Development Apprasial Flashcards
1
Q
What is a Development Appraisal?
A
A series of calculations to establish:
- Value
- Viability
- Profitability
- Suitability
Of a proposed scheme based on inputs
2
Q
What are Development Appraisals used for?
A
- To establish if a development should proceed given the profit after all the costs
- Can be used for Affordable Housing Viability
3
Q
What is the methodology for a Residual Valuation?
A
GROSS DEVELOPMENT VALUE
- Find the market value of the site, based on market inputs.
Comparable method used to establish rents and yields. - All risk yield is often applied.
Rent free and voids are to be assumed.
MINUS
TOTAL DEVELOPMENT COSTS
- Site Preparation:
Demolition,
`remediation works,
services,
clearance (based on contractors estimates) - Planning Costs:
Section 75’s,
consultant fee’s
specialist reports. - Buildings costs:
Total cost of building works - Professional Fees:
10% - 15% of total construction costs. Usually for architects, project managers, engineering consultants. - Contingency:
5% - 10% of total construction costs. - Marketing Fees
Sale fee (1-2%)
Letting fee (10% of annual rent)
EPC Costs - Purchaser Costs:
(1%) agents fee,
(0.5%) legal fee,
LBTT/Any tax - Finance Costs:
Interest rates (plus 3% premium) costs of borrowing.
MINUS
DEVELOPERS PROFIT
Usually in the region of 20% of GDC
= Site Value
4
Q
What is the methodology of a Development Appraisal?
(same as residual but with site value)
A
Gross Development Value
Minus
Total Development Costs
Minus
Site Value
= Profitability
Sensitivity Analysis
5
Q
What is a Residual Valuation used for?
A
- Used to value a site or land to find the highest and best use of the land
- Typically used as a Red Book Valuation.
6
Q
How do you establish GDV?
A
- Find Market Value of the site based on market inputs
- Comparable method used to establish rents and yields
- All Risk Yield often applied
- Any rent free or voids assumed
7
Q
What are some Gross Development Costs?
A
- Site Preparation:
Demolition 20k,
remediation works,
services, clearance (based on contractors estimates) - Planning Costs:
Section 75’s,
consultant fee’s,
specialist reports - Buildings cost per sq ft
(Total cost of works) - Professional Fees:
(10-15%) of total construction costs. architects, project managers, engineering consultants. - Contingency Fees:
(5-10%) total construction costs - Marketing Fees
Sale fee (1-2%)
Letting fee (10% of annual rent)
EPC Costs - Purchaser Costs:
(1%) agents fee,
(0.5%) legal fee,
LBTT/Any tax - Finance Costs:
Interest Rates (%) plus 3% premium
borrowing costs
8
Q
What is usually Developers Profit?
A
Usually around 20% of GDC
- Depends of risk (25% if no planning)
- Can be on GDV or GDC
9
Q
What is the difference between a Development Appraisal and a Residual Valuation?
A
- Development Appraisal gives you the profitability of a site when land value is known
where as
- Residual valuation gives you the value of the land
10
Q
What is a sensitivity Analysis ? and what is it used for?
A
- Analysis of the impact of changing key variables eg)
- Build costs, GDV, Yields etc
- Used for risk in terms of how changes of inputs affect profitability or viability of a scheme
11
Q
What types of Sensitivity Analysis are there?
A
- 3 Forms
- Simple: analysis of key variables
- Scenario: changes to development eg) phasing or design changes
- Monte Carlo: Probability theory using software like Crystal Ball
12
Q
What is an S Curve?
A
Reflects the payment of construction costs, shaped over the length of the development.
13
Q
Define GDV?
A
The market value of the proposed development once completed
14
Q
What are Developer Contributions?
A
- Mandatory Requirements that benefit the community paid/contributed to by developers
- Education, Roads, Affordable housing
15
Q
What are the limitations to a Residual Valuation?
A
- Relies on accurate information/inputs
- BCIS updating
- Doesn’t consider timing of cash flow
- Sensitive to minor adjustments
16
Q
What are the LBTT levels ?
A
Land and Buildings Transaction Tax
- Up to £150,000 = 0%
- £150,001 to £250,000 = 1%
- Above £250,00 = 5%
17
Q
What is an interest rate?
A
The rate of borrowing which is applied in development appraisals
18
Q
What is net development value?
A
Gross Development Value
Minus
Assumed sales costs.
19
Q
When analysing the development potential of a property, a valuer should consider?
A
- Planning permission
- Available services
- Infrastructure
- Ground conditions
- Development constraints
- Accessibility
- Car parking
20
Q
What two methods of valuation are usually used in development property ?
A
- Comparable method
- Residual method
21
Q
Talk me through the process of a residual development valuation?
A
- Instruction - AML, T+C’s agreed.
- Investigation: Inspection, property analysis, market research.
- Collection of data: Specific to the development.
- Qualification and Verification
- Valuation Report
22
Q
Do you base profit on GDC or GDV?
A
- Typically if commercial development market practice is on GDC
- Resie is on GDV
- But it can be clients preference and usually clients dont mind as long as positive NPV
23
Q
What do you know about the RICS Guidance is there for Development Property?
A
- RICS Guidance Notes Valuation of Development Property 1st Edition 2020
- It supplements IVS 4 Development Property
- Use of Assumptions and Special Assumptions
- Basis of Market Value
24
Q
How can interest rates affect developments?
A
- This can affect the price of debt on the development
- Represents the minimum cost of borrowing money
25
What is common finance for a development?
- Debt Finance
- Lending money from a bank or financial institution
26
What are the two types of Development Finance?
1. Debt Finance: Lending from a bank or funding institution
2. Equity Finance: Selling Shares, JV's, own money
- Mezzanine Finance is additional funding outside of high street banks (15%)
27
Coldrach
Why did you run 3 appraisal scenarios?
- To show a variety of scenarios to the council that the scheme with S75 wasn't viable
- Want to take the development on and rebuild a steading development in the National Park
28
What is BCIS and what are the prices based upon?
- Building Cost Information Service
- QS sources/recent contract prices
- measured in GIA
- Run by RICS
- Can be out of date
29
Madras
You mention Special Assumption, what is this?
- An assumption that is assumed to be true but is not
- Planning in this case was a fair and reasonable special assumption for this project
30
Madras
How did you assess the rents?
- Looking at market comps for similar spec and size accommodation
- Limited due to only 2 private schemes so also looked at similar size private flats
- Looked at similar University Towns
31
Madras
Can you elaborate on the build costs? What components or factors did you consider when estimating construction expenses?
- A cost plan came from the clients architects
- They had suggested build costs of £95,000 per room
32
Madras
How was your exit yield influenced and what was it?
- Through rationale and market evidence
- 5.25%
33
Madras
Why was your exit yield high?
- Reflects the evidence
- Little trading in St Andrews (2 Private schemes)
- Looked at similar Uni towns
- Investor demand
34
Madras
How did you calculate your total rent?
- Units x Term x Rent per week + Voids@1.5 + Fees@1.5%
35
Madras
What were the profit that you included in the development appraisal?
- 20% on GDC
36
Madras
Where there any special costs associated with this project?
- Planning
- Surveys
- Bank Monitoring
- Potential s75
- Scheme Mobilisation
37
Newburgh
At Newburgh, how did you account for the 20% affordable housing requirement in your appraisal?
- This was account for via the Government Incentives given for affordable housing and adopted within then appraisal
38
Coldrach
How did you allow for the S75 in your appraisal?
- The S75 was for affordable housing contributions
- The contribution was monetary and so was made allowance for in the appraisal
- To show the scheme would not be viable with this S75 in place
39
How would you calculate development finance?
- Interest rate (5.25%) plus 3%
- Madras was total 7.5%
Interest rate plus 3% premium
40
What is Overage?
- Arrangement made for the sharing of extra receipts made over original profit expected
- Pre arranged sharing between developer and seller
41
What is Profit Erosion?
- Length of time it will take for development profit to be eroded by holding charges after schemes completion
- Usually interest rates or scheme making a loss
42
Coldrach
What were the 3 scenarios you ran?
1. Appraisal assuming 17.5% profit
2. Reducing profit to 10%
3. Using Purchase Price of £350,000 which only gave 5.2%
- Professional fees 10%
- Contingency at 5%
- Sales cots 1.5%
- Finance around 6-7%
Interest rate was only 3% in Nov 2022
43
Coldrach
What profit was used for the first scenario?
- 17.5% on GDC
Smaller development
44
Coldrach
What was the viability outcome of the appraisal?
- The development was only viable when Section 75 Affordable housing contribution wasn't provided
- Wanting council flexibility to bring forward development that would allow for the reuse of a vacant steading
45
Coldrach
What were your build costs?
- £1,800 per sqm for the Steading conversion
- £1,700 per sq m for the new build holiday chalet
46
Newburgh
What was your timescales?
- 24 months Construction
- 24 months sales
Total: 48 months
47
Newburgh
You mention Professional Fees, what did that include?
- 10-15% of total construction costs
- Architects fees
- Project managers
- Engineering consultants
48
Newburgh
What costs did you apply?
- Professional fees 10%
- Contingency 5%
- Profit 20%
- Finance 5+3%
- Build costs: £1,450 per sqft
49
Madras
You mention Purpose Built Student Accommodation, what issues did this bring up
- Proximity to residential housing
- Overhead lines in on the site
50
Where do you get build costs from?
- BCIS
- Cost plan from clients
- Liasing with BS team
51
Newburgh
What is this market like?
- Commuter town
- Good transport links to Dundee and Edinburgh
- Variety in level of sales
