What is a development appraisal?
A tool to financially assess the viability of a development scheme and its sensitivity to changing inputs
What is the methodology?
- 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) agents fees
(Less) planning fees
(Less) Finance costs
What are Site preparation costs made up of?
Demolition, remediation works, landfill tax, provision of services, site clearance, levelling and fencing
What do you planning costs consist of?
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
What are build costs and where do you find out this information?
Estimate total cost of building works
Sources of building costs include client information, Quantity surveyor estimate, Building surveyor estimate, BCIS
What is the typical level of professional fees and what do these comprise?
10 to 15% plus VAT of total construction costs
These include architects M and E consultants, project managers and structural engineers
What is typically the largest proportion of professional fees?
Architects are usually the largest proportion of total fees
What are typical marketing costs and 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
What is included in the finance rate?
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
What are the three main elements for finance?
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
What rate is developers profit usually set at?
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.
Name two types of development finance
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
What is the current loan to value ratio in London?
50 to 60%
What is senior debt?
The first level of borrowing which takes the precedence over secondary/mezzanine funding
What is mezzanine funding?
Mezzanine funding is additional funding for the additional monies required over the normal loan to value lending
What is a swap?
A form of derivative hedging rate for interest rates.
A swap rate is the market interest rate for fixed rate, fixed term loans
Can you name any more development funding options?
Joint ventures-two or more parties jointly develop.
Forward sales – when a completed scheme pre-sold to investor or occupier
What is overage?
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
What is the profit erosion period?
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
What are the limitations of residual valuation methodology and finance modelling?
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
What is sensitivity analysis?
This is required for key variables such as gross development value, build costs and the finance rate, to show range of values
What are the three forms of sensitivity analysis?
- 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
What is the are RICS guidance note relating to development appraisals?
RICS guidance note valuation of development property, first edition, 2019 (effective from 1st February 2020)
What is the definition of development property?
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
What else is stated within this guidance note?
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
What are Permitted Development Rights?
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.
How can local authorities remove Permitted Development Rights within an area?
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.
What is the relevant legislation?
The Town and Country Planning (General Permitted Development) (England) Order 2015 is the principal order.
What is required in an application for Permitted Development?
- Transport and highways impacts
- Contamination and flooding risks
- Impacts of noise from commercial premises on the intended occupiers of the development
What date did the office to residential permitted development rights come in?
What things should you look out for when inspecting a development site?
Physical - contamination, evasive species, surrounding area, recent developments, development sites for sale
Legal - access, properties overlooking (rights of light), rights of way
Which RICS document relates to financial viability?
- RICS Professional Statement: Financial viability in planning: conduct and reporting
- 1st edition, May 2019
What is the purpose of this report?
- It sets out mandatory requirements that inform the practitioner on what must be included
- within reports and how the process must be conducted.
What are the main headings within the document?
- 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)
What are the key pieces of legislation that set out governance for development?
- The Town and Country Planning Act 1990
- Planning and Compulsory Purchase Act 2004
- Local Plans
- Neighborhood Plans
What RICS documents relates to development valuation?
Valuation of development property 1st edition, October 2019
What is the definition of development property?
- ‘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
What is the current 3 month Libor Rate?
What is replacing the LIBOR rate and when?
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.
What are the current UBR rates?
- Standard multiplier - 50.4p
- Small Businesses - 49.1%
Who benefits from the current Corona virus business rates holiday?
- As shops, restaurants, cafes, drinking establishments, cinemas and live music venues,
- For assembly and leisure
- As hotels, guest & boarding premises and self-catering accommodation.
What is the recent guidance note published relating to development property?
RICS Guidance Note 'Valuation of Development Property' 2019
What is the purpose of this document?
To supplement the International Valuation Standards.
What does this document advise?
- 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.