Development Appraisals

Question 1

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

Answer 1

Residual appraisals are valuations based on market inputs to come to a market value of the site.

Development appraisals are a tool to determine weather a development opportunity is worth pursuing through establishing the viability or profitability.

Question 2

Are the inputs to a development appraisal market facing ?

Answer 2

They can be but some can be chosen by a developer.

Question 3

What is the process involved in calculating these RV or DA?

Answer 3

GDV (revenue of the proposed development)
deduct
Build costs, land acquisition fees, development costs, professional fees, disposal fees and developers profit = Land Value

Question 4

What is the RICS definition of GDV?

Answer 4

The aggregate Market Value of the proposed development on the special assumption that the development is complete at the date of the valuation in the market conditions on that date.

Question 5

How might you calculate the GDV?

Answer 5

Comparable or investment method.

Question 6

How can inputs be affected by macro-economic factors? What macro-economic factors are affecting development at the moment?

Answer 6

• Interest Rates affect the costs of finance (Truss mini-budget).
• Brexit - high build cost inflation.
• Cost of living crisis - Lower absorption rates/ property affordability.
• Wars - flows of capital from certain places and higher build/labour costs.

Question 7

What other guidance is available ?

Answer 7

RICS Professional Standard: Valuation of Development Property 2019.

Question 8

What does the RICS Valuation of Development Property 2019 set out?

Answer 8

Sets out the main approaches to valuation of development property.
1. Market comparison approach.
2. Residual method.

Question 9

What is the definition of Development Property?

Answer 9

Interests which redevelopment is required to achieve the highest and best use.

Question 10

Why is sensitivity analysis required?

Answer 10

It is required for key variables such as GDV, Build Cost and finance rate to show range of values.

Question 11

What are the different types of sensitivity analysis ?

Answer 11

1. Simple sensitivity analysis of key variables - build costs, yield and GDV.
2. Scenario Analysis - change scenarios for the development content/ timing/ costs - phasing a scheme or modifying the design.
3. Monte Carlo Simulation - using probability theory using software ‘crystal ball’.

Question 12

What is the different types of sensitivity analysis?

Answer 12

Simple sensitivity analysis of key variables - build costs, yield, GDV.

Question 13

How do you calculate finance rate ?

Answer 13

1. SONIA (Sterling Overnight Index Average).
2. Bank of England Base Rate plus premium.
3. Rate at which the client can borrow money.

Question 14

What are the three elements of finance?

Answer 14

The developer needs to borrow money for the site:
1. Site purchase
2. Total construction and associated costs.
3. Holding costs to cover voids until disposal of the scheme.

Question 15

What is the principle of the S-curve ?

Answer 15

To reflect when monies tend to be drawn down.
Calcuate by assuming total costs over half of the time using S-curve.

Question 16

What is a SONIA rate?

Answer 16

Sterling Overnight Index Average - reflects average interest rate that banks pay to borrow sterling overnight from financial institutions.

Question 17

What did SONIA replace ?

Answer 17

LIBOR - London Inter Bank Rate which is the variable lending rate for a three month borrowing term.

Question 18

What is the current base rate?

Answer 18

4.75% as per the 7th November

Question 19

Why is it bank of england plus a premium?

Answer 19

To reflect the risk associated with borrowing money and the risk of the development (covenant of a larger developer vs a smaller developer).

Question 20

What is finance charged against?

Answer 20

The site purchase including purchasers costs.

Total construction and associated costs.

Holding costs to cover voids (empty rates, service charge).

Question 21

What are the limitations of a development appraisal?

Answer 21

Sensitive to changes in inputs - build cost inflation/house prices drop.
Dependant on the accuracy of inputs.

Question 22

What is the key takeaway from your argus developer session?

Answer 22

I learnt how to effectively profile out timescales.

Question 23

What are the limitations of using Argus?

Answer 23

Sensitive to inputs
Does not show the full calculations to the client

Question 24

Would a developer typically have 100% debt?

Answer 24

Usually they would have a 60% Loan To Value ratio
This would typically comprise senior debt which is the first level of borrowing and then mezzanine funding which is the additional monies required over the LTV ratio.

Question 25

Why would you assume 100% debt

Answer 25

1. To reflect that equity isnt free due to the opportunity cost. 2. It also reflects the additional fees and interest that would be incurred in borrowing. 3. It is useful for comparison if a client is comparing developments it is useful to compare like for like. 4. It is industry standard to use when providing market facing appraisals.

Question 26

What do you mean by opportunity cost?

Answer 26

It represents the potential benefits that the investor would miss out on when choosing one option over another. So in this case they would miss out on investing in something else.

Question 27

What level of developers profit?

Answer 27

Usually betwen 15%-20% reflecting risk.

Question 28

What is BICS?

Answer 28

Build Cost Information Service A database of build costs. Build costs are given in sqm and given in upper, median and lower quartiles. Shows information from QS and BS tenders.

Question 29

What are the limitations of BCIS ?

Answer 29

Can be based on a small sample size. Not always up-to-date Don't account for the site specifics such as ground conditions.

Question 30

What does BCIS exclude?

Answer 30

External works, contingency and design fees.

Question 31

How often is BCIS updated ?

Answer 31

Every quarter

Question 32

What is S106?

Answer 32

- S106 agreement - Introduced under the Town and Country Planning Act 1990. - Planning obligations set out in a legally binding agreement enforceable by the LPA and are site specific impact related only. - Agreement has to be entered into before the planning consent is granted. - Only justifiable to make the development acceptable in planning terms, directly related to the development and reasonable in relation to the scale of the development. - Can be used the secure affordable housing on a development. - Site specific charge - By negotiation.

Question 33

What is CIL ?

Answer 33

Community Infrastructure Levy Used by Local Planning Authorities for off-site payments from developers to raise funds for infrastructure. Cannot be used to secure affordable housing. Charging schedule must cover the whole area. Tariff based charging system based on the increase on floor area of the scheme.

Question 34

What RICS guidance is there for FVAs ?

Answer 34

RICS Professional Standard: Financial Viability in Planning: Conduct and Reporting May 2019. RICS Professional Standard: Assessing Viability in Planning Under the National Planning Policy Framework 2019 for England March 2021.

Question 35

What does the RICS Professional Standard: Financial Viability in Planning Conduct and Reporting May 2019 set out ?

Answer 35

Mandatory requirements on conduct and reporting in relation to FVAs for planning in England. Recognises importance of practicioners acting with impartiality, objectivity and transparency when reporting on such matters. Ascertaining viability involves making valuation judgements (inputs) which need to be rational, realistic and reasonable, relying on evidence and valuation and excersing judgement. Practicioners must therefore employ: - evidence based judgement - Collaboration - Transparency - Consistent, standardised approach. Must include sensitivity analysis and non-technical summaries No contingent fees

Question 36

What does the RICS Professional Standard: Assessing Viability in Planning under the NPPF for England 2019, March 2021 set out ?

Answer 36

Considers scope and means of undertaking FVAs in accordance with the NPPF and other planning guidance. FVA methods and inputs and the sensitivity testing of these are explained as are BLV, EUV and AUV.

Question 37

Was there anything in the Autumn budget that impact development?

Answer 37

- Planning reform is at the heart of the governments agenda. - Will respond to the NPPF consultation before the end of the year. - Impliment legislative change to ensure a simplified and streamlined planning system. - £500 million boost to the affordable housing programme.

Question 38

What use IRR in development?

Answer 38

To assess the total return from an investment opportunity.

Question 39

What is profit erosion?

Answer 39

How long it will take for the developers profit to erode to 0 by holding charges following completion of a scheme.

Question 40

Why should you sense check using land transactions?

Answer 40

Under the RICS Professional Standard Valuation of Development Property 2019, you should avoid reliance on a single approach.

Question 41

What is a Financial Viability Assessment ?

Answer 41

A Financial Viability Assessment is an analysis used to determine the financial feasibility for a development project, especially in the context of planning applications and policy compliance.

Question 42

How would you assess viability using BLV?

Answer 42

Residual Land Value – Benchmark Land Value = Surplu/Deficit If a deficit is produced, the scheme is not viable. If a surplus is produced, the scheme is viable.

Question 43

What is the existing use value + premium approach ?

Answer 43

THE EUV+ method is based on the existing use value of a site (current use value) plus a premium. The principle of this approach is that a landowner should receive at least the value of the land in its pre-permission use which would normally be lost when brought forward for development. The premium is added to provide the landowner with incentive to release the land for development.

Question 44

What is landowner premium ?

Answer 44

The landowner premium is added to provide the landowner with incentive to release the land for development. The range is between 0-30% depending on the size and complexity of the scheme.

Question 45

What is the Benchmark Land Value?

Answer 45

The minimum amount a landowner is likely to accept for their land when considering whether to sell it for development.

Question 46

How do you calculate BLV?

Answer 46

Existing Use + Premium approach or Alternative use approach

Question 47

Was you FVA Red Book Global Compliant?

Answer 47

No – because it was for negotiation purposes and therefore exempt from RBG under PS1 of the RBG Compliance with standards and practice statements where a written valuation is required.