Development Appraisals

Question 1

What is the difference between a development appraisal and a residual appraisal?

Answer 1

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.

Question 2

How would you undertake a development appraisal without Argus

Answer 2

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.

Question 3

Why would you 1/2 your costs to cash flow?

Answer 3

As this best represents the S curve

Question 4

Is BCIS reliable?

Answer 4

No, cost should always be checked by a quantity or building surveyor

Question 5

How does an increased profit allow for risk?

Answer 5

Higher the risk, higher the reward

Question 6

What are the limitations of the residual method?

Answer 6

Importance of acdurare inputs
Sensitive to minor adjustments
Growth implicit
Always needs to be cross checked with comps

Question 7

What are the limitations of Argus?

Answer 7

It assumes 100% debt finance

Question 8

Why is 100% debt finance assumed?

Answer 8

It protects the valuer and gives consistency in the market

Question 9

What are considered abnormal costs?

Answer 9

Additional planning costs
Foundation costs
Contamination costs
Site clearance
Demolition costs

Question 10

What is BCIS?

Answer 10

Rics build cost information service

Question 11

Other than addressing build costs what can BCIS be used for?

Answer 11

Indexation, especially with the use of CIl

Question 12

What information would be required for a development appraisal?

Answer 12

Fixed land cost and typically developers costs.

Question 13

What are the two types of debt?

Answer 13

Junior and senior

Question 14

What are the differences in the two types of debt?

Answer 14

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.

Question 15

What is a REIT?

Answer 15

Real estate investment trust

Question 16

Can anyone pay into a RIET?

Answer 16

Yes typically on the London stock exchange

Question 17

What are the two types of funding?

Answer 17

Debt and equity

Question 18

What type of finance is assumed in Argus?

Answer 18

100%

Question 19

Is development finance typically 100% debt?

Answer 19

No it is typically 60%-70% loan to value

Question 20

Why do you use Argus if it is not representing true market conditions?

Answer 20

It is a market standard and 100% debt finance protects the valuer however, it is Argus’s biggest downfall

Question 21

What guidance is sensitivity analysis stated in?

Answer 21

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.

Question 22

Why is there typically such a fluctuation within the sensitivity analysis?

Answer 22

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.

Question 23

Why would you use 20% on cost?

Answer 23

Costs tend to fluctuate less than GDV and the percentage reflects risk.

Question 24

What would you change in your residual if RM’s had not been granted yet?

Answer 24

I would increase planning costs and pre construction time scales.

Question 25

What was the point of providing a fixed land value assessment?

Answer 25

To understand profitability or viability of the investment.

Question 26

What is the typically land value per acre for employment in that area?

Answer 26

£500,000

Question 27

How would you cash flow build costs in Argus?

Answer 27

Using an S curve

Question 28

Would the finance rate be different now than when you undertook this appraisal?

Answer 28

Yes, I understand for property finance lenders are offering 2.5/3% above base rate. Development finance is that much higher between 10 and 15% depending on the risk.

Question 29

What are the types of sensitivty analysis?

Answer 29

Simple - what I tend to use
Scenario
Probability