Development Appraisals Flashcards
(40 cards)
What is the difference between a residual valuation and a development appraisal?
A residual valuation finds the market value of a site at one moment in time (the valuation date)
Development appraisal is a series of calculations to establish the value/profitability/viability of a proposed development based on the clients inputs
Not all developments have to be valued using the residual method
Sensitivity analysis has to be included in a development appraisal
Residual uses market led costs but development appraisal uses costs provided by the client
What factors influence a site’s profitability/value?
• Sustainability
• Physical
• Legal
• Planning
• Construction
• Finance
• Competition
If one factor suddenly isn’t available, the whole scheme can become unviable
What GN is relevant for development appraisals?
GN - ‘RICS (2019) Valuation of Development Property, 1st edition’
What does a development appraisal calculate?
- Residual site value
- Residual development profit
- Other outputs
What is development risk?
The risk associated with the implementation and completion of a development, including post-construction letting and sales
Determined through sensitivity analysis
New sustainability legislation may have what type of impact on development schemes?
It may increase the biodiversity provision of new schemes/focus on BREEAM
What physical factors can impact development potential?
- Size
- Topography
- Servicing (have to pay to get service infrastructure on site)
- Ground conditions (can’t just build over redundant coal mine)
- Aggressive plant species
- Contamination (costs can be so high it makes scheme unprofitable)
- Flooding risk
- Asbestos buried under ground can delay developments
What are some planning considerations you have to make?
Must comply with NPPF and local/regional plans (e.g. Manchester currently going through local plan creation)
Planning fees (e.g. pre-applications) have to be included in appraisal
If you breach planning it becomes criminal so you have a duty of care to inform your client
Have nature considerations (trees, flora, fauna)
Locational considerations (national parks, areas of national beauty, listed buildings, conservation areas)
S106 agreements and CIL payments can stop a scheme being viable
How many species of bat are there in the UK?
17
How is a residual valuation funded?
Assume 100% debt funded
What are some types of development agreement?
- Unconditional purchase agreement
- Promotion (partnership) agreement… when a landowner hangs onto land whilst developer promotes land to secure planning permission and market it to find a buyer. Landowner sells to buyer and sale proceeds shared
- Option agreement.. developer agrees to buy land if planning permission is secured
What is overage/clawback?
Overage - if a developer can get more units into site than they thought they then pay more
Clawback - a developer can get money back if they can get less units than they thought
What are hard costs/soft costs?
Hard costs - directly related to the construction of development (e.g. labour/materials, demolition, s106 costs etc)… can hurt a scheme
Soft costs - not directly related (e.g. marketing/agency fees).. are manageable
What did the case of Stokes v Cambridge Corporation 1961 involve?
Relates to ransom strips (an area of land which provides the key to unlock the development potential of adjacent land)
Determined that in a compulsory purchase situation, an owner is entitled to one third of the resulting property value
What are the benefits of a sensitivity analysis?
- Can assess the potential risk of a strategy
- Can understand the relationship between input variables and the outcome
- Adds credibility to development model through testing
- Help find errors in the development model
- Helps determine the likelihood of an occurrence
What is profit erosion?
The time it would take to leave the completed development unsold before the interest payable reduced the development profit to 0
Most lenders don’t want profit erosion to be less than 3 months
What are the 4 key stages of the valuation development process?
(according to the Valuation of Development Property guidance note)
- Instruction (terms of engagement)
- Investigation (inspection/market research)
- Data handling (analysing comparables/residual land value/sensitivity analysis)
- Reporting (market value/valuation report)
What is CIL?
Community Infrastructure Levy - money paid to the LPA to help them deal with the increased pressure on infrastructure (schools, roads etc) as a result of increased housing from a scheme
What is the typical Loan to Value ratio?
60%
What is debt finance?
Lending money from the bank
What is equity finance?
Your own money/selling shares in a company etc
What is senior debt?
The first level of borrowing (takes precedence to pay back)
Mezzanine funding is additional funding
What are S106 costs?
Legal agreements for planning obligations (e.g. affordable housing provision)
What is the contingency rate?
The amount of money you add to base costs to cover potential deviations from expected cost
5-10% based on level of risk/movements in build costs
