Development Appraisals Flashcards
What is the role of development appraisals?
To value properties with development, redevelopment or refurbishment potential,
Used when land value is known and shows profitability of scheme
Name some key inputs?
What are the 3 key components of development finance?
site acquisition, total costs, hold costs
What is the ‘S’ curve?
Costs start low and develop throughout the project
Talk about hold costs?
compounded on a straight-line basis
Talk me through the structure of a development appraisal?
GDV-Costs-site value = profit
What are the sources of finance?
debt - senior and mezzanine (15-20%)
equity / JV
Current base rate?
4.45%
What is SONIA?
Sterling overnight index average
variable rates between banks for a 3 month term, plus a premium to reflect interest
Are there any RICS guidance?
RICS valuation of development property 1st Ed (2019)
RICS Valuation - Global standards (2024)
Talk me through the 7 Hugon Road apprisal?
What role does the Building Cost Information Service play in determining build costs?
BCIS owned by RICS, provided costs up-to-date data, helps determine build costs
m2
How do market conditions and client-specific considerations affect appraisal inputs?
Market conditions at the moment particular are very influential on appraisals, very sensitive for example a change in the interest rate can have large implications.
How are interest rates benchmarked in the context of development finance?
Borrowing rate is based on the interest rate currently 4.45%, a percentage is then added onto this for example my client as a pre-agreed lending facility with a bank where they can borrow 2% above the base rate and to a max of 30% value of the portfolio.
Why didn’t the 7 Hugon Road scheme appear financially viable when you ran the appraisal in Argus?
The scheme wasn’t financially via as the book value was 1.35m and the GDV was only significantly increased to 1.65. Given the poor state of the flats and the E rating EPC, the redevelopment works were extensive. Costing 500k this coming out at a loss already without accounting for professional fees. However, the motive was to increase the EPC to ensure they were compliant with MEES in the near future.
What factors did you consider when preparing the appraisals for the 7 Hugon Road project
Firstly understanding the site, looking at what could be feasible based on other consented schemes. What surveys were needed, I knew the site was near the river so a flood risk survey was needed. Client’s inputs of BC, finance etc
What was the rental income assumption you made for the commercial element in the development appraisal for 198 Wandsworth Bridge Road?
I assumed a rental income of £20,000 this was based on advise I got from a local agent, this figure was capitalised at an exit yield of 7.5%
I also checked CoStar
What were the BC for 198?
BC, I applied £100 for commercial and £250 for resi to reflect the work.
This was multiplied by GIA
What factors did you take into account while calculating the professional fees and additional costs of the mixed-use development on Wandsworth Bridge Road?
Since the site did not have planning I factored in a greater percentage for architects fees to reflect this, 6%. Further fees included QS, structural engineer, planning consultant, project manager
Other costs: Compensation for the commercial tenant 1xRV £24k (under 14 years)
CIL payment
Was there any requirement for affordable housing contributions in the Wandsworth Bridge Road development?
None, the scheme did not trigger the affordable housing mark 10 of more houses, 50% affordable
What was your advice to the client regarding the profitability of the 198 Wandsworth Bridge Road scheme?
Profit on costs just below 5%, profit erosion was 11 months and given this was very low, the scheme was just on the cusp of being profitable, so I advised we would be better of to gain planning and sell the block with consent.
How did you verify the initial GDV breakdown provided in the marketing particulars for the potential acquisition of 98-96 King Street?
GDV was provided on the particulars, I checked this by valuing the resi via comparable and commercial investment method.
What were the appraisal results for the 98-96 King Street mixed-use development, and how did they compare to the client’s hurdle rate?
14% profit on GDV, slightly below the clients target of 15% - considering the large capital needed for this project I advised it was too risky
Can you explain the sensitivity analysis you ran for 98-96 King Street and how it impacted your advisory response?
Build costs and interest rate, once the sensitivity analysis was run this heighten the risk exposure
