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An Introduction to Development Appraisal & Residual Valuations

Speaker: Simon Wainwright BSc FRICS

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2013 Lecture SeriesLecture Date

An introduction to development appraisal & residual valuations:

7th February 2013

Cash flow techniques and sensitivity analysis:

13th February 2013

Possession strategy : 25th February 2013

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dfdf9900 Wilshire Boulevard Beverly Hills

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Valuation of Development LandComparison Method or Residual Method?

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Terminology

• Residual Valuation • Comparable Valuation• Development Appraisal• Viability Study• Feasibility Study

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Think Timeline

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RESIDUAL VALUATION &DEVELOPMENT APPRAISAL

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Residual ValuationMonth 12

• Value of Completed Development

Month 12

• Less Development ProfitMonth 1 -

12

• Less Construction Cost Month 1–12

• Less Finance Cost%

Month 1

• Residual Site Value

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Development AppraisalMonth 1

• Residual Site Value

Month 1 - 12

• Plus Construction Cost Month 1 -

12

• Plus Finance Cost%

Month

12

• Less Capital Receipts

Month 12

• Development Profit

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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

PLANNING & DEVELOPMENT RISKPROFIT

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Land Speculation v Development

Land Speculation

1• Agricultural Land• Planning Application

2• Development Land• Planning Risk

3• Site Sale• Speculative Profit

Development

1• Development Land• Planning Permission

2• Construction Finance• Development Risk

3• New Building• Development Profit

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Urbanisation of Land

Land Plotting & Urbanisation

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Development Options

RegenerationRedevelopmentRetrofittingRefurbishmentRedecorationRepair & MaintenanceImprovements

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Where do you start?

Sensitivity Analysis

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-80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0%

Rent +10%

Rent -10%

Yield +10%

Yield -10%

Building Cost +10%

Building Cost -10%

Land Cost +10%

Land Cost -10%

Finance Rate +10%

Finance Rate -10%

Pre-construction period +10%

Pre-construction period -10%

Construction period +10%

Construction period -10%

Letting Period +10%

Letting Period -10%

% Profit Change

Var

iab

le

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What guidance is available?

• RICS Guidance Note• RICS Valuation

Information Paper 12• RICS Practice Standard

UK

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An Introduction to Development Appraisal & Residual Valuations

Speaker: Simon Wainwright BSc FRICS