Development Appraisal Flashcards
(81 cards)
1
Q
What is the purpose of a development appraisal?
A
- It is a tool to financially assess the viability of a development scheme
- Used to assess profitability of a proposed scheme and sensitivity to changing inputs
- It can assume a site value or calculate a site value
2
Q
What is the GDV?
A
- Market value of completed development at current date
- MR/ARY use comparables to find these
- Purchaser’s costs deducted
3
Q
What is the process of a development appraisal?
A
- Calculate the GDV
- Less site price, planning, construction costs, professional fees, marketing and agent’s costs, finance and purchaser’s costs
4
Q
What is included in development costs?
A
- Site Prep - demolition / remedial cost plan
- Planning costs - S106/CIL/affordable housing
- Building Cost Information Service - BCIS index
- Professional fees - 10-15% of construction costs (architects largest)
- Contingency - 5-10% of total construction costs
- Marketing costs
- Agents fees - 1% for sale, 10% for letting
- Developers profit (on cost/GDV - 15-20%)
5
Q
How do you calculate finance?
A
- Bank of England Base Rate plus a Premium (4.5% + premium)
- Rate at which the developer can borrow money
6
Q
What is an opportunity cost of capital?
A
Interest on finance is rolled up, compound basis, interest starts low and then builds up
7
Q
What are the 3 elements for finance?
A
- Site purchase - compound rolled up - straight line
- Total construction costs - S curve
- Holding costs - cover voids - straight line
8
Q
Why are construction costs S curved?
A
S curve adopts profile of payment of construction fees
9
Q
What are the two types of development finance?
A
- Debt Finance - lending money from a bank or lending institution
- Equity Finance - selling shares in a company or a JV or own money
10
Q
What is a typical loan to value ratio?
A
Typically 60% but varies amongst assets
11
Q
What is senior debt finance?
A
First level of debt - takes precedent
12
Q
What is mezzanine funding?
A
Additional funding over normal LTV
13
Q
What are swaps?
A
- They are a form of derivative hedging rate for interest rates
- A swap rate is the market interest rate for fixed rate/term loans
14
Q
What is a joint venture?
A
Where 2 or more parties join to develop
15
Q
What are forward sales?
A
Where completed schemes are forward sold
16
Q
What is profit erosion?
A
Length of time profit is eroded by holding charges following completion until profit has been completely drawn down
17
Q
What are the 3 types of sensitvity analysis?
A
- Simple analysis - key variables - GDV, build costs, finance rate
- Scenario analysis - timing, costs, phasing
- Monte Carlo Simulation - probability theory with software
18
Q
What are the key limitations of using Argus?
A
Key assumptions and calculations remain hidden - user reliant on information being put in being correct
19
Q
What is s106 used for?
A
Affordable housing, infrastructure, school, agreed between local authorities and developers
20
Q
What is CIL?
A
Community Infrastructure Levy based on the net additional floorspace of a new development set by the Local Planning Authority
Planning Act 2008
21
Q
What is overage?
A
Arrangement made for sharing any extra receipts received over and above profits expected in pre-agreed formula ‘claw back’
22
Q
What does the RICS Professional Standard Valuation of Development Property 2019 state?
A
- Special assumptions must be clearly stated in the valuation report
- Best practice - not rely on one approach
- Highlights the importance of thorough DD
23
Q
What does S278 Highways state?
A
The developer/investor/client pays a s278 agreement and the amount for them to sort highways if impacted
24
Q
What sustainability costs do you include?
A
- £1,500 per dwelling to reflect EV charging and part L of the Building Regulations
- Market facing evidence
25
What does the RICS Professional Standard - Financial Viability in planning: conduct and reporting 2019 state?
- Used when undertaking a planning viability assessment
- Discusses residuals and GDV caluclations saying to compare against actual land transactions
26
How is CIL calculated?
- Net additional floorspace of the development
- CIL charging schedule (sqm)
- Borough dependant
27
If the CIL charging schedule was not indexed what would you do?
If not indexed, I would take from BCIS index
28
What does the Levelling Up and Regeneration Act 2023 state?
- Going to introduce the Infrastructure Levy which is designed to replace the Community Infrastructure Levy (CIL) and Section 106 planning obligations
- Not yet come into effect
29
How do you get s106 costs with planning?
Get from s106 agreement
30
How do you get s106 without planning?
Can benchmark from similar schemes which have planning and break it back to psf and go to planning consultant
31
What measurement is the BCIS based off?
GIA basis
32
Where does the BCIS get the information from?
Obtains updates from Quantity and Building Surveyor sources and recent contract prices/tenders agreed
33
What are the disadvantages of BCIS?
There is a time lag
34
Do development appraisals assume 100% debt finance?
Yes
35
How would you calcualte the finance required for the construction period?
Assume total construction costs (including fees) over half of time period using an S surve calculation
36
What is the principle of the s-curve?
The payment of construction costs adopts the profile of an S shaped curve over the length of the development project, the usual assumption is to halve the interest that would be borrowed for all of the construction period
37
What does the s curve reflect?
Reflect when monies tend to be drawn down
38
How would you calculate any finance required for on-going holding costs?
From completion of construction until disposal on a straight line basis using compound interest
39
If in a more difficult market, what would you expect to see in terms of loan to value?
Lenders may adopt a loan to cost ratio
40
What does S73 of the Town & Countril Planning Act 1990 state?
Allows LPAs to agree to a request to remove, vary or discharge a planning condition following the grant of a planning consent
41
What are the 3 grades of listing?
* Grade 1 (buildings of exception interest)
* Grade 2* (buildings of particular importance)
* Grade 2 (90% + of all listings - buildings of special interst)
42
What are permitted development rights?
A national planning permission that allows certain building works and changes of use to be carried out without requiring a formal planning application
43
What are the two types of planning applications?
* Outline - to establish the principle for development
* Full - for full consent
44
What is the definition of development?
The making of any material change in the use of any buildings or land
45
What things do you need to consider when undertaking a development valuation?
- Is this land permitted for a specific use?
- Are there any existing current permissions?
- If there is permisson, is this time limited?
- Is the land within a heritage or conservation site?
- Any requirements for view corridors and sight lines?
46
When physically inspecting a development site, what things are you noting?
- Cross check site boundaries with OS map
- Looking for rights of access
- Potential for contamination
- Topography
- Evidence of waste management obligations
47
With larger sites that will take longer to develop, what options are there for developers to consider?
1. Develop
2. Develop in phases
3. Sell or dispose
4. Defer or wait
48
When determining the use/extent of development on a site, what things need to be considered?
- Permissable land uses
- Density of development
- Topography and site factors
- Any planning obligations attached to the permission to develop
- Adjacent land use
- Accessibility of the site
- Environmental issues
49
What are the two methods of valuation of development?
1. Market comparison approach
2. The residual method
50
What is the target profit?
The level of acceptable profit considering the risk of the particular project normally expressed as an individual sum
51
What is the target/required return?
The level of commercially-acceptable return considering the risk of the particular project expressed as a periodic rate of return
52
What is a speculative development?
Developments that are generally commenced prior to any agreed sales or lettings
53
What is a pre-let?
Where a developer of a project has agreed lettings with occupiers or sales of part of the whole of the development prior to commencement or during the development
54
What is the IRR?
The rate of interest (expressed as a percentage) at which all future project cash flows will be discounted in order that the NPV of those cash flows (including the initial investment) be equal to zero
55
What is hope value?
An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use
56
What is a holding cost?
The cost involved in owning a site or property, which may include such items as interest on finance used to acquire the asset, maintenance costs, any taxes payable by the owner etc
57
What are developer contributions?
Obligations often tied to the grant of development permissions providing a benefit to the community
58
How does the concept of sensitivity analysis apply to development appraisals?
Helps assess the impact of changing key variables on the projects profitability and viability by testing different scenarios and seeing how these changes affect the outcome
59
What is Argus developer?
Argus developer is a software system used for development appraisals to model and analyse the financial viability of development projects
60
What is the difference between a residual valuation and a development appraisal?
- Main difference is that a residual valuation establishes the value of the land at valuation date using current market assumptions
- Whereas a development appraisal establishes the viability and profitability of a development from a known land value
61
What is included within the RICS Professional Standard: Valuation of Development Property 2019?
- Introduction
- Development Valuation Process
- Establishing the facts
- Addressing development potential
- Valuation: market approach
- Valuation: residual approach
- Risk anaylsis & residual profit
- Land in the course of development
- Reporting the valuation
62
What is the importance of contingency in development appraisals?
Important because it provides an allowance for any unexpected increases in cost due to unforeseen circumstances
63
How might different funding structures affect a development appraisal?
- Higher LTV ratio does not offer more capital upfront, but results in higher interest payments & potentially a reduced profit margin
- Using a larger proportion of equity means less reliance on debt, but requires more upfront investment which can be a barrier for some developers
64
What are some typical phases that are modelled within a development appraisal?
- Pre development (enabling works, site remediation, demolition etc.)
- Construction period
- Sales period
65
Can you explain the concept of 'profit on cost'?
- A metric used to measure the profitability of a development based on its total development costs
- Calculated by dividing the projects profit by total development costs x 100
66
What is BLR grant funding?
It is a government initiative set up to support and encourage development on brownfield land
67
How much grant funding is provided within the BLRF?
Up to £180 million across the years 2022 - 2025
68
How would you typically cross-check a cost plan?
- Either speak to a quantity surveyor or compare with BCIS data
- On BCIS, there is a benchmarking feature which allows you to see how the cost plan compares with averages for similar projects
69
What data is on BCIS?
- **Tender Price Index** - measures change in the cost of procuring a built asset
- **General Building Cost Index** - tracks changes in the cost of labour and material inputs for building contractors
- **Cost Analyses** - provides detailed breakdowns of costs for specific building elements
- **Average Prices** - offers costs per functional unit for various building types
- **Benchmark** - provides comparative data against averages for similar schemes
70
How did you account for enalbing works in your appraisal?
5% of total construction costs - was included in my clients cost plan
71
Can you talk me through the process how you used Argus to establish residual land value?
Firstly estimated GDV, then subtracted all development costs and targeted profit provided by my client, then this calculated the land value
72
# Viability Appraisal East London - Level 2
What assumptions did you make about sales rate for the resi units?
- For the private I adopted £800 psf
- For the affordable, for shared ownership £420 psf and social rented £190 psf
73
What is the difference between social rented and shared ownership?
- Social rented properties are provided by local authorities and the rent is set at a level dictated by the national rent regime
- Shared ownership is when you buy a share of the property and the remaining share is rented
74
How does CIL differ from s106?
- CIL is non-negotiable whereas s106 is
- CIL is a fund generally pooled together to wider area benefits
- Whereas s106 are site-specific arrangements that address site-specific impacts from the development - often used to secure AH
75
What are the key components of the Kingston CIL calculator?
- Date
- Site demolition (sqm)
- Gross area & retained area
- Select KCIL rate and MCIL rate
- Social housing relief (sqm)
- Total liability (£)
76
How does AH relief work in relation to CIL and how did you apply it?
- No CIL is chargeable on any floorspace providing AH
- 25% of the resi units in this example were AH
77
What other reliefs or exemptions apply for CIL?
Specific criteria varies between local authorities but an example might be development for charitable purposes may be eligible for relief
78
How might phasing of the develoment affect CIL liability?
- Where a planning permission is phased, CIL is applied to each phase of the development-
- Benefit is it spreads the cost across multiple stages, which could improve the cash flow and viability
79
How does the inclusion of commercial floorspace affect CIL comparing to resi?
- Each LPA has different charging schedule for different uses
- Kingston retail and resi were comparable at £200 psf
80
Were there any indexation factors you needed to consider?
- Kingston CIL caluclator was adopted in 2015
- I indexed by multiplying the liability by index figure year permission was granted divided by index figure year charging schedule took effect
- Got the index figures from BCIS
81
How does the CIL calculation in Kingston compare to other London boroughs?
- Varies by borough and is also influenced by Mayor's CIL
- Kingston is in Zone 2 of the MCIL (£69 sqm)
