1
Q
What is the purpose of a development appraisal?
A
- Tool to assess the financial viability of a development project
- Can be used to assess the residual site value or profitability of a development project
- Its sensitivity to different input changes is key
- It is a calculation to establish the viability based upon the client’s inputs rather than market inputs
- Site value can be assumed or calculated
2
Q
What can development appraisals be used for?
A
- Analysis considering planning
- Whether a development is viable given level of profit
- Assessing optimal use/comparing different uses
- Assessing viable affordable housing whilst still maintaining profit
3
Q
Which RICS document discusses development appraisals?
A
- RICS Professional Standard: Valuation of Development Property, 2019
- Defines development appraisal as a financial appraisal of a development used to calculate either residual site value or residual development profit
- Can also be used to calculate other outputs
4
Q
What should be considered when calculating profit?
A
- Consider whether to adopt profit based on cost or based on GDV
- Profit on cost approach is more accurate than based on GDV as GDV calculation is more subjective and relies upon accurate construction costs
- Advice depends on client objectives
5
Q
Which RICS document concerns planning viability?
A
- RICS Professional Standard: Financial viability in planning: conduct and reporting, 2019
6
Q
Outline the main forms of development finance used by developers.
A
- Senior Debt – lower interest rates because of the priority in repayment (60—70% projects total costs)
- Mezzanine – higher interest rates – lender has second charge on the property which is riskier and hence commands higher returns (10-20%)
- Equity – developer provides equity which is the developers own funds or contributions.
7
Q
How do you work out what rate of interest to use to calculate finance costs?
A
- This is completely dependent on the type of loan, how risky it is, the lenders appetite for risk, the borrower and the asset
- Base interest rates set by Bank of England 5%
- Loan risk profile – risk premium on top of the base rate to reflect the risk of the development project
8
Q
What is an S curve? When is it used and why?
A
- Graphical representation commonly used in development to show the typical flow of costs
- After site acquisition costs start off small then increase and then taper off again towards the end
9
Q
What factors affect the sensitivity of an appraisal? How can you deal with these sensitivities?
A
- Construction costs
- Rates of interest
- Yield
- Rent
10
Q
What is the difference between a residual valuation and a development appraisal?
A
- Outputs of residual = land value
- Outputs of development appraisal = profitability and viability
11
Q
What software does your practice use for development appraisals? Do you like this software? What are its limitations?
A
- Argus Developer
- Limitations – limited scenario analysis, requires significant data input, complex for beginners
12
Q
What are the main forms of sensitivity analyses?
A
- Simple sensitivity analysis – key variables such as yield, GDV, build costs and finance rate
- Scenario analysis – changing scenario for the development content/timing/costs eg phasing
- Monte carlo – using probability theory, using software such as ‘crystal ball’
13
Q
What are the main weaknesses of the residual method of valuation?
A
- Very sensitive to inputs
- Basic doesn’t take into account time value of money
- There can be unforeseen delays/ inaccurate cost estimates
- Planning risk – if permission denied or delayed residual becomes invalid
- Doesn’t adjust for market changes
14
Q
Why are purchaser’s costs deducted from an appraisal and when are they deducted?
A
- Provides a more realistic view of the total investment required for a property and ensures more accurate assessment of property’s value from buyers perspective
15
Q
What is the difference between explicit and implicit growth?
A
Implicit = yield includes income and growth expectations; Explicit = growth breaks down each component including growth
Implicit growth considers overall yield, while explicit growth focuses on individual growth components.
16
Q
What are similarities between RV and DA?
A
All inputs are taken as at date of valuation, assuming current conditions; Both are growth implicit
Both methodologies are used to assess property values based on current market conditions.
17
Q
What external factors can incentivize development activity?
A
- Tax incentives
- Low interest rates
- Strong property market
These factors can create a favorable environment for developers to undertake new projects.
18
Q
What external factors can inhibit development activity?
A
- Weak property market
- High interest rates
- Cost of construction
- Shortage of land
These factors can create barriers for developers and impact project feasibility.
19
Q
Is development appraisal a red book valuation?
A
Yes – RICS professional standard on development property 2019
The ‘Red Book’ refers to RICS standards for property valuation, including development appraisals.
20
Q
Why might you be interested in the topography of a site?
A
- Uneven surfaces
- Topography increases development risk
- Piling and groundwork complications
- Can determine the development type
Understanding site topography is crucial for planning construction methods and assessing potential risks.
21
Q
What are key land risks?
A
- Physical
- Archaeology, contamination
- Legal
- Rights of light, rights of way, party walls
- Boundary
- Location of boundary, ransom strip
Identifying land risks is essential for mitigating potential issues in the development process.
22
Q
What additional risks are found with city centre development?
A
- Rights of light
- Contamination
- Infrastructure
- Archaeological sites
Urban developments often face unique challenges compared to suburban or rural projects.
23
Q
What is a greenfield site?
A
Undeveloped land
Greenfield sites are typically considered for new developments due to their lack of prior construction.
24
Q
What is a brownfield site?
A
Land which has previously been developed on and often derelict and disused (potential contamination)
Brownfield sites may require remediation before new development can occur.
25
What is the process of undertaking a development appraisal?
Find gross development value; Construction cost; Site value = development profit
## Footnote
This formula helps in determining the financial viability of a development project.
26
What is GDV?
Market value of completed development scheme; Rent capitalized by a yield (market rent / yield)
## Footnote
GDV represents the expected revenue from a completed development.
27
What risk is used in a development appraisal?
All risk yield and contingency
## Footnote
This yield reflects the overall risk associated with the development project.
28
If a development is let, can the diminished risk be reflected in the all risk yield?
Yes, but more common to reflect it in profit on cost
## Footnote
This reflects the lower risk associated with properties that are already generating income.
29
What costs are accounted for in a development appraisal?
* Land cost
* Construction cost
* Project/professional fees
* Finance rates
* Contingency
* Marketing cost
* Planning cost
## Footnote
These costs are crucial for accurately assessing the financial feasibility of a development.
30
What do site preparation costs cover?
* Demolition
* Ground clearance
* Remediation works
* Levelling
* Landfill tax
## Footnote
Site preparation is essential for making a site ready for construction.
31
Where can build costs be sourced?
* Building surveyors estimate
* Quantity survey estimate
* RICS building cost information service (BCIS)
* Client information
## Footnote
Accurate building costs are vital for budgeting and financial planning.
32
What are the dangers of relying on BCIS?
* Costs are quoted, not agreed
* Sample size may be small
* Lag time in gaining info
## Footnote
Relying solely on BCIS data can lead to inaccuracies in cost estimates.
33
What were the construction costs of care home developments?
£150,000 per bed
## Footnote
This range reflects the typical costs associated with specialized life science facilities.
34
What is the contingency of a care home development?
2.5%-5%
## Footnote
Contingency accounts for unforeseen costs and risks in development projects.
35
What does contingency cover?
* Planning risk
* Development risk
* Letting risk
## Footnote
Contingency is essential for managing uncertainties in construction and development.
36
What does contingency depend on?
Level of risk in project and movement of build cost
## Footnote
Higher risk projects typically require a larger contingency.
37
When may contingency be lower?
On a fixed price contract
## Footnote
Fixed price contracts reduce the uncertainty of costs, allowing for a lower contingency.
38
What are typical professional fees?
7.5% of contract value
## Footnote
Professional fees vary based on project size and complexity.
39
What is the typical breakdown of professional fees?
Architect
Project Manager
Quantity Surveyor
Structural Engineer
M&E Engineer
CDM Coordinator
## Footnote
This breakdown helps in understanding the allocation of costs for professional services.
40
When may an architect's fees be lower?
Simple design and planning secured
## Footnote
Simpler projects typically incur lower architectural fees due to less complexity.
41
What is a CDM / Principal designer?
They manage health and safety construction risks, and ensure compliance with the Construction Design and Management (CDM) Regulations 2015
## Footnote
CDM regulations aim to improve health and safety in construction projects.
42
Is VAT paid on professional fees?
Yes
## Footnote
VAT is applicable to most professional services in the UK.
43
What are key planning risks?
* Not getting planning
* Changes in planning (e.g., affordable homes and neighboring occupiers)
* Planning costs
## Footnote
Navigating planning risks is critical for successful project execution.
44
What are the different planning costs which may need to be reflected in a development appraisal?
* Section 106
* CIL (Community Infrastructure Levy)
* Section 278 (payment of highway works)
## Footnote
Understanding these costs is essential for accurate budgeting in development projects.
45
What other planning costs need to be considered?
* Planning application and building regulation fees
* Planning consultant fees
* Environmental impact assessment
## Footnote
These costs can significantly affect the overall financial feasibility of a project.
46
What would be the effect on a development if planning could not be secured?
* Increase risk
* Design changes
* Longer lead-in period
## Footnote
Failing to secure planning permission can lead to significant delays and increased costs.
47
How does the longer lead-in time affect a development scheme's financials?
* Lower site value
* Lower development profit
## Footnote
Extended timelines can reduce overall profitability for developers.
48
What is a development brief?
A document produced by a landowner (local authority) informing developers of the constraints and opportunities presented by a site, and the type of development encouraged by local planning policies
## Footnote
Development briefs guide developers in understanding site-specific requirements and opportunities.
49
What are normal letting fees?
10% of first year's rent
## Footnote
Letting fees are an important consideration for ongoing property management costs.
50
What are the current LTV ratios?
65% but rising
## Footnote
Loan-to-value (LTV) ratios are critical for assessing financing options.
51
What is a typical development finance rate?
6-8%
## Footnote
Development finance rates can vary based on market conditions and lender criteria.
52
What are development finance rates based on?
Bank of England Base Rate, plus a premium
## Footnote
Understanding the basis for finance rates is essential for financial planning.
53
What is a base rate?
The interest rate the Bank of England lends to other banks at
Currently 4%
## Footnote
The base rate influences overall interest rates in the economy.
54
How is interest calculated?
On a compound (rolled-up) basis, i.e., added to the amount of the loan as the project proceeds
## Footnote
Understanding interest calculations is crucial for managing financing costs.
55
At which three points of a development may a developer need to borrow money?
* Purchase site
* Construction costs
* Holding costs (empty rates etc)
## Footnote
These are key stages where financing is often necessary.
56
What is the primary source of debt funding?
Senior Debt -> takes precedent over any secondary / mezzanine funding
## Footnote
Senior debt is typically the first source of financing sought by developers.
57
What part of the appraisal ensures that the market value of a development is its present value?
The finance rate
## Footnote
The finance rate is critical for determining the current value of future cash flows.
58
What are key finance risks?
* Can fluctuate (interest rates)
* Changes in company cash flow
* SWAPS
## Footnote
Identifying finance risks is crucial for effective risk management.
59
What are swaps?
A form of derivative hedging rate for interest rates
## Footnote
Swaps are used to manage interest rate risk in financing.
60
What is a SWAP rate?
The market interest rate for a fixed rate, fixed term loan
## Footnote
Understanding SWAP rates is important for managing financing costs.
61
What is a derivative?
A financial derivative is a contract between two or more parties whose value is based on an underlying asset, index, or rate
## Footnote
Derivatives are used for hedging and speculative purposes in finance.
62
What is a normal sales fee?
1%
## Footnote
Sales fees are an important consideration in the overall financial assessment of a development.
63
What is a typical developer's profit?
10-20% (of total cost) and dependent on level of risk
## Footnote
Developer's profit margins vary based on project complexity and risk.
64
What are the two biggest risks for developer's profit?
* Planning risk
* Letting risk
## Footnote
These risks can significantly impact the overall profitability of a development.
65
What other factors affect developer's profit?
* Delays in timelines
* Opportunity cost
## Footnote
Understanding these factors is critical for accurate profit forecasting.
66
How can you decrease risk reflected in developer's profit?
* Pre-let
* Ensure planning consent
* Forward funding
* Good tenant covenant
## Footnote
These strategies help mitigate risks associated with development projects.
67
What is forward funding?
An investor purchases a site, funds the construction and holds the building once development is complete; The development is funded at a lower rate in return for a softer yield
## Footnote
Forward funding can provide financial benefits for both developers and investors.
68
What is a forward sale?
An investor purchases a contract and to own the development when complete – they do not fund the cost of the development
## Footnote
Forward sales allow investors to secure properties at current prices without immediate capital outlay.
69
What are outputs in a development appraisal other than profit?
* Profit on GDV
* Development IRR
* Rent cover
## Footnote
Understanding these outputs is essential for evaluating the overall success of a development.
70
When is profit on GDV adopted?
Residential schemes
## Footnote
This metric is commonly used in evaluating residential developments.
71
What is profit on cost based on?
All costs
## Footnote
This metric provides a comprehensive view of profitability relative to total expenditures.
72
What is profit erosion / rent cover?
The outgoings of a project when it is complete; Costs associated with void periods, interest rates etc; Calculated: developer's profit / annual rent
## Footnote
Understanding profit erosion is crucial for assessing long-term financial viability.
73
Why would a developer look at a development IRR as a measure of return?
To compare a single scheme with other investment opportunities e.g., opportunity cost
## Footnote
IRR is a key metric for evaluating investment performance.
74
What is development overage?
When an interest in land is transferred, the purchaser is required to make payments to the seller reflecting a share in the increase in the value of the land
## Footnote
This mechanism ensures that sellers benefit from future increases in land value.
75
What is a clawback?
When a local authority transfers a freehold interest in land less than market value; When the land use changes, increasing value and clawback provisions make the purchaser pay the local authority a proportion of value uplift
## Footnote
Clawback provisions protect local authorities from losing out on increased land value.
76
If a development is profitable, why would you not construct a scheme double the size?
* Increase construction risk
* Planning restriction
* Market dynamics
* Site restrictions
## Footnote
These factors highlight the complexities and risks associated with scaling up development projects.
77
What input of an appraisal would you carry out sensitivity analysis?
Construction cost and profit level, rent yield
## Footnote
Sensitivity analysis helps assess the impact of variations in key inputs on project outcomes.
78
What is the key planning legislation?
* NPPF
* Town and Country Planning Act 1947 and 1990
* Local Government and Land Act (1990)
* Planning Act 2008
## Footnote
These laws govern the planning process and development regulations.
79
What is the definition of a development?
Making any material change to a building or land
## Footnote
This definition is foundational to understanding planning regulations.
80
Where is the definition of development found?
Town and Country Planning Act 1990
## Footnote
This act provides the legal framework for planning in the UK.
81
What are the key initiatives of the NPPF?
* Balancing economic growth and environmental protection
* Streamlining the planning process
* Promote sustainable development
* Ensure planning decisions are made at a local level
## Footnote
These initiatives aim to create a more efficient and effective planning system.
82
How long does full planning permission last?
3 years
## Footnote
This time limit ensures that developments are initiated in a timely manner.
83
What details are included in a planning application?
* Completed Application Form
* Appropriate Fee -> as set out by the Planning Authority
* Ownership Certificate
* Agricultural Holding Certificate
* Drawings
* Site Plan
* Location Plan
* Design and Access Statement
## Footnote
These documents provide essential information for the assessment of the application.
84
What other documents may be required in a planning application?
* Title plans
* Architecture plans
* Ground surveys
* Environmental reports
* Transport assessment
* Flood risk strategy
## Footnote
Additional documents support the application by addressing various regulatory requirements.
85
What is the normal time in which a planning application should be decided?
3 months
## Footnote
Timely decisions are important for project planning and execution.
86
What is the timescale if the applicant has submitted an environmental impact assessment?
16 weeks
## Footnote
Environmental assessments require additional time for thorough review.
87
What is contained within a S106 agreement?
Planning obligations which are set out as legally binding agreements and considered a community gain
eg. Contribution to school or training / insight days, Affordable housing
## Footnote
These obligations ensure that developers contribute to local infrastructure and services.
88
What dictates the level of affordable housing for a development?
Local planning policy
different types: senior housing, shared housing, key worker
## Footnote
Local policies guide the provision of affordable housing in developments.
89
What other planning obligations are there?
* Developer may be required to deliver playgrounds, open spaces, public art etc
## Footnote
These obligations enhance community amenities and livability.
90
When you reflect S106 obligations in a development appraisal, where do you provide them?
Provided by the council website; The payment is specific to the development
## Footnote
Accurate reflection of S106 obligations is essential for financial planning.
91
What is CIL?
An offsite payment which raises funds to construct the infrastructure necessary to support development in the area
## Footnote
CIL is an important funding mechanism for local infrastructure projects.
92
What is CIL based on?
A tariff that relates to the size or change of size of a development based on net floor space; A charging schedule is based on each square metre of additional floor space
## Footnote
CIL calculations are critical for budgeting and financial planning.
93
How are CIL procedures initiated?
Assumption of liability notice
## Footnote
Proper initiation of CIL processes is essential for compliance.
94
Can a development have both a S106 and CIL?
Yes; But a development cannot be double charged for the same item
## Footnote
Understanding the interaction between S106 and CIL is critical for financial planning.
95
What are the proceeds of CIL spent on?
* Local and Regional Infrastructure, to include:
* Roads and Transport
* Flood Defences
* Open Spaces
* Schools
* Medical Facilities
* Sporting Facilities
## Footnote
CIL funds are allocated to enhance community infrastructure and services.
96
What are the main differences in CIL and S106 planning obligations?
S106 is negotiable
## Footnote
Understanding the differences between these two funding mechanisms is essential for developers.
97
What are typical CIL rates?
Depends on the LPA; Can be anywhere from £25 - £200 per sq m
## Footnote
CIL rates vary based on local authority policies and market conditions.
98
What is mayoral CIL?
An additional form of CIL, used to fund transport and infrastructure in London, i.e., Crossrail; Between £20 - £50 per sq m
## Footnote
Mayoral CIL specifically targets infrastructure needs in the Greater London area.
99
What can you do if a planning application has been refused?
* Appeal (within 6 months)
* Resubmit for planning
## Footnote
Developers have options for addressing planning refusals to pursue their projects.
100
What is a certificate of lawful existing use or development (CLEUD)?
A legal document that confirms that a use or development is lawful under planning law
## Footnote
CLEUDs provide certainty for developers regarding the legality of existing uses.
101
What are the typical costs for planning per square meter?
Between £20 - £50 per sq m
102
By whom are appeals heard?
* Written Representation
* Informal Hearing
* Planning Inquiry
* Secretary of State
103
When must enforcement action be taken for operational development breaches?
Within 4 years
104
When must enforcement action be taken for other breaches of planning control?
Within 10 years or it becomes lawful
105
What happens when there is a breach of planning control?
An enforcement notice is served against owner or occupiers
106
What is contained in an enforcement notice?
* A description of the breach
* Proposed remedy to the breach
107
When must an appeal against an enforcement notice be undertaken?
Prior to the day the notice will take effect
108
What is a stop notice?
A notice which prohibits the continuation of any activity set out in an enforcement notice
109
What penalty may be enforced for failure to comply with a stop notice?
* £20,000 fine
* Unlimited fine
No appeal possible
110
What is a listed building?
Included in a listing under the Planning (Listed Buildings and Conservation Areas) Act 1990
111
Who maintains the list of listed buildings?
Department for Communities and Local Government
Administered by Historic England
* Grade 1 - buildings of exceptional interest
* Grade 2* - buildings of particular importance
* Grade 2 - buildings of special interest
112
What are the 6 principles of listing?
* Age
* Rarity
* Selectivity
* State of repair
* Aesthetic merit
* National interest
113
What is required when proposing to do work to a listed building?
Listed building consent
114
Can a building be de-listed?
Yes, if it no longer meets the statutory criteria
115
Can owners oppose the listing of their property?
Yes, by applying for judicial review
116
What is a conservation area?
An area of special architectural or historic interest, the character of which it is desirable to preserve or enhance
117
What is required when proposing works within a conservation area?
Conservation area consent
118
Are trees protected in conservation areas?
Yes
119
How can you obtain additional space under height restrictions on a roofscape?
A mansard roof, as it is not visible from street level
120
What is a Tree Preservation Order (TPO)?
Prevents a tree being cut down, lopped, or damaged. Requires LPA permission. £20,000 fine or unlimited
121
What is an Environmental Impact Assessment (EIA)?
A systematic process used to identify, predict, and evaluate the environmental effects of proposed development action prior to permission being granted
122
What permissions are required to demolish a structure?
* Planning Permission
* Environmental Impact Assessment
123
What are enterprise zones?
Areas where business investment is encouraged by way of business rate discounts, tax incentives, tax breaks, faster broadband, and a fast track simplified planning process
124
What has the Infrastructure Act 2015 done?
* Amended current legislation to ease conversion of empty and redundant buildings
* Enabled quicker sales of surplus and redundant public sector land and property
* Ended unreasonable delays on projects with existing planning permission
