1. Development Appraisal Day 1 Exercises – Part I

2. Residual land value Minus 2. Construction Costs
1. Development Value
Minus
2. Construction Costs
3. Other Costs (inc. finance)
4. Developers Margin
= Residual Land Value 2

3. Residual developer’s margin
1. Development Value
Minus
2. Land Cost
3. Construction Costs
4. Other Costs (inc. finance)
= Residual Developers Margin 3

4. Exercise 1 - Office appraisal
Development Value:
Value = Rent x Yield
(i) Estimated Rent = Net Floorspace x Rental Level
(ii) Gross Value = Estimated Rent x 100 / Yield
(iii) Net Receipts = Gross Value – Purchasers Costs 4

5. Exercise 1 - Office appraisal
Development Costs:
Build costs
Site preparation & external works
Fees & marketing/sales
(iv) Other costs
(v) Finance costs 5

6. Exercise 1 - Office appraisal
Key points:
Rents & build costs: per sq m
Other development costs: % of build cost, all construction cost or value
Finance costs: based on build, void and land costs
Use the RTP Day 1 exercise 1 ( excel spreadsheet) The red boxes are for inputs. Do not overtype the other data as there are formula behind the boxes. Use the assumptions on slide 7 to test the impact on the residual valuations. Slide 8 – demonstrated the spreadsheet completed. 6

7. Exercise 1 - Office appraisal
Variable
Assumption
Gross Floorspace
5,000 sq m
Net/Gross Ratio
85%
Rental Value
£250 per sq m
Yield
7.00%
Build Costs
£1,250 per sq m
External Works
10% (of build costs)
Professional Fees
12% (of all construction costs)
Sales & Marketing
2% (of development value)
Other Costs
3% (of build costs)
Developer contribution
£50 per sq m
Finance Rate
7.5%pa
Margin on Cost
20% 7

8. Now change contruction cost by 250 per square metres – slide 9 demonstrates this change. Why don’t you try different scenarios and see the different residual land valuation.

9. 9

10. How viable is office development in your area?
Key factors:
Rental Values
Investment Yield
Demand / Supply
Office Specification
Use the information that you have for your area in the model and see what the impact is on residual valuation. Try reducing the developers profit or ‘margin on cost’

11. Office Rents 11

12. Office Yields 12

13. Office Void Period 13

14. £/m2 gross internal floor area
Office Build Costs
£/m2 gross internal floor area
Lowest
Highest
Mean
Generally (15)
£496
£3,655
£1,168
Air-conditioned
£538
£1,306
1-2 storey (15)
£2,156
£1,135
3-5 storey (15)
£566
£1,324
6+ storey (15)
£1,141
£3,115
£1,719
Not air-conditioned
£2,206
£1,070
£1,912
£990
£785
£1,132
£1,030
£1,667
£1,466
Source: Building Cost Information Service (BCIS) 14

15. Development Appraisal Day 1 Exercises – Part II15

16. Exercise 2 - Residential Appraisal
Variable
Assumption
Density
30dph
Affordable Housing
30%
Sales Value
£200,000 50%)
Build Costs
£70,000 per unit
External Works
10% (of build costs)
Professional Fees
12% (of build costs)
Sales & Marketing
2% (of development value)
Other Costs
3% (of build costs)
Developer contribution
£5,000 per unit
Finance Rate
7.5%pa
Margin on Cost
20%
Use these assumptions in RTP day 1 –exercise 2 in the RTP day 1 excel spreadsheet – or you can vary the assumptions and see what difference it makes. A completed example of this model is illustrated in slide 17. 16

17. This is a completed example – with all the inputs ( assumptions) for day 1 exercise 2.17

18. Exercise 2 – Sensitivity Analysis
Try using the model to test different inputs/assumtions and note the sensitivity. 18

19. Exercise 3 – Interpreting the residual
Compare to site existing and alternative use value (EUV & AUV)
If residual is higher than both, development is in theory viable
Landowner might want more than EUV and AUV in real life
Open exercise 3 on the spreadsheet. 19

20. Change the rental value and yield for an area or site that you know (or just guess for the purpose of the exercise) and see what the different it makes to the net value. How does the existing use value compare to the residual valuation? 20

21. Exercise 4 - Cashflow
If developer is borrowing money, timing will affect finance costs
High upfront costs means finance charged on these items for longer
Slow sale of units means borrowed funds + interest can’t be paid off as quickly
Open up exercise 4 on the spreadsheet.
You can use this spread sheet to input different scenarios – what happens when you have to pay more of your costs early on in comparison to later. The timing of payments – or cash flow can make the difference between a development being viable or not.
You may be given a large proportion of your affordable housing money up front – try adding that in.
You may sell your development in phases 21

22. This is an example of a cost flow model – how does it compare with yours?22

23. Exercise 5 – Large strategic sites
Option Agreements:
Provide landowner with:
Option fee, base price, planning permission
Provide developer with:
Land bank, limited outlay, limit risk of key unknown costs impact on return
Provide LPA with:
Opportunity to secure higher planning gain
Move onto exercise 5 and change the rate of sales, the building costs, land costs and developer contributions.
e.g. China is buying more minerals and construction materials, and inflation is rising increase building costs by 5%.
The price of land is dropping – try changing by 2%.
The council planning department has decided it has been way to generous and has done a Copntributions DPD and raised its contributions to £75 per sq m. 23

24. The spreadsheet demonstrates a lengthy cash flow.24