Development Appraisals Flashcards
What is the difference between residual valuation and a development appraisal?
Development appraisal = a calculation to assess the value / viability / profitability of a proposed development based upon the client’s inputs. It can assume or calculate a site value.
Residual site valuation = Specific valuation of a property holding to find the market value of the site. All inputs are market inputs taken at one moment in time (Valuation date) for a particular purpose. This is a form of development appraisal. Can be based on residual valuation or the DCF method.
Describe a Typical Development Appraisal of an office property from Start to Finish: (Assume you are paying X for a piece of land and the Y is the target (Profit/Return).
(1) Acceptance of the instruction -> COI check, HoT, understanding key requirements, client specific inputs
(2) Calculation of Gross Development Value (MR * Cap Rate) -> GDV = market value of completed scheme at todays date, letting terms incorporated, purchaser costs deducted to get NDV
(3) Establish full costs of the development: Land acquisition cost
Planning costs:
CIL payemtns charged most by LPA, planning application and building reg fees, planning consultant, cost of specialist report, other planning obligations, site preparation. build costs - BCIS or from client, professional fees - 10/15% of total construction costs + VAT , contingency 10/15%. marketing costs, agent fee 0.75% GDV and letting fee 10% of year 1 rent, finance cost: SONIA (sterling overnight index average + premium (banks marging))
Developers profit % of GDV or total construction cost - 15/20%
Sensitivity analysis
- Simple analysis of key variables (yield, GDV, build costs, finance rate)
- Scenario analysis – change scenarios for development timing/modifying build design
- Monte Carlo simulation – using probability theory with software such as ‘Crystal Ball’
What is a Development Property, as defined in the RICS Guidance Note ‘Valuation of Development Property’ 2019?
interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date”. This may include;
- The construction of buildings
- Previously undeveloped land which is being provided with infrastructure
- Improvement / alteration of existing builds
- Land allocated for development in a statutory plan.
Have you actually been onto the BCIS? How Does it Work?
Yes, you go onto the online database and select schedule of rates – the most common schedules I use are:
- BCIS Alterations and Refurbishment
- BCIS Major Works Estimating Prices
- BCIS Minor Works Estimating Prices
How is CIL Calculated?
A fixed tariff that varies from council to council, and is based on floor area and uplift in value.
What are Exemptions from CIL?
If you build a house and occupy it yourself for 3 years. Affordable housing. Existing floorspace.
What are the differences between S106 and CIL?
. S106 is a negotiable site specific planning obligation that is required to make a development acceptable in planning terms. This may include affordable housing for example. CIL is a fixed tariff that varies between boroughs and relates to infrastructure in the area e.g roads & transport facilities, flood defences. Developer cannot be double charged but obligations can be levied on both.
Is CIL better than S106?
CIL reduces negotiation and provides a standardised, thorough unflexible approach
What planning costs would you consider in your appraisals?
Section 106 payments (infrastructure), CIL charges, Section 278 payments (highway work), planning application
What is contingency and how do you work out your contingency rate?
Contingency is there in case of any unpredictable issues that arise such as additional construction costs. Typically this range is between 5 & 10%.
How do you reflect letting void?
This could be reflected in the cashflow at the end of the construction process. Alternatively you can reflect it within the yield.
Why do developers work on Profit on Cost?
This is because it’s a relatively fixed fee. A developer will want to know how much profit they are receiving from costs.
Shows true return on capital, including finance costs. Balances risk to reward and allows easy comparison.
IRR takes into account time better.
What other performance metrics can be used with development appraisals?
- Profit on GDV or NDV
- Development Yield
- Profit amount (£)
- IRR
What finance rate did you use in your development appraisal? Where did you get this finance from?
I used the rate provided by the client that they could ascertain debt or consult a member of our debt advisory team to understand the latest market offering.
Failing that this can be ascertained by using the Bank of England base rate plus a premium or SONIA plus premium.
