Development Apprasials Flashcards

1
Q

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

A

A development appraisal is where you find the profitability from a known site cost (after deducting costs)

A residual valuation is where you find the site cost by by deducting all costs and profit

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2
Q

GDV is what?

A

An estimation of the completed development value of the site if it were on the open market

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3
Q

What is NDV?

A

Net development value is calculated by deducting purchaser’s costs such as stamp duty and legal fees from the GDV

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4
Q

What costs might be expected as part of a development or residual appraisal?

A
Site survey
Site purchase price
Agents fees
SDLT
Legal fees
Planning costs
Finance costs
Professional fees
Construction costs
Contingency
Marketing/ letting
Agent and legal sale costs
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5
Q

Where might you find information to assist with your appraisal assumptions?

A

BICS
Agent
QS

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6
Q

What are some financial risks of a development?

A

Various costs increasing

Delays cost money

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7
Q

What are considered ‘professional fees’

A

Architect
Structural engineer
Planning consultants
Quantity Surveyor

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8
Q

What are some non-financial risks of development?

A

Planning risks/delays
Macro economic impacts
Ground condition risk/ topology

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9
Q

Why do you need to be so careful when making your assumptions? What analysis can you undertake to test your assumptions?

A

Because its all about making the most accurate prediction

Sensitivity analysis to test the impact of changing assumptions

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10
Q

How would you construct a Development Appraisal

A

Establish costs, by making assumptions based on research/experience/professional advice

Determine the GDV using comparables

Calculate the profit figure

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11
Q

How would you construct a Residual Valuation

A

Establish desired profit (i.e. 20%)

Determine the GDV using comparables

Establish costs, by making assumptions based on research/experience/professional advice

Calculate the site value to achieve the desired profit

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12
Q

What are key profitability/return metrics?

A

Profit (i.e. Return on equity)
Profit on cost
IRR

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13
Q

What are the weaknesses of Development Appraisals?

A

It can’t account for unforeseen changes

Sensitive to minor adjustments to inputs

Quality/reliability of inputs can vary

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14
Q

Give some examples of key inputs?

A

Construction costs
Yield/rent
Finance costs

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15
Q

Give some examples of typical inputs?

A

Professional fees
Planning costs
Contingency
Construction costs

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16
Q

Give some typical percentages for planning and professional fees?

A

10-15% of total construction costs

17
Q

Give some key outputs?

A

Profit percentage
GDV
IRR

18
Q

What financing assumptions might you make?

A

Senior debt, typically 6% per annum with 60-65% LTV

19
Q

What are IRR and XIRR? What is the difference?

A

Both are a return metric that factors in the rate at which funds are expended or returned over time.

The IRR calculation assumes all periods are equally distanced apart

The XIRR calculation allows you to associate specific date with periods

20
Q

How would estimate cost timing?

A

You would make the assumption that the costs of the development follow the ‘S-curve’

21
Q

Does the Red Book cover Development Appraisals?

A

Valuation of development property

1st edition, October 2019 Guidance Note

22
Q

What RICS help is there on valuing/appraising sites?

A

BCIS (Building Costs Information Service)

23
Q

How would you pick your rents & yield on the GDV

A

Using comparable evidence and analysis

24
Q

What third party reports might you rely on to guide your inputs?

A

Agents - rent and yield
Environmental reports - site conditions
QS - determine build costs

25
Q

What important aspects are not included in a Development Appraisal?

A

Planning risk

Site condition risk

26
Q

To what extent should you inflate rents/costs?

A

Grow the rents and costs at inflation (CPI)

If advised that rental growth is higher/lower then you could use this

27
Q

What are the steps to undertake a Development Appraisal?

A

Determine your inputs
Determine a time scale
Determine a GDV
Determine the profit required

28
Q

How do you reflect (or price) planning risk in the appraisal?

A

Add contingency/time buffer

29
Q

What is an S-curve and are there different types?

A

An S-curve dictates the timing of costs

Yes

30
Q

What is a profit hurdle and what was yours on Bickington?

A

Profit hurdle depends on the developers requirements but usually between 15-20% of GDV.

We used 20%

31
Q

What was the Bickington appraisal most sensitive to?

A

Sale prices

32
Q

How do you source finance rates from banks? What would senior bank interest rates and leverage be for development finance?

A

Speak and share development appraisal. Leverage usually around 60% LTV at 6%.

33
Q

What are typical build costs of office, resi and industrial?

A

Office - £1,200 per square meter
Resi - £1,200 per square meter
Industrial - £600-£700 per square meter