Development Appraisals/ Legal & Regulatory Compliance (Submission) Flashcards
When would you use a development appraisal?
When I need to calculate the land value for my client, assuming their appropriate profit margin, enabling me to understand the land value my client can offer.
Talk me through the development programme?
- Site purchase: site, assembly, VP, planning process and tender negotiations.
- Pre-construction period: site preparation, remediation, archaeological works.
- Construction period: construction of the buildings, this might be phased.
- Post construction period: sales period.
Positives and negatives of development appraisals over comparable analysis?
Development appraisals = take longer but much more accurate and are site specific.
Comparable land value analysis = every site is different, however this gives a quick approximate.
What is the Cash Flow used for in a development appraisal?
To allow a developer to understand the interest to be paid each month that the money is borrowed.
What effect does a longer and shorter construction period and the sales period have on development?
Shorter construction period = means you pay less interest on the development as you are borrowing money for a shorter time period.
Shorter sale period = can pay loan back sooner and accumulate less interest payments.
What sales rate did you advise originally on Edlesborough and what did you change it to?
After speaking to our sales team about the speed of sales at our comparable Sonning Common development, I suggested a sales rate of 1 dwelling a month initially. But changed it to 2 dwellings every 3 months.
Speak to local agents to see if you can obtain information on sales at other nearby sites if Shanly don’t have something close
What makes up purchasers costs?
Stamp duty (5%)
Legal fees (0.5%)
Agents fees (1%)
MOCK QUESTION
What is included in the total development cost?
- Site Preparation (e.g. tree removal & demo)
- Planning costs (including Section 106 & CIL)
- Building costs
- Professional fees 10-15%
- Contingency 5-10%
- Marketing costs = Marketing budget & Agency fees (2% of GDV for the sale and 0.5% Legal fees on sales)
Can you give me an idea of the £/sqft build cost for houses?
As of Apr 2023, BCIS average for a detached house was £156/sqft. This was 20% than Mar 2021.
Shanly Homes’s is confidential but it is significantly higher as we have a high specification of product and do not benefit from the same extent of economies of scale.
How do you/ your Commercial team estimate build costs?
They benchmark them against schemes we are currently constructing. As we are geographically focused in the South East, we can guage a good idea of predicted build costs from our current schemes.
What is actually included within the build costs?
Mainly labour, equipment and materials.
How do you account for market fluctuations in your appraisal?
Higher contingency for rise in build costs.
I would be careful not to over-inflate the predicted sales prices when undertaking the comparable process for deciding the GDV.
What is a contingency and why is it needed?
A contingency makes an allowance for unknown project risks. They can cover increased costs but also project delays and potential for future consultants.
How do you assess your level of contingency?
The level depends on the project risk and likely movement in build costs.
How do you cope with continually rising build costs in your development appraisals?
Assume a higher level of contingency.
What level of contingency do you assume in your development appraisal?
I usually allow a 5% contingency - but it depends on the level of information available and risk associated with the site.
Where do I think build costs are going? Why have they risen so much?
According to BCIS, build costs have risen 20% from 2021 to 2023. There are signs that the rise is beginning to slow, although there is still significant labour shortages.
They have risen due to high material demand and lower supply with the war in Ukraine impacting the supply chain and increasing energy prices.
What is VAT charged on?
VAT = Value Added Tax. Land is exempt from VAT.
VAT is charged on building fees and professional fees.
A landlord can choose to elect a property to charge VAT to recover VAT on their costs expended.
What is the Bank of Englands interest rate? And how will it impact the housing industry?
Recent increase to 4.5%. This means sales rate is likely to slow as it becomes more expensive to take a mortgage. This means buyers more likely to opt for the rental market.
In terms of development finance, higher interest rates make borrowing costs higher, hence meaning projects could become unviable.
Tell us about the Little Kimble outline consent?
Outline planning permission with all matters reserved for the development of up to 45 residential units.
The site was previously adopted in the Local Plan.
What are the differences between a development appraisal and a residual valuation?
Development appraisal is used to assess the viability & profitability of a proposed development.
Whereas a residual valuation is purely used to calculate the Market Value of land using market inputs.
What is affordable housing?
It is a form of s106 requirement under the Town and Country Planning Act 1990.
What is a s106 agreement? Why is it required? What legislation is it from?
It is a legally binding agreement signed by a developer in order to mitigate the site specific impacts of a development.
They are obligations such as the provision of affordable housing, infrastructure needs or public facilities.
Introduced in the Town and Country Planning Act 1990.
What is the main difference between s106 and CIL?
s106 are site-specific obligations such as providing affordable housing and determining working hours, whereas CIL is a fixed payment which facilitates offsite/ community contributions.
s106 is negotiable and CIL is not negotiable.
Where is a S278 from and how do they work? What did the Edlesborough S278 require?
It is a section of the Highways Act 1980 that allows developers to enter into a legal agreement with the council to make permanent alterations or improvements to a public highway, as part of a planning approval.
I was required to consider the cost of a road traffic calming system. I showed the plans to my internal estimator and he estimated the cost of the work to be £50,000.
MOCK QUESTION
What other assumptions did you make on Edlesborough?
- I assumed we would have to pile the site rather than using strip foundations do to the heavy tree coverage. I reflected this added cost within the build cost.
- The pump station on site in order to pump the foul 120m up the road to a sewage connection point.
- £10,000 cost for site tree clearance
- No CIL payable in Aylesbury Vale
- S106 costs of £210,000 as per the officers reports recommendations.
- Land intro fee of 2% of the Land Value
On Edlesborough, were you required to consider finance costs? And if so, what finance interest rate did you use?
No, within our appraisals I assume my client borrows money from the Chairman. I can not disclose the amount rate set but it is similar to the industry average rate of borrowing which is around 7%.
This is the UK base rate of 4.5% plus a % premium depending on the risk of the development.
Difference between pile and strip foundations?
Strip = most common and used for grounds with good weight bearing capacity. Essentially is a strip of concrete under load bearing walls.
Pile = required where soil weight bearing capacity is poor. It essentially is large piled columns forced into the ground using a piling rig.
What are the different afforable housing tenures?
Shared ownership: circa 70% of MV
Affordable rent: circa 55% of MV
Social rent: circa 40% of MV
