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

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12
Q

What is the Net Development Value (NDV)?

A

Reflects transaction costs incurred if the completed development was sold on the date of valuation.

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13
Q

How do you establish GDV?

A

Generally using the comparable or investment methods.

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14
Q

What do development costs include? (10 marks)

  1. Build costs (based on GIA)
  2. Sale agent fee (10% initial rent)
  3. Build costs (based on NIA)
  4. Letting fee (10% initial rent)
  5. Professional fees (c. 10-20%)
  6. Letting fee (1-2% GDV)
  7. Professional fees (1% GDV)
  8. Marketing costs
  9. Contingency (3-10% construction costs)
  10. Site preparation
  11. S106/CIL
  12. Planning and statutory/ regulatory obligation costs
  13. Contingency (25%+ construction costs)
  14. Sale agent fee (1-2% GDV)
  15. Finance costs
A
  1. Build costs (based on GIA)
  2. Letting fee (10% initial rent)
  3. Professional fees (c. 10-20%)
  4. Marketing costs
  5. Contingency (3-10% construction costs)
  6. Site preparation
  7. S106/CIL
  8. Planning and statutory/ regulatory obligation costs
  9. Sale agent fee (1-2% GDV)
  10. Finance costs
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15
Q

Where could you source build costs from? (5 marks)

  1. QS
  2. SPONS
  3. Client
  4. BCIS
  5. Contractors
  6. A vague guess
A
  1. QS
  2. SPONS
  3. Client
  4. BCIS
  5. Contractors
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16
Q

What is included in the development programme?
(3 marks)

  1. Pre-construction - site assembly, obtaining vacant possession, planning, design and engineering process, ground investigations and works, building contracts, demolition and site preparation.
  2. Pre-construction - completion until full letting, sale of re-financing, defects liability period.
  3. Post-construction - enabling works, main build (could be phased).
  4. Post-construction - completion until full letting, sale of re-financing, defects liability period.
  5. Principal construction - enabling works, main build (could be phased).
  6. Principal construction - site assembly, obtaining vacant possession, planning, design and engineering process, ground investigations and works, building contracts, demolition and site preparation.
A
  1. Pre-construction - site assembly, obtaining vacant possession, planning, design and engineering process, ground investigations and works, building contracts, demolition and site preparation.
  2. Post-construction - completion until full letting, sale of re-financing, defects liability period.
  3. Principal construction - enabling works, main build (could be phased).
17
Q

What is S106?

A

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

18
Q

What is the Community Infrastructure Levy (CIL)?

A

Planning charge to help deliver infrastructure to support the development of an area.

19
Q

What is CIL charged on?

A

Net increase in the gross internal area of development on the site.

20
Q

What are finance costs paid on? (3 marks)

  1. Site purchase including purchaser’s costs (straight line basis).
  2. Site purchase including purchaser’s costs (S curve).
  3. Development costs (straight line basis).
  4. Holding/void costs (straight line basis).
  5. Development costs (S curve).
  6. Holding/void costs (S curve).
A
  1. Site purchase including purchaser’s costs (straight line basis).
  2. Holding/void costs (straight line basis).
  3. Development costs (S curve).
21
Q

What do holding costs typically include? (6 marks)

  1. Service Charge
  2. Insurance
  3. Construction costs
  4. Interest
  5. Security
  6. Agent fees
  7. Empty rates
  8. Cleaning
A
  1. Service Charge
  2. Insurance
  3. Interest
  4. Security
  5. Empty rates
  6. Cleaning
22
Q

How is developer’s profit typically calculated?
(2 marks)

  1. % of total development cost including interest
  2. % of NDV
  3. % of GDV
  4. % of build costs only
A
  1. % of total development cost including interest

2. % of GDV

23
Q

What other criteria might be assessed in terms of performance measurement? (8 marks)

  1. Initial yield on cost
  2. Acid test
  3. Equated yield (IRR approach)
  4. Cash-on-cash (equity yield)
  5. Amount of cover
  6. Interest on capital employed
  7. Net assets per share
  8. Return on capital employed
  9. Profit erosion
  10. DCF (NPV approach)
A
  1. Initial yield on cost
  2. Equated yield (IRR approach)
  3. Cash-on-cash (equity yield)
  4. Amount of cover
  5. Interest on capital employed
  6. Return on capital employed
  7. Profit erosion
  8. DCF (NPV approach)
24
Q

Development is inherently risky, how can you assess this risk for a client? (3 marks)

  1. Sensitivity analysis
  2. Asking another valuer to provide a RLV
  3. Avoiding such schemes
  4. Monte Carlo simulation
  5. Scenario analysis
A
  1. Sensitivity analysis
  2. Monte Carlo simulation
  3. Scenario analysis
25
Q

What are the disadvantages of a RLV? (4 marks)

  1. Needs accurate inputs
  2. Can’t be used for Market Value
  3. Doesn’t take into account timing of cash flows
  4. Sensitive to minor adjustments
  5. Calculations hidden (particularly if using software such as Argus)
  6. Doesn’t produce land value
A
  1. Needs accurate inputs
  2. Doesn’t take into account timing of cash flows
  3. Sensitive to minor adjustments
  4. Calculations hidden (particularly if using software such as Argus)