Development Appraisals Flashcards
Define Development Property?
Interest where redevelopment is required to obtain highest and best use or where improvements are being contemplated or are in progress at valuation date.
Define Development?
Defined by Town & Country Planning Act 1990:
“the carrying out of building, engineering, mining or other operation in, on, over or under land, or the making of any material change in the use of any building or other land”.
When would you use a Development Appraisal?
I would use a development appraisal when I needed to calculate the profit of a client’s proposed development, or offer advice on a proposed development.
Outline the differences between a residual valuation and a development appraisal?
Residual = finding residual land value, based on market assumptions.
Appraisal = assessing the profitability of a scheme and are based on client assumptions and market assumptions.
How is residual land value calculated?
GDV - (build costs & profit) = Residual Land Value
What are some of the main costs included in a residual?
Build Cost Professional fees Statutory costs Marketing costs Legal costs Purchasers costs Agents fees Contingency
What are the professional fees?
Architect (usually highest proportion of fees) Quantity Surveyor Structural engineer Mechanical/electrical engineer Project manager C.D. Manager
What are the main components of a residual valuation?
GDV Build Cost Professional fees Statutory costs Marketing costs Legal costs Purchasers costs Agents fees Contingency Profit Residual Land Value Timescales Sensitivity analysis
What is profit erosion?
The period within which the profit from the development is eroded after completion due to holding charges (i.e. interest charges, building insurance, security and utility charges).
What is IRR?
Internal rate of return is a time weighted measure of return.
Internal rate of return is the annual rate of growth an investment is expected to generate.
The higher the IRR the better. Reduce timescales to improve.
What is an S-curve?
The S-curve is the pattern of cash flow which I assume the construction costs follow within my Argus Residual Appraisal.
It represents the assumption of how costs are spread across the construction period, with the majority expected during the middle of the construction period.
The purpose is to reflect when monies will be spent.
The interest is expected to follow the same pattern across this period.
What are the limitations to the residual method?
- The use of assumptions and not real costs.
- Assumes 100% debt finance which isn’t realistic.
- Small changed to inputs can have a large impact on profit/residual land value.
As per the RICS guidance note: Valuation of Development Property 2019 - you should cross check with the comparable method.
What is the basis of measurement used for the calculation of build costs and where would you find an up to date estimate of such costs?
GIA
BCIS (Build Cost Information Service)
Consult a building surveyor
What is a sensitivity analysis?
It’s a risk analysis technique, used to presented potential outcomes in changes to key variables.
What are the three forms of sensitivity analysis?
- Simple sensitivity analysis of key variables i.e. GDV and construction costs.
- Scenario analysis - changes scenarios for the development content i.e. changing the phasing of the scheme of its design.
- Monte Carlo Simulation - using probability theory, using software such as ‘Crystal Ball’.
What inputs would you vary in a simple sensitivity analysis?
i.e. upwards and downwards changes in construction costs and sales rates.
What outputs would you expect to show in a sensitivity analysis?
- Effect on land value
2. Effect on profit amount
How would you reflect planning requirements within your valuation?
I would enter any S.106 or CIL costs under ‘statutory’ within my valuation. I would also time the cash flow in accordance with the requirements within the CIL liability notice and the S.106 agreement.
What interest rate do you typically use?
Typically within my development valuations I assume the project will be 100% debt financed and generate a general market facing finance rate (to allow for comparison purposes and not accounting for developer specific discounts).
Typically I apply 6.5% which includes the Bank of England base rate (0.1%) cost of borrowing and arrangement fees.
How do you phase affordable housing in a cash flow?
Using the ‘golden brick’ method, to reflect the typical income flow from the RP where usually you would expect a percentage of the receipt to be paid up front, sometimes with an element in the middle of the construction period (depending on the length of development) and the remainder on practical completion.
Why is stamp duty not included within your case study?
As the subject comprises garden land, residential SDLT would be applicable. However, as the Government
announced on the 8th July 2020, there is a residential SDLT holiday until the 31st March 2021 which means that stamp duty is only paid on the amount above £500,000.
Therefore, I did not incorporate stamp duty into my residual appraisal as I have assumed the Borrower will purchase the plots within this period. If this turns out not to be correct, then I reserves the right to amend my valuation accordingly.
