Development Appraisals Flashcards
What is RICS key legislation on Development Appraisals and what does it say?
RICS Valuation of Development Appraisals (2019)
- Guide the valuer in the approach to development property valuations
What is the difference between a residual and a development appraisal?
Residual: market assumptions to determine site value at moment in time (valuation date)
Development Appraisal: series of calculations to assess the viability/profitability of the scheme using developers inputs.
Is 15% contingency standard? Why did you use such a high contingency for Barnet?
Slightly high.
Site had a slope and no ground surveys had been done. used piled foundations with big costs. 15% reflected additional risk.
Why do you use different contingencies in each example?
Barnet- 15%
Bedford- 10%
Both were at a time of build cost inflation. However, in Barnet- site was on a slope.
What is profit erosion?
Period between completion and when property is let- will trigger developers profit.
What is the difference between CIL and S106?
CIL - a fee that has to be paid. calculated by multiplying the net uplift in floor space (sqm) by the CIL rate outlined in charging schedule
S106- specific site mitigation required- negotiated between developer and local authority such as new roads, affordable housing
For your development scheme in Bedford, what was the market uncertainty at time of valuation?
Ukraine war- inflation (energy prices, inflation/ potential mortgage rates – bank base rate was 1.25%, inflation was 9%.
What are some of the key inputs that can effect the viability of a project?
- GDV
- Construction Costs
- Finance Costs
-Contingency Rate - Professional Fees
- Planning Costs (CIL/S106)
- Developers Profit
What were the adverse economic movements at time of Bedford valuation?
-War
-Inflation reached 9%
-bank base rate was 1.25%
What is a sensitivity analysis and what is the purpose?
-series of calculations to determine risk by evaluating how changes to individual inputs would impact it.
-how movements in GDV/build costs would effect profit and land value
-clearly shows client what may happen if fluctuations.
What is the margin of error for surveyors, as detailed in your appraisal for Bedford?
10%, depending on facts
Why was it a development appraisal if your output was determining the profitability of the scheme?
As I was using the developer’s inputs and was then testing profit by changing different inputs in the sensitivity analysis.
How would you de-risk a scheme?
fixed build contract (no fluctuations)
ensure planning in place/no contamination
In your scheme in Romford, you note adding a 6-month development period. How do timescales affect a development period?
-affect finance- longer time frames and voids = more accrued interest= less profitable
What was the purpose of:
Barnet Appraisal: to assess whether the development was viable to the developer targeting a 20% profit level.
Bedford: to determine land value after inputting various costs
Stanmore: determine land value
Romford: land value
What is the residual method of valuation?
calculates land value. development appraisal can then test viability of scheme + establish residual land value
What is a development appraisal?
calculations to establish viability or profitability of a project based on clients inputs
What costs contribute to the total development cost?
site prep, planning, build costs
What is development finance?
two main methods for funding your scheme:
1. Debt Finance
2. Equity Finance (selling shares in a company or joint venture/own money)
Tell me about loans?
Loan to value ratio typically in the region of 60% , Senior debt is the first level of borrowing, Mezzanine funding is additional funding
What is overage?
This is the arrangements made for the sharing of any extra receipts received over and above the profits originally expected as agreed in a pre-agreed formula
Limitations of residual valuation and financial modelling
-Important of accurate information inputs
-Residual valuation does not consider timing of cash flow
-sensitive to minor adjustments
try to cross check with a comparable site valuation
How many forms of sensitivity analysis are there
-Simple - analysis of key variable such as yield, GDV
-Scenario analysis - change scenarios for the development content/timings
-Monte Carlo simulation - using probability theory using software such as crystal ball
What are typical professional fees?
10%-15% plus VAT of total construction costs
