2. 2013 Lecture Series
Lecture Date
An introduction to development 7th February 2013
appraisal & residual valuations:
Cash flow techniques and 13th February 2013
sensitivity analysis:
Possession strategy : 25th February 2013
2
3. Development Appraisal
Month • Residual Site Value
1
Month • Plus Construction Cost
1 - 12
Month • Plus Finance Cost%
1 - 12
Month • Less Capital Receipts
12
Month • Development Profit
12
3
4. Development Appraisal
GROSS DEVELOPMENT VALUE
COST HEADINGS
• Site Cost
• Construction Cost
• Professional Fees
• Marketing Cost
• Finance Cost
• Other Costs
OUTPUTS
• Development Profit
• Profit on Cost %
• Profit on Cost IRR (inc/exc finance)
• Yield on Cost
• Profit / Rent Cover
• Profit Erosion / Dissipation
4
5. Development Appraisal
Capital Value
Less Development Cost
_________________
Development Profit
5
18. Effect of 10% Change in a Variables
Letting Period -10%
Letting Period +10%
Construction period -10%
Construction period +10%
Pre-construction period -10%
Pre-construction period +10%
Variable
Finance Rate -10%
Finance Rate +10%
Land Cost -10%
Land Cost +10%
Building Cost -10%
Building Cost +10%
Yield -10%
Yield +10%
Rent -10%
Rent +10%
-80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0%
% Profit Change
18
Basis of Measurement – Code of Measuring PracticeGross External AreasGross Internal AreasNet Internal Areas
Development Appraisal – target profit What basis for site cost / value?Market ValueExisting Use ValueAlternative Use Value Opportunity CostHistoric Cost Assumptions/BasisSite Acquisition CostsStamp dutyAgent’s feesLegal feesSurveys Environmental SurveyGround Conditions Report / Soil survey Level SurveyAsbestos ReportPlanning CostsApplication CostsFeesDemolitionVacant Possession Costs Acquisition of leasehold interestTenant's compensation
QS Cost Estimate Spons /BCIS Tender price discrepancyVAT Cash flow timing effectMiscellaneous Section 106 AgreementCosts Community Infrastructure LevyContingency How many contingencies?Professional Fees1. Architect2. QS 3. Structural Engineer4. M&E Engineer5. Project Management6. Others OthersPlanning consultantInterior designLandscapingAcousticsArchaeologicalListed BuildingsDDALightingTransport / HighwaysRights of LightParty WallDon’t forget the expenses budget!Consider type of building contract and impact on construction cost.Design & Build, Guaranteed Maximum Price, Shell & Core etc.
Letting Fees1/2/3 agentsVATTiming of paymentMarketingBrochuresCAD Images / Fly-throughModelsReceptionsMarketing suite - staffAdvertisingWeb SiteLetting IncentivesRent free periodFitting out contributionVoid Costs Include in Capital Value?
Bank Finance v Equity FundingAgents fees 1/2 agentsLegal fees 1/2 lawyersFund's/Bank's supervisionBank valuation feesBank's arrangement/facility feeBank’s legal costs
Site Finance 100% for full periodConstruction cost 50% for full period and fees or S curvesFunding fees Payment assumptionsVoid % Pre-letsInterest compoundedQuarterlyMonthly9% per annumAnnually9.00% pa Quarterly 9.31% pa Monthly 9.38% pa Weekly 9.41% pa
Lump Sum Profit NCV - TDC Profit on Cost % Profit / TDC"The amount ofdevelopmentprofitexpressed as a percentage of the total development cost"NCV = Net Capital ValueTDC = Total Development CostProfit/rent cover"The number of months rental cover which theprofit represents"£200,000 / £60,000pa = 3.33 years = 40 monthsProfit dissipation/erosion"The number of months it will take for the total development cost to compound to the net capitalvalue allowing for finance costs at the prescribed interest rate"Yield on Cost"The return which the net rental income will show on the total development cost"Breakeven Rent “The minimum rent required to produce a yield on cost equivalent to the investment yield and yet not produce a loss”
Sensitivity Analysis can be undertaken on any 2 variablesRentInvestment yieldConstruction costPre-construction periodConstruction periodLetting voidInterim finance rateFloor area
Scheme RefinementRedecoration & RepairRetrofittingRefurbishmentRedevelopmentDifferent Floor Areas/Costs/ValuesWrong answer? Is the basement is too large, does it produce income or add to the valueIs there too much car parking on your shopping centre, and why should it be free car parkingThe building is too expensive – whyThe value of the existing retail investment is too high – can the retailer continue trading whilst the refurbishment takes place around them? Peter JonesPlot Ratio – GEA:site AreaGross / net floor area ratioCapital value £psm / £psf comparisonCost comparison to other schemesElemental viability analysisMarginal viability analysis
Value/Cost/Profit by useResidential/Offices/RetailWhich element delivers highest profit-on-cost
Cash Flow Benefits· Accuracy of interest calculation· Assess maximum exposure· “What if” analysis· Assess profit in relation to time -IRR· VAT impactCash Flow DisadvantagesTime consuming to enter / amend dataPresentationFormula definitionsPrepare “traditional” appraisalDecide cash flow periodStudy programmeDecide on spread of payments / receipts Enter into model
Cash Flow IssuesRent quarterly in advance and date of paymentAssumptions on transfer to investment a/cPrecise date of payment (interest calculation)Cost inflationRental growthSite purchase transfer date and costChoice of interest rate and compounding periodCash Flow ResultsNet Present ValueInternal Rate of ReturnProfitMaximum cash exposure
Net Present ValueInternal Rate of ReturnProfitMaximum cash exposureInternal Rate of ReturnThe internal rate of return on an investment or project is the “annualised rate of return" that makes the net present value(NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.