Development Appraisals Flashcards
What is the difference between a development appraisal and a residual appraisal?
A development appraisal is used to understand the viability or profitability of a site using developer inputs
A residual appraisal is used to understand the likely land value using market facing inputs.
How would you undertake a development appraisal without Argus
I would use Microsoft excel.
I would deduct all relevant build costs from my GDV and cash flow over the appropriate time scales.
To undertake the cash flow I would 1/2 my costs and times by my finance rate which is then multiplied by the timescale.
Why would you 1/2 your costs to cash flow?
As this best represents the S curve
Is BCIS reliable?
No, cost should always be checked by a quantity or building surveyor
How does an increased profit allow for risk?
Higher the risk, higher the reward
What are the limitations of the residual method?
Importance of acdurare inputs
Sensitive to minor adjustments
Growth implicit
Always needs to be cross checked with comps
What are the limitations of Argus?
It assumes 100% debt finance
Why is 100% debt finance assumed?
It protects the valuer and gives consistency in the market
What are considered abnormal costs?
Additional planning costs
Foundation costs
Contamination costs
Site clearance
Demolition costs
What is BCIS?
Rics build cost information service
Other than addressing build costs what can BCIS be used for?
Indexation, especially with the use of CIl
What information would be required for a development appraisal?
Fixed land cost and typically developers costs.
What are the two types of debt?
Junior and senior
What are the differences in the two types of debt?
Junior debt would have second charge on the register and is a seconadarybtype of funding such as bridge or mezzanine funding.
Senior debt would take first change on the register and is required to be paid off first.
You can raise senior debt from high street banks.
What is a REIT?
Real estate investment trust
Can anyone pay into a RIET?
Yes typically on the London stock exchange
What are the two types of funding?
Debt and equity
What type of finance is assumed in Argus?
100%
Is development finance typically 100% debt?
No it is typically 60%-70% loan to value
Why do you use Argus if it is not representing true market conditions?
It is a market standard and 100% debt finance protects the valuer however, it is Argus’s biggest downfall
What guidance is sensitivity analysis stated in?
Is it mandatory in section 7 of valuation of development property which sits along side IVS410 and makes risk analysis mandatory when valuing development property.
Why is there typically such a fluctuation within the sensitivity analysis?
Also the inputs change typically the amount of time you would borrow for would decrease or increase and therefore causing a large fluctuation in land value as the profit is fixed.
Why would you use 20% on cost?
Costs tend to fluctuate less than GDV and the percentage reflects risk.
What would you change in your residual if RM’s had not been granted yet?
I would increase planning costs and pre construction time scales.
