Development Appraisals - Level 3 (Ready)

Question 1

When might you use Profit on Cost vs Profit on GDV

Answer 1

• McLaren have always used profit on cost as their metric
• Profit on cost is typically more predictable than GDV
• GDV tends to be more susceptible to changes

Question 2

What is IRR? What are the benefits of this against other metrics?

Answer 2

Internal rate of return

• Allows you to assess the return of a project over a period of time
• Can assess the performance of your equity

Question 3

What are the various benefits of Argus vs Excel?

Answer 3

• Argus allows for more detailed financial modelling

Question 4

What is the difference between development appraisal and residual valuation?

Answer 4

• Development appraisal is based on client inputs

- Residual appraisal is carried out on market inputs

Question 5

Talk me through your BTR NDV calculation?

Answer 5

• Assessed the rental income of each unit type
• Capitalised this at a yield of 4%
• Deducted operating costs to arrive at GDV
• Deducted Purchasers costs to arrive at NDV

Question 6

Did you assume any additional costs when you compared to a BTS scheme?

Answer 6

• Yes, purchasers costs

- Operating costs

Question 7

Are there other types of sensitivity analysis that you could have undertaken?

Answer 7

• Simple or probability / Monte-Carlo

Question 8

How did you forward fund assumptions differ from a development appraisal?

Answer 8

• Forward fund assumptions would assume interest rate in line with yield
• Forward funded assumes McLaren only require equity input until the point the project if forward funded

Question 9

Did you adjust your finance calculation?

Answer 9

Yes, the interest rate is adjusted to the rate of the yield

- This is a commonly adopted approach that I have confirmed with investment agents

Question 10

Why did you assume 20% profit on cost for a forward funding? This seems high compared to the previous example

Answer 10

• My Board felt that given the size of the deal and risk associated with letting such a quantum of bedrooms, they would require 20% profit on cost

Question 11

Talk me through a student appraisal

Answer 11

• Run this on the investment method
• Establish rental value of student bedrooms
• Deduct operating costs
• Capitalise net operating income
• Deduct build costs, planning costs, professional fees, marketing costs, finance costs
• Deduct profit and arrive at NDV

Question 12

Did you include affordable PBSA?

Answer 12

• No
• There is policy within London
• 35% at an affordable rent which is linked to 55% of maintenance loan
• Published by the Mayor of London

Question 13

What is the hierarchy of evidence?

Answer 13

• Certain types of evidence take precedence over others, hierarchy of evidence sets this out into three categories
• Category A - Direct Comparables
• Category B - General market Data
• Category C - Other sources

Question 14

How do you apply the Hierarchy of Evidence to a PBSA appraisal?

Answer 14

• Look for directly comparable student schemes
• ## Look at average rents in an area

Question 15

How did you establish an appropriate yield for your BTR appraisal?

Answer 15

• Through comparable investment transactions

- Through discussions with investment agents

Question 16

Talk me through the competing schemes in MK?

Answer 16

-

Question 17

Are there additional risks associated with FF structure that aren’t present in senior debt?

Answer 17

• Yield agreed at the outset, risk of losing potential value if yield compression occurs during development phase
• Total return usually lower to reflect the additional risk that the funder is taking

Question 18

How did you calculate your your affordable for BTR?

Answer 18

• Local plan policy dictated that it is required to be at a level of between 65% to 80% of market rent

Question 19

Why could you pay more on a BTS basis than BTR?

Answer 19

• Because investors typically like to see a discount on OMV to reflect the risk associated with occupying the building
• Typical discount to “break up value” is around 10%

Question 20

How would your affordable tenures differ from BTR to BTS?

Answer 20

• This depends on the local planning requirements, but in some instances the affordable element of a BTR scheme will be wholly discounted market rent as opposed to traditional affordable housing

Question 21

Difference in assumptions between Unconditional and STP?

Answer 21

• Unconditional appraisal would require a higher profit on cost to reflect the increased risk
• STP deal would include an element of time and costs associated with getting planning
• STP deal may also include a different distribution of the land payment

Question 22

What is the methodology for calculating residual site value?

Answer 22

• Gross development value - Total development costs = Gross site value
  Gross site value - purchasers costs = Residual site value

Question 23

What costs would you allow for as part of total development costs

Answer 23

• Site preparation
• Planning
• Construction
• Contingencies
• Professional Fees + VAT
• Marketing
• Finance
• Developers profit

Question 24

What is included within site preparation costs?

Answer 24

• Remediation
• Demolition
• Site clearance

Question 25

What would be included in your estimate for planning costs?

Answer 25

- Planning application fee - Pre-application engagement - Section 106 - Section 278 - CIL - Building Control - Planning Consultant

Question 26

How are build costs on BCIS usually expressed?

Answer 26

- In terms of GIA | - Prices obtained by Quantity Surveyors on a monthly basis

Question 27

What would be included in your estimate for professional fees?

Answer 27

``` Architect - 3.5% Project Manager - 1.5% Quantity Surveyor - 1.5% Structural Engineer - 1.5% Mechanical & Electrical Consultant - 1% Other consultants - 1% ``` Can vary based on size and complexity of project

Question 28

What would your marketing costs typically include?

Answer 28

- Cost of a show flat - Cost of mobilisation - Cost of an EPC - Cost of marketing team

Question 29

How would you estimate your interest rate?

Answer 29

- Rate at which client can borrow money - If uncertain, can use LIBOR + premium - Could also use Bank of England Base Rate + Premium

Question 30

What is the current Bank of England Base Rate (May 2021)

Answer 30

0.1%

Question 31

What are the three stages for which a developer needs to borrow money?

Answer 31

``` Land (straight line) Construction (s-Curve) Hold period (straight line) ```

Question 32

What is the concept of an S-Curve?

Answer 32

- Development costs are less intense at the start and end of the construction period - Reflects typical drawdown

Question 33

How would you calculate an S-Curve manually?

Answer 33

- Total construction costs over half the time

Question 34

What is an overage?

Answer 34

The sharing of any additional profits over and above the expectations, usually agreed in a pre-agreed formula

Question 35

What are the different types of sensitivity analysis?

Answer 35

Simple sensitivity analysis - Shifting key variables such as build cost or GDV Scenario analysis - changing scenarios for the development content/timing/costs such as phasing the scheme or modifying the design Monte Carlo - Using probability theory with software such as Crystal ball?

Question 36

What do developers perceive to be the greatest risk?

Answer 36

Planning permission

Question 37

Can you tell me about the competing schemes in Milton Keynes?

Answer 37

- Solstice apartments | - The Hub

Question 38

Why were you able to pay more on the basis of build to sell?

Answer 38

- Investors typically look for a discount to OMV in their "break up value" relative to the risk - Where exit values go above a certain level, BTR values can not compete because rental values do not go up pro-rate

Question 39

What Guidance have the RICS issued with regards to valuing development property?

Answer 39

RICS Guidance Note Valuation of Development Property 2019 - Aims to supplement IVS 410 "Development Property" - Suggests a surveyor should use at least two methods of valuation (comparable / residual) etc - Establishes that common basis of val is MV - Requires you to undertake risk analysis