Development Appraisals

Question 1

What is RICS guidance in this area?

Answer 1

RICS Valuation of Development Property Guidance Note 2019

Red Book

IVS 410 - Development Property

Question 2

What is the purpose of RICS Valuation of Development Property Guidance Note 2019?

Answer 2

• Provides guidance in the approach to development property valuations.
• Complex and high sensitivity.
• Outlines different methods to be used - comparable and residual.

Question 3

What is a Development Appraisal?

Answer 3

Valuation to establish the value/ profitability/ viability of a proposed development based on client inputs.

Question 4

What is a Residual Valuation?

Answer 4

Valuation to establish the site value based on market inputs.

Question 5

What are the steps within a residual valuation?

Answer 5

1. Gross Development Value (GDV)
2. Total Development Costs
3. Finance
4. Developers Profit
5. Purchasers Costs
6. Residual land value

Question 6

What is the issue with residual valuations?

Answer 6

High sensitivity

Question 7

Sustainability factors with regards to development appraisals?

Answer 7

CIL, S106, Densities, Infrastructure

Question 8

What is hope value?

Answer 8

Difference between the value of the land with planning permission and without.

Question 9

What is the difference between new build comparables and second hand sales?

Answer 9

New build properties usually apply a premium on top of second hand sales.

Question 10

Issues with BCIS?

Answer 10

• Information mostly made up of small schemes constructed by local/small developers.
• Large housebuilders don’t provide their info so cost therefore inflated.
• Cost info also from registered providers so not reflective of typical product that a private house builder would produce.

Question 11

Average profit on GDV?

Answer 11

15% to 25% (Dependent on scheme and developers intentions)

Question 12

Residential profit

Answer 12

Profit on GDV

Question 13

Commercial profit

Answer 13

Profit on Cost

Question 14

Types of planning costs?

Answer 14

Affordable housing

CIL, S106, S278

Question 15

Ways to calculate finance costs?

Answer 15

1. LIBOR (replaced by SONIA in 2021).
2. Bank of England base rate plus premium to reflect risk and opportunity cost.
3. Rate at which client can borrow money.

Question 16

What is a sensitivity analysis?

Answer 16

Demonstrates fluctuations in certain elements on the appraisal on the land value/ profit margin/ GDV (whatever looking at).

Question 17

What is an overage?

Answer 17

Arrangement made for sharing any receipts received over and above profits originally expected.

Question 18

Types of planning consent?

Answer 18

Outline - seeks to establish whether the proposed development would be acceptable without providing full details of the development.

Full - detailed planning application.

Question 19

Issues with the comparable method for development appraisals?

Answer 19

No two sites are the same.

Question 20

What assumptions do you usually make within a development appraisal/ residual valuation?

Answer 20

• Assume the site benefits from full vacant possession.
• Assume no onerous covenants or restrictions exist.

Question 21

What costs does finance usually cover?

Answer 21

• Cost of Land
• Construction/ Development Costs

Question 22

What is GDV?

Answer 22

Gross Development Value -

Aggregate MV of the proposed development, assessed on the special assumption that the development is complete at the valuation date.

Question 23

Impact of Mini Budget on development appraisals?

Answer 23

• Increased fuel prices/ high inflation; increased build costs
• Rising interest rates; more expensive finance
• Rising interest rates; expensive borrowing, unaffordable mortgages leading to less demand for housing - could lead to extended marketing timescales
• Revised stamp duty rates; potentially make housing more attractive as less stamp duty to be paid
• Brexit; shortage of labour and construction materials - increased build cost

Question 24

What are Section 106 costs? Provide example.

Answer 24

A section 106 agreement is designed to make a development possible that would otherwise not be possible, by obtaining concessions and contributions from the developer.

It forms a section of the Town And Country Planning Act 1990.

It can be negotiated.

EXAMPLE - Highways, Education, Public Open Space

Question 25

What are Section 106 costs? Provide an example.

Answer 25

A section 106 agreement is designed to make a development possible that would otherwise not be possible, by obtaining concessions and contributions from the developer. It forms a section of the Town And Country Planning Act 1990. It can be negotiated. Site-specific. EXAMPLE - Highways, Education, Public Open Space

Question 26

What is CIL? Provide an example.

Answer 26

A Community Infrastructure Levy (CIL) is a new planning charge introduced by the government via the Planning Act 2008. It provides a means of ensuring that a new development contributes to the cost of the infrastructure that the development will rely on, such as schools and roads. The levy applies to most new buildings and charges are based on the size and type of the floor space being created. The idea behind the CIL is that it’s fairer, faster and more certain than the system of S106 planning obligations, which are negotiated on a case-by-case basis. Cannot be negotiated. Some local authorities do not have an adopted CIL charging schedule.

Question 27

What are the different types of affordable housing?

Answer 27

1. Affordable Rent 2. Shared Ownership 3. Intermediate (Discounted Open Market)

Question 28

For student accommodation, what are some examples of operating costs?

Answer 28

1. Maintenance & cleaning 2. Electricity 3. Insurance 4. Internet costs 5. Water

Question 29

Types of additional funding available?

Answer 29

Mezzanine finance

Question 30

What is an agreement for lease?

Answer 30

A contract between two or more parties to enter into a lease, following the satisfaction of conditions set out in the agreement.