Development Appraisals (Level 2)

Question 1

Tell me about a development appraisal you have carried out.

Mixed-Use Development, Winchester

Answer 1

• Residual development appraisal to assess the viability of a mixed use development opportunity

Determined the following inputs
o GDV – used the investment method
o Construction Costs – used BCIS and consulted with pre-construction team to
account for abnormal costs
o Affordable housing provision – reviewed local planning policy to assess affordable
rental levels
o Professional Fees – typically between 10-20% of construction cost, assumed 6-8%
because of in house knowledge
o Historical and archaeological interest – increased contingency fees, increased
surveys an remediation works to account for this

• Undertook sensitivity analysis using scenario modelling
• Determined the site was unviable as it did not meet the return requirements for Linkcity

Question 2

Development Appraisal - Mixed Use Development, Winchester

How did you use the investment method to determine GDV?

Answer 2

• Assessed the market rent for the proposed development by reviewing comparable
  evidence
• Applied a capitalisation rate based on NIY’s of recent transactions

Question 3

Development Appraisal - Mixed Use Development, Winchester

What is BCIS and how did it give you an indication of construction costs?

Answer 3

• BCIS = Building Cost Information Service
• Provides cost and price data for the UK Construction Industry
• Used the TPI index = all in tender price index which provides cost of procuring built assets (inclusive of contractor’s margin)

Question 4

Development Appraisal - Mixed Use Development, Winchester

What type of affordable rents did you need to use?

Answer 4

• Inputted social rents and intermediate rents based off guidance contained in local planning policy

Question 5

Development Appraisal - Mixed Use Development, Winchester

What professional fee assumptions did you use and why?

Answer 5

• Assumed professional fees at 8% of construction cost
• Aware that professional fees are typically between 10-20% of construction cost however this is reduced at Linkcity because of in house expertise
• I did increase this assumption from the normal 6% to account for the potential cost of bringing in house experts to deal with the archaeological and historical interest in the site

Question 6

Development Appraisal - Mixed Use Development, Winchester

How sensitive were the IRR and the viability?

Answer 6

• Very sensitive – given the increased construction costs any changes in incomes reduced the IRR significantly
• Winchester not a very high value area for residential

Question 7

Development Appraisal - Mixed Use Development, Winchester

How did you choose an appropriate developer’s profit?

Answer 7

• Linkcity typically assume a development management fee of between 4-6%
• Also assumed a portion of the developer’s profit leftover dependent on the funding structure with private equity partners

Question 8

Development Appraisal - Mixed Use Development, Winchester

Is GDV an input or an output?

Answer 8

• Input
• Outputs in development appraisals are IRR, Profit on Cost, Developer’s Profit, Profit on GDV

Question 9

Tell me about a development appraisal you have carried out.

Mixed-Use Development, Birmingham

Answer 9

• Residual development appraisal to assess profitability of residential development with supermarket on ground floor

Determined the following inputs:
o GDV – reviewed comparable commercial rental data and residential sales estimations, capitalised income using All Risks Yield
o Construction Cost – consulted in-house construction team
o Unit Sizes – reduced average unit floor plate and increased number of units

Question 10

Mixed-Use Development, Birmingham

Did you use a DCF model? Why or why not?

Answer 10

• I did not use a DCF model
• I was modelling straightforward assumptions without the need to input explicit timings and client requirements

Question 11

Mixed-Use Development, Birmingham

What are the advantages and disadvantages of using a DCF?

Answer 11

Advantages:
- Able to model complex assumptions e.g specific client or funding requirements and development timings
- Growth explicit you can apply your own specific growth rate to a DCF model
- Increased accuracy as they tend to be less generic

Disadvantages:
- Very sensitive to changes in assumptions
- Requires a large number of assumptions
- Time consuming
- Not always needed on straightforward project structures

Question 12

Mixed-Use Development, Birmingham

What is an all risks yield?

Answer 12

All Risks Yield provide an indication of the likely risks apparent in a particular investment, and involves a holistic assessment of the condition of the property market

Question 13

Mixed-Use Development, Birmingham

How did you assure your internal construction cost advice?

Answer 13

• Sense check against BCIS
• If still unsure will seek the advice of external cost consultant

Question 14

Mixed-Use Development, Birmingham

Why do you think the units were so big?

Answer 14

• Architect wanted to maximise design quality rather than income