Development Appraisal

Question 1

Which RICS Professional Standard covers Development Appraisals?

Answer 1

Valuation of
development property
RICS PROFESSIONAL STANDARD
Global
1st edition, October 2019
Effective from 1 February 2020

Question 2

What are the acquisition/disposal costs?

Answer 2

Legal and agent fees, as well as any purchase or sales taxes.

Question 3

What is a Comparable property transaction?

Answer 3

A property used in the valuation process as
evidence to support the valuation of another
property

Question 4

What is a Discounted cash flow?

Answer 4

A method of valuation explicitly setting out
the inflows and outflows of an investment/
development, adjusting for IRR /NPV.

Question 5

What is a development appraisal?

Answer 5

A financial appraisal of a development. It is
normally used to calculate either the residual site value or the residual development profit.

Question 6

How do you calculate the development yield?

Answer 6

The rental income divided by the actual cost
incurred in realising the development.

This can be based on either current or future estimates of the rental value of the completed development.

Question 7

What is the discount rate in a development appraisal?

Answer 7

The rate, or rates, of interest selected when
calculating the present value of some future cost or benefit

Question 8

How is GEA calculated?

Answer 8

The combined external area of a building
or footprint, taking each floor into account,
measured with reference to the appropriate
code of measuring practice.

Question 9

What is Hope Value?

Answer 9

An element of market value in excess of the
existing use value, reflecting the prospect of
some more valuable future use.

Question 10

What is IRR (internal rate of return)?

Answer 10

It calculates the break even point of a development.

The rate of interest (expressed as a percentage)
at which all future project cash flows (positive
and negative) will be discounted in order that
the net present value (NPV) of those cash flows,
including the initial investment, and be equal to zero.

IRR can be assessed on both gross and net of
finance.

Question 11

Define Market rent?

Answer 11

Defined in International Valuation Standards
(IVS) 104 as

‘the estimated amount for which
an interest in real property should be leased
on the valuation date between a willing lessor
and a willing lessee on appropriate lease terms
in an arm’s length transaction, after proper
marketing and where the parties had each
acted knowledgeably, prudently and without
compulsion’.

Question 12

Define market value?

Answer 12

Defined in International Valuation Standards (IVS) 104 as

‘the estimated amount for which an asset
or liability should exchange on the valuation
date between a willing buyer and a willing seller
in an arm’s length transaction, after proper
marketing and where the parties had each
acted knowledgeably, prudently and without
compulsion’.

Question 13

What is the Net development value (NDV)

Answer 13

The gross development value (GDV) minus
assumed sale costs.

Question 14

What is Net internal area (NIA)?

Answer 14

The usable space within a building measured to
the internal finish of structural, external or party walls, but excluding toilets, lift and plant rooms,
stairs and lift wells, common entrance halls,
lobbies and corridors and car parking areas

Question 15

Net present value (NPV)

Answer 15

The sum of the discounted values of a net cash flow including all inflows and outflows, where
each receipt/payment is discounted to its
present value at a specified discount rate.

Where the NPV is zero, the discount rate is also the internal rate of return (IRR).

Question 16

What is an opportunity cost?

Answer 16

The return or benefit foregone by pursuing an
alternative action

Question 17

What is an Oversailing licences?

Answer 17

An oversailing licence allows a structure – a
crane, for example – to overhang public or
privately-owned property.

Question 18

What are two ways to measure profit?

Answer 18

Profit on cost
Profit on value

Profit on cost: The profit of the project expressed as a percentage of total development costs.

Profit on value: The profit of the project expressed as a percentage of the project’s net development value (NDV).

Question 19

What is a Residual method of valuation?

Answer 19

A valuation/appraisal of a development based
on a deduction of the costs of development
from the anticipated proceeds (including profit) . The residual calculates the land value.

Question 20

What is ROC (Return on capital)?

Answer 20

Net income/capital

The ratio of annual net income to capital derived from analysis of a transaction and expressed as
a percentage.

Question 21

What is Sensitivity analysis?

Answer 21

A series of calculations resulting from the
appraisal involving one or more
variables (rent, sales values, build costs, etc.) that are varied to show the differing results.

Question 22

What is a Simulation in an appraisal?

Answer 22

A simulation tests how changes in important financial figures can affect the value of a development. It helps show how much the value might go up or down if things don’t go exactly as expected..

Question 23

What is a standing investment?

Answer 23

Properties that are income-producing, usually
with a tenant in occupation.

Question 24

What is a turn key development?

Answer 24

A type ofdevelopment in which the property is
constructed and fitted out by the landlord/owner to a fully operational standard whereby an
operator can commence trading with immediate effect. It also assumes all necessary licenses or
registrations have been obtained.

Question 25

What is AUV

Answer 25

Alternative Use Value The market value, or any other appropriate basis, with the special assumption of an alternative use to the existing use or permitted highest and best use.

Question 26

What is EUV?

Answer 26

Existing Use Value The market value, or any other appropriate basis, assuming the property continues in its existing use with no expectation of that use changing in the foreseeable future

Question 27

What is Weighted average cost of capital?

Answer 27

The minimum return a company should earn in respect of an asset by reference to relative weight of equity and debt within its capital structure. This may be stated by the client.

Question 28

What is a yield?

Answer 28

Annual Rent/Property Value Yield can be applied to different commercial elements of a project, for example, office, retail, leisure, etc. It is usually calculated as a year’s rental income as a percentage of the value of the property. It includes capitalisation or cap-rate, all-risks yield, equivalent yield, income yield and initial yield.

Question 29

What factors are typically including in the Gross Development Costs? (7 + other)

Answer 29

• site clearance, remediation or preparation costs • costs of construction, including any contingencies • professional fees related to construction • costs and professional fees relating to planning, any planning obligations or levies linked to the development • finance for the development, including the site • land value • any other costs or inflows related to the development and • site costs where land value is not the residual.

Question 30

How do you calculate the development appraisal?

Answer 30

NDV - GDC = profit

Question 31

What are the two approaches to residual valuation?

Answer 31

Simple and DCF Two different applications of the residual method have been developed: discounted cash flow and a more basic application of the residual method. The basic residual valuation might be used for less complex assets or early in the development process to consider optimum development. A discounted cash flow may be used for more complex assets with phased construction or disposal where the timing of events needs to be fully accounted for in the valuation

Question 32

What should a development appraisal report include?

Answer 32

1. Purpose and Client details 2. Brief overview of methodology and headline figures (GDV, GDC, residual land value) 3. Assumptions and special assumptions (planning permission, market conditions) 4. Basis of valuation (e.g. RICS Red Book compliant; Market Value as per IVS) 5. Valuation date 6. Property Description Site location, size, boundaries, topography. Access and infrastructure. Current use and planning status. Legal title and ownership. Any restrictions, easements, or covenants 4. Planning Context Current planning policy and framework (e.g. Local Plan). Existing or potential planning permissions. CIL/S106 obligations (if known) 5. Development Proposal Scheme details: number of units, floorspace, tenure, use class. Phasing and development timeline. Market positioning (target occupiers/users) 6. Market Evidence & GDV Analysis Sales and/or rental comparables. Estimated sales prices/rents per unit. Discount rate/yield assumptions. Timeframe for achieving sales or letting. 7. Cost Analysis Build costs (often based on BCIS data). Professional fees and SDLT, Finance costs (including interest and arrangement fees). Marketing and disposal costs (legal, agents' fees). Planning/CIL/S106 contributions. Contingency allowance. Developer’s profit (as % of cost or GDV) 8. Residual Valuation Calculation Clear summary of inputs: GDV, costs, land cost. Sensitivity analysis (optional but best practice). Cashflow model if complex/phased 9. Valuation Conclusion Opinion of residual value (rounded, with rationale). Commentary on the strength or weakness of the appraisal. 10. Caveats, limitations, and valuation uncertainty statement (if applicable) 11. Appendices Supporting evidence (comparables, cost estimates). Plans and maps. Residual valuation spreadsheet (e.g. Argus/Excel)

Question 33

What is the industry standard for contingency allowance in a development appraisal.

Answer 33

Depends on risk level. Usually 5-10% of construction costs.

Question 34

Optimum GEA to NIA ratio

Answer 34

75-85% Depends on asset office less than industrial

Question 35

What is industry standard developer's profit margin?

Answer 35

15-25% risk dependant

Question 36

What’s the difference between profit on cost and profit on GDV? When would you use each?

Answer 36

→ Profit on cost: viability and appraisals. → Profit on GDV: investor perspective or valuation.

Question 37

Explain the difference between gross development value (GDV) and net development value (NDV).

Answer 37

GDV = total expected sale value; NDV = GDV minus costs like letting, purchaser’s costs, or sales fees.

Question 38

What data sources do you use to inform inputs into your appraisals?

Answer 38

BCIS, Land Registry, EGi/RADIUS, CoStar, sales evidence, QS inputs, agency advice, tender costs.

Question 39

How do you deal with uncertainty in appraisal inputs?

Answer 39

sensitivity testing, scenario analysis, and using a range of values

Question 40

Can you explain the implications of planning obligations (e.g. CIL, S106) on land value?

Answer 40

Planning obligations are a cost to the developer. In residual valuation terms, they reduce the land value.

Question 41

What are the key inputs in a residual appraisal and how do changes to them affect land value

Answer 41

Key inputs include: GDV: based on rent or sales values and capitalisation/yield Construction costs: using BCIS or QS estimates Professional fees, finance, contingency Developer’s profit Land value/profit is highly sensitive to these inputs. For example, a 25bps shift in yield can significantly alter GDV. Similarly, higher build costs or land value reduce profit.

Question 42

Give 5 examples of development appraisal assumptions?

Answer 42

Clear title. No charge Compliance with covenants

Question 43

Give 5 examples of development appraisal special assumptions?