Development Appraisals

Question 1

You’ve noted in your summary of experience that development appraisals are highly sensitive to the inputs. How do you look to ensure that your appraisal is accurate and the risks are minimised?

Answer 1

I ensure to make market facing assumptions and verify certain inputs:

GDV - Sales agents
Build costs - Building Consultancy colleagues

Question 2

Buckinghamshire Agency – you noted that a Sport and Leisure contribution was required – how did you input this cost into your appraisal?

Answer 2

My client’s planning consultant provided the finalised figure which was based on per bedroom for the development.

It was indexed against the BCIS All-in Tender Price Index.

Question 3

West Berkshire Agency – I note this scheme had 40% affordable, how did you value the affordable housing?

Answer 3

17 affordable units and I input these at 60% of open market value which I sense checked with my firm’s affordable housing team.

Tenure mix was not confirmed when I ran my appraisal as it was to be agreed at reserved matters stage.

Question 4

Cheltenham Agency – As this was a brownfield site were there any additional costs you needed to include?

Question 5

For Cheltenham, you mentioned that market conditions were uncertain. How do you reflect economic volatility in your appraisal assumptions, and what advice do you give clients in such circumstances?

Question 6

What’s the definition of Gross Development Value Is this defined by the RICS? Where is this defined?

Answer 6

This is defined in the RICS Professional Standard - Valuation of development property.

Definition is: 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.

Question 7

What was included in your professional fees allowance?

Question 8

How did you profile the construction costs in Argus Developer? S-Curve? How would this impact on the finance cost of a project compared to spreading the costs evenly?

Question 9

What is the hierarchy of comparable evidence?

Answer 9

In terms of the RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ (2019) there are three sections;
A = Direct comparables
B = Wider comparables
C= Other market evidence

Determining the most relevant factors of comparable evidence in comparison to the subject property.
- location
- condition
- specification
- type of property
- size
- amenity space

Question 10

How do you calculate the Residual Land Value?

Answer 10

GDV - (build costs & profit) = RLV

Question 11

How do you determine the level of profit?

Answer 11

Usually 20% profit on cost.

It reflects the risk associated with the development and a market-facing input I would typically expect given the requirements of developers on similar dev. projects

Question 12

When would you increase contingency?

Answer 12

In speculative circumstances where the development is in the early stages of planning for instance.

or where there are higher risks associated.

Question 13

What abnormal costs can occur in a development?

Answer 13

Ground contamination, piled foundations necessary, allowances for flooding.

Question 14

What is the likely level of finance costs in a development appraisal?

Answer 14

This would depend on the Base Rate and market conditions. Typically, I would apply 2 - 3% over the base rate to account for the cost of borrowing and arrangement fees.

Question 15

How may profit vary on a scheme of 100 units and a scheme of 1 unit?

Answer 15

Might expect higher profit given the higher associated risks.

Question 16

What are the limitations of Argus Developer?

Answer 16

It bases the appraisal on the basis of 100% debt finance which is an unrealistic scenario.

Question 17

What are the drawbacks of BCIS?

Answer 17

Time lag
Low sample sizes
Costs are site-specific
Not ‘all in’ build costs

Question 18

What is the difference between a high-level appraisal and a detailed one?

Answer 18

A high level would involve many assumptions for example on the scheme and costings of this (very theoretical). A detailed one would be you are modelling it of an agreed scheme and you have a better understanding as to potential costs and contributions for example. (more factual)

Question 19

Why is it important to include a sensitivity analysis?

Answer 19

It is a very reflective way of indicating movements in the market and how this could have an impact on the appraisal.

Question 20

What factors may affect the net developable area?

Answer 20

Topography, existing factors on site such as trees, structures, and existing infrastructure under the ground. Also planning policy. Such as s106 requirements for open space for example.

Question 21

You mention the sensitivity of appraisals, can you tell me how slight changes in finance rates would affect the appraisal output?

Answer 21

Increase in finance rates leads to higher costs which can have a negative output on land value or profit (depending on what you set the output to look at.)

Question 22

How do you know what sales rate to adopt?

Answer 22

Comparable evidence through discussions with agents

Question 23

How do you calculate CIL?

Answer 23

Find the liability for the relevant LA and apply to the GIA of the private units.

Index

Question 24

How is CIL indexed?

Answer 24

RICS CIL Index (from 2020 onwards)

Question 25

What would happen to the land value if you doubled the construction phase and kept everything else the same? Why?

Answer 25

The land value would decrease as more interest would be payable given the longer timescales

Question 26

What do you consider when selecting a profit rate?

Answer 26

Risk and acceptable rate within the market

Question 27

Aside from profit, what else do you vary to account for affordable housing?

Answer 27

- Sales rate - GDV - No CIL / Building Safety Levy

Question 28

Tell me about how the revenue phasing of a housing-led scheme differ to an apartment scheme? Why?

Question 29

Tell me about what appraisal considerations you make with regards to a conversion scheme?

Answer 29

- Contingency - Build cost (more challenging to benchmark)

Question 30

Tell me why you don't calculate the SDLT manually?

Answer 30

Calculated from the RLV and in turn deducted from the RLV

Question 31

Tell me about how you'd phase abnormal costs (e.g. piling) in an appraisal? Why?

Answer 31

S Curve over construction

Question 32

How would you phase demolition? Why?

Answer 32

S curve over pre-construction phase

Question 33

What is the difference between a development appraisal and residual appraisal?

Question 34

What is a sensitivity analysis?

Question 35

What was your S106 input for Buckinghamshire? Was it a fixed price? Was in indexed? If so, how was it indexed?

Question 36

For West Berkshire, you say there was a 40% affordable housing requirement, how did you calculate your sales rate for these?

Answer 36

17 affordable units and I input these at 60% of open market value which I sense checked with my firm's affordable housing team. Tenure mix was not confirmed when I ran my appraisal as it was to be agreed at reserved matters stage.

Question 37

For West Berkshire, you say you made market facing assumptions for your professional fees, interest rates and marketing costs. Please can you talk me through some of them and how you knew they were market facing?

Question 38

For Cheltenham, it was a conversion scheme - was there anything in particular you needed to consider?

Question 39

For Cheltenham, was there any affordable housing?

Question 40

For Marston, did you account for S106 and CIL?

Question 41

What is ransom strip?

Answer 41

A piece of adjoining land in separate ownership that is required for access to development land.

Question 42

How would you value a ransom strip?

Question 43

What are the principles and practices of development appraisals?

Question 44

Why do inputs on development appraisals need to be justifiable?

Question 45

What is a sensitivity analysis? How does it manage risk?

Question 46

What increments do you use on a sensitivity analysis?

Answer 46

It is market practice to use 5% and 10% increments. However, may use smaller increments for a higher risk site or where a site is more sensitive to changes. E.g. Changed the GDV by 2% is going to have a greater impact on a 200 unit site to a 2 unit site

Question 47

What market research do you carry out to establish your inputs?

Answer 47

GDV - verify transactions with local agents and ask them about the market Affordable housing - check planning policy Finance rate - check base rate and analysis risk Marketing and agency costs - speak to agents

Question 48

For Buckinghamshire, where did you get your S106 input from? Was it indexed?

Question 49

What is a S106 agreement?

Answer 49

It is a legally binding document that requires the developer of a site to provide financial contributions or specific actions to mitigate the negative impacts of development. Example: provision of a school.

Question 50

When is a S106 payable/triggered?

Answer 50

This is site specific and will be agreed and set out in the contract. Contributions could be payable by instalments - 50% upon commencement of development and 50% paid upon completion of development.

Question 51

Why are S106s indexed?

Answer 51

To account for inflation. The LPA is protected against the cost of delivering infrastructure rising from the time the agreement is signed.

Question 52

For West Berkshire, how did you calculate the sales rate for the affordable units?

Answer 52

Assumed 60% of MV and discussed with my firm's affordable housing team to sense check

Question 53

Please can you talk me through your West Berkshire appraisal?

Question 54

For Cheltenham, as it was a conversion, was there anything extra you accounted for?

Question 55

For Cheltenham, you say that it was difficult to appraise given the market at the time. What were the market conditions and how did you account this?

Question 56

For Marston, why did you use 20% profit on cost?

Question 57

For Marston, why did you use 10% increments for the sensitivity analysis?

Answer 57

I used 5% and 10% which is market practice.

Question 58

For Marston, why did the 14 unit scheme produce the lowest land value?

Answer 58

Oxford's affordable housing requirement was 50% for sites of 10 units so taking this into account on my appraisal gave the lowest land value.

Question 59

For Marston, why did you advice your client to not use a guide price?

Answer 59

The four appraisals showed that the land value can very depending on what can be achieved with planning. Therefore, I advised to not set a guide price but instead lead the market lead and ask for parties to set out their own planning strategy.

Question 60

What is a development appraisal?

Answer 60

It is a financial appraisal of a development

Question 61

If a developer decides to sell a site they purchased, what happens to the S106?

Answer 61

The S106 is attached to the land and not the developer. Therefore, the new developer will be bound to the S106 obligations.