Development Appraisal

Question 1

What is a development appraisal ?

Answer 1

A tool used to financially assess the viability of a development scheme.

They can also be used to assess the profitability of a proposed scheme, and it’s sensitivity to changing inputs.

Question 2

Define a development appraisal ?

Answer 2

A series of calculations used to assess to establish the value/viability/ profitability/ suitability of a proposed development based on inputs.

Question 3

When would you use a residual site valuation ?

Answer 3

For a specific valuation of a property, hoping to find the market value of the site based on market inputs.

Question 4

What dates should the inputs be taken from?

Answer 4

The date of valuation.

Question 5

Explain the methodology of a residual site valuation ?

Answer 5

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 Costs: EPC, sale fee, letting fee
• Finance Costs: Interest rates, costs of borrowing.

MINUS

DEVELOPERS PROFIT

• Usually in the region of 20% of GDV.

Question 6

What are the methods of funding for a development ?

Answer 6

1. Debt Finance: Lending from a bank or institution.
2. Equity Finance: Own funds used.

Question 7

Limitations of a Residual Valuation ?

Answer 7

• Relies on accurate information to be inputted.
• Does not consider timings of cash flow.
• Very sensitive to minor adjustments.

Question 8

What is a sensitivity Analysis ? and what is it used for?

Answer 8

There are 3 forms:

1. Simple sensitivity analysis - based on key principles
2. Scenario analysis - changes in design
3. Monto Carlo Simulation - Using crystal ball software.

Question 9

What purchase/acquisition costs can be expected ?

Answer 9

Legal fee’s - agency fee’s - Any taxes.

Question 10

What developer contributions are expected ?

Answer 10

Mandatory requirements providing benefit to the community. Such as contributions to education etc.

Question 11

What is the development yield ?

Answer 11

Rental income % by the actual cost incurred.

Question 12

Define GDV?

Answer 12

The market value of the proposed development.

Question 13

What is the holding costs?

Answer 13

The cost associated with holding onto a site. For example, taxes, maintenance etc.

Question 14

What is an interest rate?

Answer 14

The rate of finance applied in a development appraisal.

Question 15

What is net development value?

Answer 15

The gross development value minus assumed sales costs.

Question 16

Talk me through the process of a residual development valuation ?

Answer 16

1. Instruction - T+C’s agreed.
2. Investigation: Inspection, property analysis, market research.
3. Collection of data: Specific to the development.
4. Qualification and verification
5. Valuation Report

Question 17

What two methods of valuation are usually used in development property ?

Answer 17

1. Comparable method
2. Residual method

Question 18

What analysing the development potential of a property, a valuer should consider ?

Answer 18

• Planning permission
• Available services
• Infrastructure
• Ground conditions
• Development restraints
• Accessibility
• Car parking

Question 19

What are purchaser costs?

Answer 19

Stamp Duty Land Tax: Circa 5%
Agency Fees: 1% of GDV
Legal Fees: 0.5%

Question 20

What is the stamp duty land tax ?

Answer 20

£0 - £150,000 = 0%

£150,001 - £250,000 = 1%

£250,000 + = 5%