Why do we use Sensitivity analysis? Is there any relevant RICS guidance you could refer to here?
It is important to know how deviations in the inputs (which are likely) will impact profitability, and therefore the risk you are taking on
What type of sensitivity have you used are you aware of and when to use each?
- Simple Sensitivity analysis - Key variables
- Scenario Analysis - change scenarios for development e.g. timings
- Monte Carlo simulation - using profitability theory e.g. using crystal ball software
What are the limitations of Argus Developer / benefits and limitations of excel?
Argus - complex and you can’t always see exactly where inputs are pulling through. If clients don’t know, it may be hard for them to understand.
Excel - you can see where pulling through and make more bespoke. But very complicated to set up model and influence human error.
What are the Total Development Costs?
- Site Preparation
a. demolition, remediation works, landfill tax, provision of services, site clearance, levelling, fencing and provision of services
b. Obtain contractor’s estimates for these works - Planning Costs
a. Town and Country Planning Act 1990 s.106 payments, CIL, s.278 payments, planning application and building regulation fees, planning consultant cost, environmental impact assessment cost, other specialists report costs - Building Costs
a. Estimate total cost of building works - Professional Fees
a. 10-15% plus VAT of total construction costs for the professional fees of architects, M&E consultants, structural engineers, etc
b. lower percentage appropriate for a large project
c. Does depend on size of building contract with a reduced level of fee agreed for large contracts
d. Architects are usually the largest proportion of total fees
e. Remember CDM Coordinator costs - Contingency
a. 5-10% of total construction costs depending upon level of risk and market conditions - Marketing Costs & Fees
a. assume a realistic marketing budget (use evidence/quotes)
b. Cost of an EPC and NHBC warranty (for residential scheme)
c. Normal sale fee circa 1-2% of GDV and normal letting fee around 10% of initial annual rent - Developer’s Profit
a. percentage of GDV OR total construction cost – circa 15-25% dependent upon risk
b. GDV more frequently used as a base for residential use
c. If scheme low risk (pre-let/sold) a lower return may be required
d. % of profit required has recently risen given current risky market conditions - Finance
Whats the difference between development appraisal and residual valuation?
Development - profit
Residual - land value
What is sensitivity analysis?
Looking at different possible outcomes based on different inputs
What is S106 agreement?
Negotiated between developer and council - contribution to infrastructure
