Development 1 Flashcards
- What is the difference between a development appraisal and a residual valuation?
Development appraisal assesses the profitability or viability of a proposed scheme based on client’s inputs.
Residual Valuation provides a market value for the site based on market inputs – development appraisal can be used to do this
- What is the methodology for a development appraisal?
PROFIT = Gross Development Value – Total Development Costs – Site Value
- What is the methodology for a residual valuation?
SITE VALUE = Gross Development Value – Total Development Costs – Profit
- What is Gross Development Value?
Market value of a completed scheme at today’s date/valuation date
- What is the acre to hectare ratio?
1 hectare = 2.47 acres
0.4046 hectares = 1 acre
- How many sq ft per acres?
1 acre = 43,560 sq ft
- What are total development costs?
- Site Preparation
Demolition / remediation works / site clearance / levelling / provision of services
Obtain contractors estimate for these costs - Planning Costs
Town & Country Planning Act 1990
S.106 payment / CIL / s.278 payments / planning app / environmental impact assessment - Building Costs
Total costs of building works
BCIS or cost consultant - Professional Fees
10-15 % +VAT of total construction costs
covers all professional fees (architects, M&E consultants, structural engineers, …)
lower % appropriate for larger projects – reflects reduced level of fees arrange
architect usually accounts for largest % of total professional fees - Contingency
5-10% of total construction costs
Depends on the level of risk on site and market conditions - Marketing & Disposal Costs/Fees
Assume realistic marketing budget (use evidence and quotes)
Sales fee = 1-2% of GDV
Letting fee = 10% of initial annual rent - Developers Profit
C. 15-25% dependant on risk
Profit on Cost = commercial development
Profit on GDV = residential development
If scheme is low risk/pre-let a lower return may be required
% of profit recently risen due to market uncertainty - Finance
Debt rate = 7%
What other costs may you consider with a contentious site?
Abnormal costs (contamination level raise, bunds)
Utility costs
Infrastructure
What are the key inputs and outputs involved in the development appraisal process?
Inputs
* GDV – rent & cap rate
* Total development costs
* Finance
Outputs
* Residual land value
* Profit (cost & GDV)
* IRR
* Profit erosion period
What is a section 106 payment?
- Planning obligation (legally binding) relating to community gain, items directly linked to scheme
- Agreed prior to planning consent
- Negotiable – no fixed charging schedule
- Can be used to secure affordable housing
What is CIL?
- For infrastructure necessary to support development in the AREA
- Tariff based charging system (£ per sq m of scheme) – relates to size or change to size of development based on net floor space
- Calculated using the gross internal area of the floor space of all CIL liable buildings.
- Cannot be used to secure affordable housing
- Aim: to reduce negotiations required for s.106 and standardise/speed up the planning approach
Can a developer be double charged for s.106 and CIL payments?
No
What is a section 278 payment?
Contribution to highway works
Outline the main forms of development finance used by developers
Debt Finance – lending money from the bank or other financial institution
Equity Finance – own money used OR selling shares in company or JV partnership
How do you work out the rate of interest to use to calculate finance costs?
SONIA – (Sterling Overnight Index Average) replaced LIBOR Jan 2022 – risk free rate reflecting the average of the interest rates that banks pay to borrow from other financial institutions for sterling markets PLUS, premium to reflect interest rates
