- What is the difference between a development appraisal and a residual valuation?
Development appraisal assesses the profitability or viability of a proposed scheme based on client’s inputs.
Residual Valuation provides a market value for the site based on market inputs – development appraisal can be used to do this
- What is the methodology for a development appraisal?
PROFIT = Gross Development Value – Total Development Costs – Site Value
- What is the methodology for a residual valuation?
SITE VALUE = Gross Development Value – Total Development Costs – Profit
- What is Gross Development Value?
Market value of a completed scheme at today’s date/valuation date
- What is the acre to hectare ratio?
1 hectare = 2.47 acres
0.4046 hectares = 1 acre
- How many sq ft per acres?
1 acre = 43,560 sq ft
- What are total development costs?
- Site Preparation
Demolition / remediation works / site clearance / levelling / provision of services
Obtain contractors estimate for these costs - Planning Costs
Town & Country Planning Act 1990
S.106 payment / CIL / s.278 payments / planning app / environmental impact assessment - Building Costs
Total costs of building works
BCIS or cost consultant - Professional Fees
10-15 % +VAT of total construction costs
covers all professional fees (architects, M&E consultants, structural engineers, …)
lower % appropriate for larger projects – reflects reduced level of fees arrange
architect usually accounts for largest % of total professional fees - Contingency
5-10% of total construction costs
Depends on the level of risk on site and market conditions - Marketing & Disposal Costs/Fees
Assume realistic marketing budget (use evidence and quotes)
Sales fee = 1-2% of GDV
Letting fee = 10% of initial annual rent - Developers Profit
C. 15-25% dependant on risk
Profit on Cost = commercial development
Profit on GDV = residential development
If scheme is low risk/pre-let a lower return may be required
% of profit recently risen due to market uncertainty - Finance
Debt rate = 7%
What other costs may you consider with a contentious site?
Abnormal costs (contamination level raise, bunds)
Utility costs
Infrastructure
What are the key inputs and outputs involved in the development appraisal process?
Inputs
* GDV – rent & cap rate
* Total development costs
* Finance
Outputs
* Residual land value
* Profit (cost & GDV)
* IRR
* Profit erosion period
What is a section 106 payment?
- Planning obligation (legally binding) relating to community gain, items directly linked to scheme
- Agreed prior to planning consent
- Negotiable – no fixed charging schedule
- Can be used to secure affordable housing
What is CIL?
- For infrastructure necessary to support development in the AREA
- Tariff based charging system (£ per sq m of scheme) – relates to size or change to size of development based on net floor space
- Calculated using the gross internal area of the floor space of all CIL liable buildings.
- Cannot be used to secure affordable housing
- Aim: to reduce negotiations required for s.106 and standardise/speed up the planning approach
Can a developer be double charged for s.106 and CIL payments?
No
What is a section 278 payment?
Contribution to highway works
Outline the main forms of development finance used by developers
Debt Finance – lending money from the bank or other financial institution
Equity Finance – own money used OR selling shares in company or JV partnership
How do you work out the rate of interest to use to calculate finance costs?
SONIA – (Sterling Overnight Index Average) replaced LIBOR Jan 2022 – risk free rate reflecting the average of the interest rates that banks pay to borrow from other financial institutions for sterling markets PLUS, premium to reflect interest rates
What interest rates did you use?
SONIA - 3.91%
Risk premium - c.4%
What is happening with inflation at the moment?
Target inflation rate = 2%
Actual inflation rate = 10% (driven by rise in energy prices and cost of fuel)
CPI linked – cost of development increases as costs of goods and services increase
