Dev App

Question 1

Difference between a development appraisal and a residual land valuation?

Answer 1

A development appraisal is used to financially assess the viability of a development scheme, whilst a residual valuation focusses on the calculation of the value of land. A development appraisal can also be used to assess profitability and conduct sensitivity analysis highlighting the sensitivity of the development to changing inputs such as build costs

Question 2

Difference between Section 106, CIL and Section 278?

Answer 2

Section 106 is a legal agreement for planning obligations e.g affordably housing, new school, infrastructure costs to gain a planning consent. Whereas the Community Infrastructure Levi (CIL) is a flat rate per sqft which is charged by most local authorities and contributes towards the local infrastructure. A section 278 is in regard to highways.

Question 3

What are the inputs for a Development Appraisal?

Answer 3

Sales rate per sqft to establish a GDV in unit sales.
Then marketing and legal fees at 1% and 0.5% respectively.
Then total development costs which make up planning costs such as S.106 and CIL, Building costs, professional fees (usually 10% and mostly made up of architect fees),
Contingency (usually at 5%), calculation of finance (usually the bank of England base rate plus a certain amount for risk).
Profit 15 to 20% for residual

Question 4

BOE base rate

Answer 4

5.25%

Question 5

Key points of the guidance note ‘Valuing Development Property 2019’?

Answer 5

This guidance note is to supplement the International Valuation Standard (IVS) 410 ‘Development Property’ which provides a detailed overview of the valuation of development value. The key point is that when valuing development property, any assumptions or special assumptions must be clearly identified within the valuation report with the guidance note providing real world examples.

Cross referencing residual with comparable method

Question 6

What would a developer have to borrow money for?

Answer 6

Site Purchase
Total construction and associated costs
Holding costs to cover voids until disposal

Question 7

How do you calculate the finance?

Answer 7

Assume 100% debt finance, land purchase on a straight line basis using compound interest over the length of the development period.
To calculate the finance for the construction period, assume total construction costs over half of time period using an ‘s’ curve calculation.
The S curve is that as payment of construction costs adopts the profile of an ‘S’ shaped curve over the length of the development projects, the usual assumption is to halve the interest that would be borrowed for all the construction period.
The purposed S curve is to reflect when monies tend to be drawn down.

Question 8

What are the main types of development finance?

Answer 8

Debt finance – Lending money from a bank
Equity finance – own money used

Question 9

Talk me through developers profit?

Answer 9

A percentage of GDV or total construction costs, around 15% - 20% depending upon risk. It is their return for developing a site. Risk reward scenario. The percentage of profit required has recently risen given the current riskier market conditions.

Question 10

What is profit erosion?

Answer 10

This term relates to the length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme until the profit from the scheme has been completely drawn down.

Question 11

What are the limitations of residual valuation methodology?

Answer 11

Importance of accurate information and inputs
A residual does not consider timing of cash flows, although in argus developer it does.
Sensitive to minor adjustments
Implicit assumptions hidden and not explicit

Question 12

What is a sensitivity analysis?

Answer 12

This is where the key variables such as GDV, build costs and the finance rate are altered to show a range of values. forms of sensitivity analysis:
Simple sensitivity – Yield, GDV, build costs and finance rate
Scenario – Change of development content/timing/cists

Question 13

What is the internal rate of return?

Answer 13

The tool used to measure the profitability of potential investments. The higher the IRR the more desirable an investment.

Question 14

What is the return on capital employed?

Answer 14

A financial ratio that can be used to asses a company’s profitability and capital efficiency. Calculated Earnings before interest and tax / capital employed (total assets – current liabilities)

Question 15

What is BCIS

Answer 15

BCIS obtains updates from QS/BS sources and recent contract prices and tenders agreed

Question 16

Advantages/ dis of BCIS

Answer 16

Adv: Efficient, cheap, good market knowledge, reputable source
Dis: Potentially small sample size, builders may not update their costs regulary

Question 17

L2 Wolverhampton

Answer 17

57,000 sq ft - 40% site coverage
7.25 psf
ARY 6%
BCIS - purposes built warehouse - £75 psf
12 months for pre construction and construction for mid box asset (6 months for each)
let within 6 months
sold within 6 months
profit 17.5%
60k assumption of s106

Question 18

L2 Evesham

Answer 18

Stamp duty - 4.4% residual value
Legal - 0.5%
Agency 1%
build - £165 per sq ft
BCIS was at £145 per sqft
profit 15%
sales rate between £340 to £422 per sq ft
S106 and CIl
£400,000 per acre
4 acre site
21 homes

Question 19

L3 Henley in Arden

Answer 19

19 mid terrace Homes
each 1500 sq ft
4.52% stamp duty
legal fees 0,5%
agency 1%
SME developer adopted £175 build costs per sq ft
£450 sales rate per sq ft
Marketing 50,000
17.5% on GDV for profit

Question 20

L3 Wexham

Answer 20

11 residential dwellings
122 per sq ft build rate
Profit 20% on costs
all affordable homes, no s106 or cil
reduced costs
Sales rate 250 to 300 per sq ft

Question 21

Why do you select the certain level of profit?

Answer 21

Profit level is dependant upon the risk associated with the scheme.
Typically this would range from 15 to 20% on GDV, low risk scheme at 15%
My schemes have typically been at low risk level however due to current economic environment (rising cost of construction, interest rates, costs of living effecting sales) we have adopted 17.5% profit.

Question 22

Talk me through the risks of your examples ?

Answer 22

Smaller schemes and so are less sensitive to changes in costs and feasibility
Henley benefitted from being in a good residential market with fast sales rate (reduced holding costs and a greater portion of equity buyers)
Evesham higher costs and a small scheme would appeal to a SME opposed to national house builder. Issue of low site density due to access. Benefitted from a neighbouring scheme and so this reduced some of the marketing costs.

Question 23

What basis of measurement for building costs?

Answer 23

GIA

Question 24

Difference between cil and s106

Answer 24

CIL if a flat rate adopted per sq ft of building area which is non negotiable
S106 payments are a legal agreement for planning obligations (affordable housing, Infrastructure, new schools)