17. Development Appraisals Flashcards

Question

What is the main impact of LURA 2023?

Answer 1

Levelling Up and Regeneration Act (LURA) 2023 * Statutory Duty for Local Plans: LURA makes it a legal requirement for LPAs to produce Local Plans within 30 months, moving from guidance to statutory duty. * National Development Management Policies (NDMPs): NDMPs now override parts of Local Plans, ensuring consistent enforcement of national development principles. * Funding Support: The government has allocated £14 million to assist LPAs in delivering Local Plans promptly and train up more planning officers. * Implication for Developers and Appraisals: LPAs’ Local Plans will increasingly reflect NDMP principles, affecting assumptions in development appraisals and planning strategies.

Answer 2

The National Planning Policy Framework The NPPF outlines the UK Government's planning policies and how they should be implemented. First published in 2012, the NPPF has been updated several times.

Answer 3

The National Design Guide The NDG, introduced in 2019, outlines what constitutes 'good' design in England. Establishes high-level principles to inform design decisions. 10 characteristics / Principals

Answer 4

The National Model Design Code Introduced in 2021, the NMDC builds on the NDG by providing Local Authorities with a toolkit to develop local design codes reflecting the ten characteristics of well-designed places laid out in the NDG.

Answer 5

Potentially better word to use is VIABILITY Evaluating if the project is financially deliverable, whether it can create profit and how much?

Answer 6

In simple terms, material price increases raise build costs, reducing developer profit and impacting viability. Data sources for this could include: * Cost consultant reports – e.g. Turner & Townsend, Gleeds, Gardiner & Theobald – publish quarterly market intelligence with material price trends. * ONS Construction Material Price Indices – updated monthly with data on key materials. * BCIS – provides tender price indices and cost data, including for materials.

Answer 7

* Key materials that significantly impact build costs include: * Steel – used in structural frames, heavily affected by global markets * Concrete & cement – core components in foundations and superstructure * Bricks & blocks – essential for masonry construction * Timber – used in framing, joinery, and interior fit-out * Insulation – essential for building regulations compliance * Plasterboard & drylining – widely used in internal partitions * Copper & wiring – key for M&E installations * Cladding & glazing systems – significant in high-spec or commercial builds * Oil Price

Answer 8

A well-known example is the significant increase in timber prices during 2020–2021, largely due to: * Global supply chain disruption from COVID-19 * High international demand, particularly from the U.S. and China * Brexit-related border delays and increased import costs In some UK residential schemes, timber prices rose by over 60%. Restabilised but not settled.

Answer 9

Labour shortages and wage inflation: Skilled labour remains in short supply across key trades such as bricklaying, M&E, and drylining. Wage costs have risen significantly to attract and retain talent, particularly in high-demand areas like London and the Southeast.

Answer 10

* Yes, we reference difference BCIS indices (Tender Price Index) as a benchmark. * Costs reflect a snapshot at the appraisal date. * Contingency is included to allow for cost fluctuations and risks.

Answer 11

1. Biodiversity Net Gain (BNG): Since 12 February 2024, all developments (except certain exemptions) must deliver a minimum 10% biodiversity net gain, calculated using Natural England’s biodiversity metric (offsetting cost). 2. NPPF – In December 2024, The Labour government introduced changes to the NPPF including the introduction of Grey Belt land, but also more requirement for affordbable where viability supports. 3. The Building Safety Act 2022 – Gateway two approval process for developments classified as High Risk Buildings and Building Safety Level (additional cost/ delays impacting finance )

Answer 12

* Higher Housing Targets: LPAs must plan for an increased annual housing target of 370,000 homes. * Five-Year Housing Land Supply: LPAs are required to demonstrate and maintain a five-year supply of housing land with a 5% buffer. * Green Belt Boundary Reviews: LPAs can review and adjust Green Belt boundaries under exceptional circumstances to meet housing needs. * Grey Belt Land Management: LPAs need to identify and manage development on newly introduced Grey Belt land. * Renewable Energy Facilitation: LPAs must support increased onshore wind and larger solar projects in line with revised policies. * Stricter Affordable Housing Policies: LPAs must enforce tougher affordable housing requirements, especially in Green Belt areas. * Balancing Development and Environment: LPAs face increased pressure to balance housing delivery with environmental protections and community interests.

Answer 13

* Identify key variables and their ranges (e.g., sales price ±10%, costs ±5%). * Set up a data table with one variable’s values in a row and the other variable’s values in a column. * Use Excel’s “Data Table” function (under What-If Analysis) to populate the table by varying both variables simultaneously. * Review the output to see how changes in variables affect the output (dev profit) * Use conditional formatting to highlight where output falls below minimum requirement.

Answer 14

* Acquisition of freehold interest * Forward Funding * New Lubbesthorpe, Leicestershire * 66 bed care home * Operator: Acacia Care * Developer: Synergy Care (JV between Wynbrook & Acacia) * Development appraisal date Nov 2023 * 100% wetroom, purpose built * BREEAM very Good, EPC A * Fully electric home

Answer 15

* Family-owned care home operator, founded in 2012. * Operates 6 homes, all within the East Midlands, mainly in and around Leicester. * All homes are owned and operated freehold (OHF). * Consistently strong performance: * All homes rated “Good” by CQC. * One home is expected to achieve an “Outstanding” rating. * Recognised as a strong, experienced operator. * Established JV partnership with Wynbrook, a specialist care home developer.

Answer 16

An investor agrees to buy the development site and fund construction in stages, with a pre-agreed price to purchase the completed property at practical completion.

Answer 17

Gross Development Value (GDV):The total estimated market value of a completed development once fully sold or let. Net Development Value (NDV): NDV is the GDV minus all relevant sale-related costs, agents’ fees, marketing, legal, letting costs, and importantly, purchaser costs. Since the GDV is rent capitalised by the net initial yield (NIY), purchaser costs must be deducted to reflect the true net amount the developer expects to receive from the sale.

Answer 18

£12k a bed rent £6.25% NIY £12.8M GDV

Answer 19

£12.8M GDV £12.4M NDV £2.8m land cost £95k per bed build cost £500k / 6% license fee (Finance cost) £2.6m profit (27% profit on cost) £590k dev profit retained for opening of home 21% profit on cost after retention

Answer 20

Used internal Excel database of build costs across OHF’s portfolio of 104 care homes. Today current averages have risen to around £130k per bed.

Answer 21

Yes, it given risk profile of the scheme, providing a healthy margin given construction cost inflation at the time. Also, we did not take on development risk in traditional sense, if it went over cost, it came out of their profits.

Answer 22

Included our nominal license fee of 6% as a cost of finance in the appraisal assumptions.

Answer 23

* Client: Lovett Care – a care home developer/operator. * Task: Review pipeline of 13 sites for forward funding potential. * Why: Director asked me to run high-level appraisals to: * Calculate indicative purchase prices (using 6.00% NIY). * Assess indicative rents, build costs, and profit on cost. * Identify sites worth progressing. Methodology: * Used comparable and profits methods to identify sensible rent. * Use investment method to calc PP. * Used a development appraisal to estimate the profit on cost in the scheme. Data Provided by Developer: * Planning status, no. of beds, land price per bed, build cost per bed. * Land prices: £30k–£82k/bed * Build costs: £125k–£170k/bed (£7.8m–£13m total)Schemes ranged from 60–82 beds. Planning breakdown: * 3 with full permission * 1 outline * 2 submitted * 7 in pre-app

Answer 24

1. Abergavenny (Wales) * 60 beds, outline planning * Only 1 competitor in 5-mile catchment * Low profit on cost (7%), but good strategic location 2. Abingdon (Oxfordshire) * 75 beds, pre-app * Only 1 competitor in 3-mile catchment * High barriers to entry, affluent market * Low profit on cost (5%) 3. Chelmsford (Essex) * 60 beds, planning submitted * Former car dealership site * 610 wetroom shortfall in 5-mile catchment * Strong demand indicators * Negative profit on cost 4. Benfleet (Essex) * 70 beds, pre-app * 2,084 wetroom shortfall * Established residential location * Negative profit on cost 5. Cambridge – Huntingdon Road * 78 beds, planning submitted (after earlier hotel refusal) * Site to be demolished * 334 bed shortfall * High-value area, planning risk but strong fundamentals * Negative profit on cost * Negative profit on cost

Answer 25

* Both are market norm assumptions for stabilised care homes. * As of Q2 2025 OHF stabilised occupancy was 90% (46 mature trading care homes) * 37.5% EBITDARM margin sits mid-range of OHF’s mature portfolio, ranges from 30–52% EBITDARM margin.

Answer 26

* Benchmarked against our internal cost database of recent care home schemes across the UK. * We have detailed cost data from 13 live forward funding deals and wider portfolio evidence. * Build costs vary by developer, spec, and region — typically ranging from £95k to £150k per bed.

Answer 27

* Profitability was a key consideration – schemes had to meet minimum return thresholds to be viable. * But profit alone wasn't decisive where multiple schemes are viable also consider: * Location quality – strongest weighting overall. * Affluence of local area – supports occupancy, AWFs and stability. * Staffing * Local competition * Demographics – ageing population, care need prevalence. * Local undersupply – supported by wetroom shortfall data. * Build and planning risk – preference for sites with clearer delivery path. * Counterparty strength – confidence in developer/operator to deliver.

Answer 28

* I advised the operator/developer that the profit on cost across all five shortlisted sites was too low — ranging from negative to around +7%, which falls below viability thresholds. * I identified the five most profitable sites, but also those with strategic appeal. * They had strong local demand, undersupply, affluent catchments, and limited competition. * I advised we could only proceed if land or build costs were reduced to improve viability.

Answer 29

* Borrower: Donard Real Estate – Irish developer. * Scheme: 245-unit BTR, 1 & 2 beds, across 14 storeys. * Location: Great Oaks Retail Park, Basildon, Essex. * Existing asset: Retail – to be demolished (now completed). * Local context: High deprivation and crime rates, but close to Basildon University Hospital. * Tenure: 100% market rent – scheme couldn’t support affordable. * Funding: Developer seeking development loan to deliver scheme. * Construction: In call said they were in discussion with Swedish contractor SIMMS, modular contractor, even though their appraisal was including build costs at BCIS level – red flag that they knew their GDV was incorrect.

Answer 30

Build to Rent refers to residential developments purpose-built for long-term rental, typically owned and managed by a single institutional landlord.

Answer 31

* BTR offers self-contained apartments with long-term tenancies, aimed at a broad rental market. * Co-Living provides smaller studio units with shared communal spaces, targeting younger, urban renters. * Co-Living has a higher operational intensity and often shorter tenancies, while BTR focuses on stability and scale.

Answer 32

Yes, full planning granted in Jan 2021.

Answer 33

* Key issue: I disagreed with the developer’s appraisal, which I considered overly optimistic. * Developer’s GDV: £82m based on inflated rents, 25% opex, and 4.00% NIY. * My GDV: £63m using current market rents, 25% opex, and a more appropriate 5.50% NIY due to the secondary location and socio-economic profile. * Result: My appraisal showed a -£7m profit, indicating the scheme was not viable. * Modular build: Developer proposed low-cost modular delivery, but even with reduced build costs, the scheme still didn’t stack. * Planning evidence: My assumptions were supported by the viability assessment on the planning portal, which also showed no capacity for affordable units.

Answer 34

* 25% opex is a market-standard assumption for stabilised BTR. * Covers management, maintenance, lettings, insurance, voids, and service charge shortfalls. * Supported by internal benchmarks and published industry data. * The developer had assumed same level. Reasonable Rents: £950 - 1 bed £1,250 - 2 bed £1,900 - 3 bed

Answer 35

* Based on Knight Frank Yield Guide (Nov 2024) – indicated 5.00% for prime BTR in tier 2 regional cities. * Basildon is a secondary location with higher perceived risk – justified a more conservative 5.50% NIY. * Acknowledge 5.50% may be slightly high, but even at 5.00% the scheme was still unviable.

Answer 36

Prime refers to assets in top-tier locations, with strong tenant demand, high-quality specification, and low investment risk.

Answer 37

NOI (Net Operating Income): Net rental income from an investment property after operating costs, but before finance costs and tax. Used in investment valuations. FMOP (Fair Maintainable Operating Profit): Assumed profit a reasonably efficient operator would earn from a trading property, after operating costs and periodic costs, but before but before rent, finance, and tax. Used in profits method valuations. NOI = investment income. FMOP = trading income potential.

Answer 38

“I then deducted marketing and letting costs, six months OPEX costs, and 6.80% purchaser costs to calculate the NDV” Standard assumptions used * Sales agent’s fee: assumed at 1–2% of GDV. * Letting fees: 10% of year 1 gross rent. * Six months' operating costs: included costs to stabilise the asset. * 6.80% incoming purchaser costs

Answer 39

* Assumed 40 units let per month → full lease-up in ~6 months. * Calculated monthly rental income based on phased occupancy. * Applied 35% opex in first 3 months (higher voids/management). * Applied 25% opex in next 3 months as scheme stabilised.

Answer 40

February 2025

Answer 41

* Developer: Youngman Lovell – new venture by Jack Lovell’s son (Jack co-founded Morgan Sindall Plc). * Location: Compton, a village near Newbury, Berkshire. * North of the High Street, close to Guildford * 32 acre site previously a research facility for farm animals – did have confirmation concerns (Pirbright Institute site). * Site: 160 homes – outline planning consent already secured. * Vendor: Selling site with outline planning permission. * Ask: Bridging loan to acquire land, refine planning, and progress design (RIBA stages). * JV: Planned joint venture with Lovell Homes to deliver the scheme. * Timeline: Bids due 2 weeks post appraisal. * Result: Did not win the bid for the site.

Answer 42

Purpose: High-level appraisal to support indicative Heads of Terms (HoTs). Hadn’t received cashflow from borrower so was high level. Awaiting JV terms with Lovell Homes. 1. GDV: £105m – derived using the comparable method. * Unit Mix: 2–5 bed houses. * Affordable Housing: 22.5%. * Sales Assumptions: * Avg sale price: ~£400 psf. * Example unit values: * 2-bed: £375,000 * 3-bed: £475,000 * 4-bed: £775,000 2. Land Purchase: £17.5m + VAT. 3. Build Cost: £2,300 /m². 4. +10% contingency 5. Professional fees 15% of TDC 6. Planning obligations – planning portal CIL & S106 payment still not agreed 7. Finance Assumptions * Interest Rate: 9.0% per annum. * Build programme: * 6 months pre-construction * 18-month build * 8-month stabilisation * Interest Applied To: * 100% of land + professional fees over 30 months. * 50% of build costs over 18 months (S-curve drawdown). * 100% of all project costs over 4 months (allow for phased sales). 8. Viability - Profit on Cost: 21.01% – above client's minimum hurdle rate of 15%.

Answer 43

CREDF III Targets * Interest Return: 0.75%–1.00% per month. * Loan IRR: 12%–13.25%. * Fund IRR (net of fees): 8%–9%. * Capital Deployment: Full deployment within the closed-ended investment period. * Repayment: Full return of principal + interest within term. Lending Parameters * Term: Max 24 months. * Max 70% LTV (on day one).

Answer 44

Landworth – pulls live sold price data from Land Registry. Zoopla – for asking prices, comps, and market trends.

Answer 45

* 2-bed: £376,000 * 3-bed: £475,000 * 4-bed: £776,000 * 5-bed: £980,000 average (£400 psf)

Answer 46

House types: 2–5 bed modular, patented prefabricated designs. Sustainable features included: * Mechanical ventilation with heat recovery (MVHR) * Triple glazing * Solar PV panels * Air source heat pumps (ASHP) * EV charging points * Timber frame * All electric * Brick slip façade * Zero bills Impact on GDV: * No direct uplift applied — limited market evidence to support premium pricing. * Factored into demand assumptions with expectation of faster sales velocity due to higher specification and ESG appeal.

Answer 47

* LPA: West Berkshire Council. * Affordable Housing: 22.5%. * CIL & S106 : Applicable – to be confirmed during full application. * Conditions: 47 planning conditions attached to outline consent. Planning Documents Reviewed * Section 106 Agreement (draft). * Design & Access Statement. * Flood Risk Assessment. * Environmental Agency Report. * Natural England Response. * CIL Guidance. * Planning Conditions Schedule.

Answer 48

Calculation of the finance cost. Programme: * 6 months pre-construction * 18-month build * 6- month stabilisation Interest Applied To: * 100% of land + professional fees over 30 months. * 50% of build costs over 18 months (S-curve drawdown). * 100% of all project costs over 4 months (allow for phased sales).

Answer 49

To reflect a S-curve drawdown in a simple way. S-curve assumes lower development spend early, rising mid-build, tapering off toward completion.

Answer 50

No cashflow provided — only indicative stage Borrower was finalising JV agreement with Lovell Homes. But told me assumed pre-sale started at construction start + 8 months post final unit PC. Therefore, forecasted sales of 7 units per month.

Answer 51

* No – the developer chose not to proceed with the acquisition. * Decision followed additional info released by the agent late in the process. * Developer had expected Homes England to value qualitative factors (e.g. ESG credentials), but the bid was judged purely on price. * Also explored selling affordable units to Sovereign HA, but they were only interested in their own house types, limiting delivery flexibility.

Answer 52

* £/m² gross internal floor area * The date of the document * Sample size * lower, median and upper quartile of costs. * How many storeys * Whether the building is air conditioned or not * Whether the costs are just for fitting out the existing building. * Remember build costs are done on a GIA basis.

Answer 53

If you build a house and occupy it yourself for 3 years. Affordable housing. Existing floorspace.

Answer 54

* This is because it’s a relatively fixed fee. A developer will want to know how much profit they are receiving from costs. * Shows true return on capital, including finance costs. * Balances risk to reward and allows easy comparison.

Answer 55

A pre agreed arrangement made between the property/ land vendor and the developer for the sharing of profits received over and above the profit originally expected Vendor entitled to additional payments if profit in scheme increases above a certain level.

Answer 56

6.25% NIY 6.80% purchaser costs deducted to cal NDV £95k per bed built cost internal data / BCIS 10% contingency Profit on cost 21% sensitivity 10% increase in build cost = 16% profit on cost

Answer 57

13 sites 92% occupancy 37.50% EBITDARM margin 2.0x RCR 6.00% NIY minus 6.8% purchase cost Identified 5 most attractive sites

Answer 58

245 unit BTR scheme 25% operating cost Capitalised NOI at 5.5% NIY 6.8% deduction to calc NDV Build cost aligned BCIS median benchmarks Increased build cost contingency from 5.0% to 10.0% Negative developers profit

Answer 59

* 160 houses * assessed developer's GDV assumption * Recognised potential for above average £ / sq ft to be achieved because of sustainable design but remained conservative * Verified planning contributions against relevant planning docs. * Developers build cost exceeded BCIS median benchmarks, accepted and added 10% contingency * Development programme 6 month pre construction, 18 month build, 6 month stabilisation * 9% finance rate * Profit on cost 21.01% - exceeding minimum threshold * Issued indicative terms

Answer 60

Simplified in 2020. Found on the planning portal website: Class E: Commercial, Business and Service Class F: Local Community and Learning Class B: Indutrial Class C: Residential Sui Generis: Unique uses that do not fit into a class Town and Country Planning Act C2 - Care Homes C3 - Houses

17. Development Appraisals Flashcards

(84 cards)