Development Appraisals

A tool to financially assess the viability of a development scheme and its sensitivity to changing inputs

- Gross development value based on comparable valuation at valuation date

(Less) acquisition costs

(Less) development costs - ie Site preparation, planning costs, build cost, professional fees

(Less) contingency

(Less) agents fees

(Less) planning fees

(Less) Finance costs

Demolition, remediation works, landfill tax, provision of services, site clearance, levelling and fencing

Town and country planning act 1990 section 106 payments

Section 278 payments for highway works

Community infrastructure levy is charged by most local planning authorities

Estimate total cost of building works

Sources of building costs include client information, Quantity surveyor estimate, Building surveyor estimate, BCIS

10 to 15% plus VAT of total construction costs

These include architects M and E consultants, project managers and structural engineers

Architects are usually the largest proportion of total fees

Normally sales fee around 1 to 2% of the gross development value and normal letting fee of around 10% of initial annual rent.

Also factor in cost of an energy performance certificate

LIBOR - London Interbank offered rate which is the variable lending rate between banks for a three month boring term, plus the premium to reflect interest rate which is available.

Bank of England base rate plus premium

Rate at which the client can borrow the money

Site purchase including purchase cost-compound interest (straight line basis)

Total construction and associated costs-calculation based on an S curve taking half the costs over the length of the build programme

Holding costs to cover voids until the disposal of the scheme, these include empty rights service charges and interest charges – compound interest on a straight line basis

Percentage of GDV or total construction cost usually around 15 to 25% depending upon risk

The lower the risk of the scheme the lower return required usually.

Debt finance – lending money from a bank or other funding institution

Equity finance – selling shares in a company or joint-venture partnership or own money used

50 to 60%

The first level of borrowing which takes the precedence over secondary/mezzanine funding

Mezzanine funding is additional funding for the additional monies required over the normal loan to value lending

A form of derivative hedging rate for interest rates.

A swap rate is the market interest rate for fixed rate, fixed term loans

Joint ventures-two or more parties jointly develop.

Forward sales – when a completed scheme pre-sold to investor or occupier

This is the arrangement made for the sharing of any extra receipts received over and above the profits originally expected as agreed in a pre-agreed formula

It can be shared between the vendor/landowner and developer in a prearranged apportionment

Can also be known as a clawback

This term relates to the length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme and total profit from the scheme has been completely drawn down due to interest charges and the scheme making a loss

The importance of accurate information and inputs

A residual valuation does not consider timing of cash flows

Very sensitive to minor adjustments

Implicit assumption is hidden and not explicit (unlike a DCF)

Always cross check with a comparable site valuation if possible

This is required for key variables such as gross development value, build costs and the finance rate, to show range of values

• Simple sensitivity analysis of key variables such as the yield, GDV, build costs and the finance rate
• .
• Scenario analysis – change scenarios for the development content/timing/costs – such as phasing the scheme or modifying its design
• .
• Monte Carlo simulation – using probability theory – using software such as crystal ball

RICS guidance note valuation of development property, first edition, 2019 (effective from 1st February 2020)

Interest where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in the progress at the valuation date

When valuing development property, assumptions and/or special assumptions must clearly be identified in the valuation report

The common basis of value is market value, in which case there is an assumption of optimum development which should take into account current and prospective economic and planning conditions

Best practice avoids reliance on a single approach or method of assessing the value of development property

Best practice requires sensitivity analysis to be used

For most purposes the valuation report should be reported as a single figure except where there is potential for significant variation

You can perform certain types of work without needing to apply for planning permission. These are called "permitted development rights".

They derive from a general planning permission granted not by the local authority but by Parliament.

By issuing an Article 4.

Article 4 directions are made when the character of an area of acknowledged importance would be threatened. They are most common in conservation areas.

The Town and Country Planning (General Permitted Development) (England) Order 2015 is the principal order.

• Transport and highways impacts
• Contamination and flooding risks
• Impacts of noise from commercial premises on the intended occupiers of the development

2013

Physical - contamination, evasive species, surrounding area, recent developments, development sites for sale 

Legal - access, properties overlooking (rights of light), rights of way

• RICS Professional Statement: Financial viability in planning: conduct and reporting
• 1st edition, May 2019

• It sets out mandatory requirements that inform the practitioner on what must be included
• within reports and how the process must be conducted.

• Objectivity, impartiality and reasonableness statement
• Confirmation of instructions and absence of conflicts of interest
• A no contingent fee statement
• Confirmation where the RICS member is acting on area-wide and scheme-specific FVAs
• Justification of evidence and differences of opinion
• Benchmark land value and supporting evidence
• Sensitivity analysis (all reports)
• Engagement

• The Town and Country Planning Act 1990
• Planning and Compulsory Purchase Act 2004
• NPPF
• Local Plans
• Neighborhood Plans

Valuation of development property 1st edition, October 2019

• ‘interests where redevelopment is required to achieve the highest and best use, or
• where improvements are either being contemplated or are in progress at the valuation
• date'

0.76%

2021

SONIA (Sterling Overnight Interest Average) is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions.

• Standard multiplier - 50.4p
• Small Businesses - 49.1%

• As shops, restaurants, cafes, drinking establishments, cinemas and live music venues,
• For assembly and leisure
• As hotels, guest & boarding premises and self-catering accommodation.

RICS Guidance Note 'Valuation of Development Property' 2019

To supplement the International Valuation Standards.

• Assumptions and/or special assumptions must clearly be identified in the report
• A valuation undertaken by the market comparison approach should be cross checked against the residual method.
• The valuation should be reported as a single figure except where there is potential for significant variation.