APC Revision > Development Appraisal > Flashcards

Development Appraisal Flashcards

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1
Q

What is net yield?

A

An income return on an investment after expenses have been deducted

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2
Q

All risks yield

A

GROWTH IMPLICIT

Standard calculation for yield and adjusts them to reflect the perceived risk of property investment

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3
Q

What the definition of gross yield?

A

Income return on an investment before expenses are deducted

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4
Q

What is the definition of a reversionary yield?

A

Market rent divided by purchase price on an investment let at a rent below market rent

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5
Q

What is a yield?

A

A measure of annual investment return, reflecting risk expressed as a percentage of capital value

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6
Q

What are the 5 steps to establish benchmark land value?

A
  1. Establish the existing use value
  2. Establish the alternative use value (is appropriate)
  3. Calculate the premium (difference between EUV and BLV)
  4. Establish the residual land value of the planning policy compliment proposed scheme
  5. Cross check premium with reference to land transaction evidence
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7
Q

How to calculate the years purchase?

A

100/ yield

5% yield = 20 YP

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8
Q

What is equivilant yield?

A

Average weighted yield between the term and reversionary income

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9
Q

What is the equated yield?

A

GROWTH EXPLICIT

Yield on a property investment which takes into account growth on future income

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10
Q

What yield would each of the below have?
1. Risky investment
2. Safe investment

A
  1. High yield
  2. Low yield
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11
Q

How would you calculate net initial yield?

A

(Annual rent - annual costs) / capital value x 100 = NIY

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12
Q

How to calculate gross yield of a property?

A

Annual rent / capital value x 100 = GIY

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13
Q

Where do you find the definition of benchmark land value?

A

Planning policy guidance on Viability (paragraph 13)

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14
Q

How did you establish residual land value?

A
  1. Gross development value
    Less
  2. Total development costs
    Less
  3. Developers profit

= residual land value

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15
Q

What does viable mean in planning?

A

Where the residual land value is greater than the benchmark land value

Or

Where the residual profit is greater than the target profit

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16
Q

What is the main guidance in viability?

A
  1. RICS Assessing viability in planning under the National Planning Policy Framework 2019 for England
  2. Planning Policy Guidance - viability
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17
Q

When would you use the term and reversion method? When would you use the hardcore layer method?

A

T+R = under rented property
H+L = over rented property

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18
Q

You inspected a development site in Wigan for viability purposes, can you tell me what you noted on site?

A

Shape and topography of the site, placement of pylons and surrounding area

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19
Q

what did you determine by reviewing the local plan for the viability?

A

it emphasised the need for affordable housing which was 25% requirement for developments of over 10 units

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20
Q

Can you explain how you determined the gross development value of the scheme? (viability)

A

Market research there was also recently completed schemes nearby

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21
Q

did you make any adjustment to those values on nearby schemes and what? (viability)

A

no because they were they were still being sold at the time of undertaking the GDV market research so they were up to date and also very comparable schemes.

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22
Q

why did you value on a £ per sqm basis?

A

because this was an outline planning application however for the 2 bed houses I assumed would have been the same as previous schemes - terraced and all the evidence for 4 beds were detached.
i was only the 3 beds which were a range and we gathered semis and detached and adopted a range in the middle on a £pm2 - assumed a similar mix of house types to the directly comparable site.

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23
Q

You researched into build costs for the development – what did you conclude?

A

For the build costs on BCIS you can filter on the different types of property. But I adopted the general estate scheme which compares the mix of house types.

furthermore, I adopted the Lower quartile because large scheme and assume built by a volume housing developer. Savings in quantum. Applicant also relied on lower quartile build costs.

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24
Q

What professional fees did you account for in the appraisal? (viability)

A

6%

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25
what was the GDV for the site? (viability)
£172milllion
26
what was the construction/build costs for the appraisal? (viability)
£77 million
27
how long was the scheme? Viability
168 months
28
what was the Benchmark land value of the scheme? (viability)
£5.2 million
29
what us the EUV of the site? (viability)
£11.5k an acre (£591,100) this was derived from comparable land evidence
30
what was the premium (viability)
£4,698,900 circa 8.8x the EUV
31
what was the target profit for the scheme?
17.5% for the market housing 6% for the affordable housing a blended rate of 16.21%
32
how would you work out the blended rate profit? (viability)
you would work out what 17.5% of the private housing GDV and then what 6% of the affordable gdv is and then add together to then work out what percentage to the total gdv that equates to
33
what was deemed viable?
10% affordable housing compared to the 25% requested from the local plan.
34
Why did you undertake a sensitivity analysis?
to try to quantify the risk say if the GDV goes up or down same in relation to the Build costs to test the inputs and the impact on the viability.
35
what was the timescale breakdown of your viability?
purchase = 1 month pre-construction = 24 months construction = 140 months starting at month 14 sale = 148 month starting at month 21 total 168 months
36
what finance did you adopt? viability
7%
37
how many sales per month? surplus
3.35 units per month market housing
38
What was the size of the residual surplus in Wigan?
1.4 acres Rectangular in shape
39
Why resi development for the Wigan surplus land?
Adjacent to resi area and allocated in Local Plan for resi expansion
40
What is Argus?
Software (licenced) which facilitates property valuations
41
Benefits of Argus?
Enables phasing to be incorporated for large developments
42
Disadvantages of Argus?
I always ensure to exit the software following a residual as it is a licenced platform and therefore this free’s a licence for other members of the organisation
43
What was the net developable area for the surplus land Wigan
80% so 1.12 acres which I discussed with a senior surveyor and had reference to previous instructions
44
How many units were proposed on the Wigan surplus site?
40 units, a mix of 3 bed semis and 3 and 4 bed detached
45
Did you implement any affordable housing? surplus land
Yes 25% as set out in the local plan so 10 unit
46
What price were the affordable housing? surplus land
55% of the market value
47
What was the market value for your properties? surplus land
£260,000 - £370,000 for the market housing
48
What was the total GDV for the Wigan surplus land?
£11.3 million
49
What were the build costs for the Wigan surplus land?
Costs from BCIS £1,200 -£1,500 per unit from the lower quartile
50
Why adopt the lower quartile? surplus land
Due to the location of the site, it was not above average scheme therefore lower quartile gives a more accurate valuation.
51
Disadvantages to BCIS
Large developers don’t disclose their build costs to BCIS – if they did, the average price would be lower so I adopted the lower quartile
52
What were the total build costs for the Wigan surplus land?
£5.4 million
53
What was the contingency for the Wigan surplus land?
5% of build costs & external works (accounts for unknowns in developers’ risk) adopted in previous similar instructions
54
What is future homes?
UK government initiative mandating that all new homes built from 2025 must have significantly lower carbon emissions and high energy efficiency. BCIS costs do not include future home standards therefore added 5% uplift.
55
What future homes did you apply to the Wigan surplus land?
Future Homes – £7000 per unit based on the assumption that the future homes standard would be present once the build starts.
56
What S1-6 did you apply to the Wigan surplus land?
Section 106 – a contribution of £10,000 per unit adopted in previous similar instructions usually between 5-10% in NW / adopted higher figure as appropriate for the purpose of the valuation
57
What external works did you adopt for the surplus land in Wigan?
External costs at 15% of build costs - greenfield site, good access, close to infrastructure (advice from principle surveyor)
58
What professional fees did you apply to the Wigan surplus land?
Professional fees – 6% of build costs & external works (architect, planner, engineer, QS) – (previous similar instructions & market norm)
59
What marketing/ sales fees did you adopt for the Wigan surplus land?
Marketing/sales fees – 3% of private housing GDV -
60
What legal costs dot you apply to the Wigan surplus case?
Legal costs - £350(affordable) - £700(normal plots
61
What finance costs did you apply to the Wigan surplus land?
Finance – 7% interest rate for 100% debt funded scheme - Bank of England rate at the time = 3.75%)
62
Why would finance be above the Bank of England base rate?
finance rate is above BE rate due to realistic cost of borrowing
63
What were the total developers costs in the Wigan surplus case?
£8.2 million
64
What was the developers profit adopted for the Wigan surplus case?
- Developers Profit – Blended approach 6% affordable / 20% for private units. Blended rate 18% of GDV. - Based on profit levels adopted in other appraisals received where DVS had assessed Planning Viability. Higher on private units to account for additional risk. £2.8 million
65
Land acquisition fees for the Wigan surplus case?
1.5% legal and 5% SDLT
66
What was the residual land value for the Wigan surplus?
£975,000
67
What is section 106?
Section 106 (S106) agreements are legal agreements between developers and local planning authorities in the UK to help offset the impact of new developments by funding things like public services, infrastructure, and community facilities. Section 106 is for funding specific to the development
68
Did you account for CIL? surplus land
No, the Billing Authority do not have a Community Infrastructure Levy (CIL) charging system in place.
69
What price per acre did your land value achieve? surplus land
Approx. £350,000 per acre. - ask Alice
70
What is contingency?
It accounts for unknown future development risks to the developer (money accounted for to cover future risks)
71
72
What do you mean by surplus land?
Excess land that is not being utilised by the client currently however they are not yet actively looking to dispose.
73
Was there any site specific abnormals?
No, the client did not make me aware of any abnormals and therefore I made high level assumptions
74
Why didn’t you discount for planning not being granted?
I made an assumption that planning would be granted as I looked at the local plan and this site is marked for future resi development. I also followed from previous instructions undertaken by the local authority who would have had access to the local planning department
75
How was the finance calculated? surplus land
100% debt funded S-curve finance – lower costs at the start which increases when construction increases
76
Residual vs appraisal
A residual gives you the site value whereas a development appraisal advises whether the development is viable given certain factors such as the level of developers profit required, the number of affordable housing and contributions such as S.106 agreements.
77
What are the three forms of sensitivity analysis?
- Simple analysis of key variables (as above) - Scenario analysis (change scenarios for the development, content, timing, costs such as phasing the scheme) - Monte Carlo Simulation- using probability theory.
78
What is S curve finance?
S Curve finance is a finance model which distributes the construction and other costs over the duration of a project.
79
Did you account for Section 106? surplus land
Yes, £10,000 per property Range is usually between £5000 - £10,000. Adopted £10,000 as this was appropriate for the valuation (LA asset val) Outlined in local plan and supported by previous instructions
80
why did you adopt fair value for the surplus land?
because it was for financial reporting purposes
81
what is surplus land?
land that
82
What are the limitations of the residual method?
- Importance of accurate information and inputs - Does not take into account the timing of cash flows - Very sensitive to minor adjustments - Implicit s hidden and not explicit (unlike a DCF)
83
How is the finance calculated on the residual method?
Finance is calculated using the estimated borrowing cost over the period of time the finance is required for. For example, the finance costs for land would probably only be taken for half the period because when the build is halfway through it is generally expected that the development will have started to generate an income.
84
What are the choice of interest rates when calculating finance?
- London Inter Ban Offer Rate, variable lending rate between banks for a 3 month borrowing term plus a premium - Bank of England Base Rate plus a premium - Rate at which the client can borrow the money
85
 What is a sensitivity analysis?
This is required for key variables such as GDV, build costs and the finance rate to show a range of values.
86
 What are the three forms of sensitivity analysis?
- Simple analysis of key variables (as above) - Scenario analysis (change scenarios for the development, content, timing, costs such as phasing the scheme) - Monte Carlo Simulation- using probability theory.
87
are you aware of any RICS documents on development properties?
RICS PS valuation of development property
88
what as CIL?
community infrastructure levy levy paid on developments to help deliver infrastructure to support the development of their area
89
CIL and S106 contributions
It is accepted both are mechanisms used by UK local authorities to ensure that new developments contribute to the infrastructure and services they rely on. However, a S106 agreement is a negotiated site-dependent figure, whereas community infrastructure levy is a fixed, non-negotiable charged rate.
90
GDV definition
The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date
91
RICS doc on developments
RICS PS valuation of development property
92
examples of abnormal costs?
1. ground remediation works 2. specialist foundations 3. removal of invasive species
93
What is the hierarchy of legislation/regulations relating to development appraisals?
1. The Town and Country Planning Act 1990 2. The National Planning Policy Framework 3. Planning Practice Guidance in relation to viability 4. RICS Professional Standards
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