Essex Planning Skills 5 Chris Marsh FRICS MRTPI Daniel Kaye BSc (Hons) MRICS 02/12/2015.

Essex Planning Skills 5Essex Planning Skills 5

Chris Marsh FRICS MRTPIChris Marsh FRICS MRTPI

Daniel Kaye BSc (Hons) MRICSDaniel Kaye BSc (Hons) MRICS

02/12/2015

02/12/2015

The Importance of The Importance of Development AppraisalsDevelopment Appraisals

Policy ContextPolicy Context– Increasingly critical to test Policies in terms of Financial Increasingly critical to test Policies in terms of Financial

Viability Viability BEFOREBEFORE adoption adoption» PPS3 Para. 29 re Changing Affordable Housing ThresholdsPPS3 Para. 29 re Changing Affordable Housing Thresholds

» Strategic Housing Land Availability Assessments – Section 7CStrategic Housing Land Availability Assessments – Section 7C

» CIL testing and more generally, post Circular 05/05CIL testing and more generally, post Circular 05/05

» NPPF + Growth and Infrastructure ActNPPF + Growth and Infrastructure Act

» Government changes in 2015Government changes in 2015

Site Specific Financial TestingSite Specific Financial Testing

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An understanding of the Basics of An understanding of the Basics of Residual Valuations – Quick SummaryResidual Valuations – Quick Summary Simple method for appraising development Simple method for appraising development

viabilityviability Initial ‘Filtering’ of projects before DCFInitial ‘Filtering’ of projects before DCF To determine maximum value of a To determine maximum value of a

Development Site – the ‘Bid’ value.Development Site – the ‘Bid’ value. To calculate expected Profit and cost To calculate expected Profit and cost

ceilingceiling

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The Residual ValuationThe Residual Valuation

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The Basics The Basics

Simple method for appraising development Simple method for appraising development viabilityviability

Completed Value of the DevelopmentCompleted Value of the Development -- Construction CostsConstruction Costs -- Developers ProfitDevelopers Profit == Residual Land ValueResidual Land Value

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PurposesPurposes

To determine maximum value of a To determine maximum value of a Development Site – the ‘Bid’ value.Development Site – the ‘Bid’ value.

To calculate expected ProfitTo calculate expected Profit To calculate a cost ceilingTo calculate a cost ceiling

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COMPLETED DEVELOPMENT VALUE

-

CONSTRUCTION COSTS, FEES ETC.

-

DEVELOPER’S PROFIT

=

RESIDUAL LAND VALUE

(Must exceed Existing Use Value)

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-


PLANNING OBLIGATIONS

-


=

RESIDUAL LAND VALUE

(Must exceed Existing Use Value)REDUCTION

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-



AFFORDABLE HOUSING

-


=

RESIDUAL LAND VALUE


REDUCTION

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-



AFFORDABLE HOUSING

-


=

RESIDUAL LAND VALUE


REDUCTION

Percentage/ Tenure

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-



AFFORDABLE HOUSING

-


=

RESIDUAL LAND VALUE


REDUCTION

Percentage/ Tenure and new initiatives ?

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-



AFFORDABLE HOUSING

CIL

-


=

RESIDUAL LAND VALUE


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A Simple CaseA Simple Case

40,000ft2 Office Building40,000ft2 Office Building City Fringe location – not primeCity Fringe location – not prime Pre-let to solid covenant at £30.00psf/pa.Pre-let to solid covenant at £30.00psf/pa. Developer is competing for the land with Developer is competing for the land with

others.others. MAXIMISE LAND VALUE or what you MAXIMISE LAND VALUE or what you

think you can get away with – Speculative think you can get away with – Speculative additional profit !additional profit !

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Development ValueDevelopment ValueRental Income 32,000ft2 @ £30 960,000paRental Income 32,000ft2 @ £30 960,000paYield @ 8% Yield @ 8% 12.512.5Completed Value £12,000,000Completed Value £12,000,000

Construction CostsConstruction CostsBuild Costs 40,000ft2 @ £160 £6,400,000Build Costs 40,000ft2 @ £160 £6,400,000Ancillaries 320,000Ancillaries 320,000Fees 800,000Fees 800,000Contingency 320,000 Contingency 320,000 Borrowing @8% on Costs for 9mths Borrowing @8% on Costs for 9mths 470,400470,400 8,310,400 8,310,400

Developers ProfitDevelopers Profit @ 15% on Value @ 15% on Value 1,800,0001,800,000

Residual Land ValueResidual Land Value £1,889,600 £1,889,600(Less fees and interest on borrowing)(Less fees and interest on borrowing)

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What’s the problem ?What’s the problem ?

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Development ValueDevelopment ValueRental Income 32,000ft2 @ £30 960,000paRental Income 32,000ft2 @ £30 960,000pa

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Development ValueDevelopment ValueRental Income 32,000ft2 @ £30 960,000paRental Income 32,000ft2 @ £30 960,000pa

Problems:Problems:- Is the rental evidence reliable ?- Is the rental evidence reliable ?- Will the pre-let require special terms ?- Will the pre-let require special terms ?- Will the lease provide the developer with enough - Will the lease provide the developer with enough security ? security ?- Temptation to assume early rental growth to boost- Temptation to assume early rental growth to boost bid value ? bid value ? SENSITIVE VARIABLE SENSITIVE VARIABLE

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Risk and YieldRisk and Yield

RENTRENT YIELDYIELD MULTIPLIERMULTIPLIER

YEARSYEARS

PURCHASEPURCHASE

CAPITAL CAPITAL VALUEVALUE

10001000 5%5%

Low RiskLow Risk

2020 20,00020,000

High ValueHigh Value

10001000 8%8% 12.512.5 12,50012,500

10001000 10%10%

High RiskHigh Risk

1010 10,00010,000

Low ValueLow Value

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Risk and YieldRisk and Yield

RENTRENT YIELDYIELD MULTIPLIERMULTIPLIER

YEARSYEARS

PURCHASEPURCHASE

CAPITAL CAPITAL VALUEVALUE

960,000960,000 7.5%7.5% 13.3313.33 12,800,00012,800,000

960,000960,000 8%8% 12.512.5 12,000,00012,000,000

960,000960,000 8.5%8.5% 11.7611.76 11,290,00011,290,000

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VERY SENSITIVE VARIABLE INDEED VERY SENSITIVE VARIABLE INDEED ESPECIALLY …. ESPECIALLY ….

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The Peak of the Market

Recession – little or no development activity

Demand falls – Rental Growth slows

Capital Values fall

Developments Unviable

Banks stop lending

Bankruptcies Increased Demand as Recovery begins

Reduction in Over-supply

Rents Rising

Development Activity

Capital Values Rising

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The Peak of the Market

Recession – little or no development activity

Demand falls – Rental Growth slows

Capital Values fall

Developments Unviable

Banks stop lending

Bankruptcies Increased Demand as Recovery begins

Reduction in Over-supply

Rents Rising

Development Activity

Capital Values Rising

WHAT TIME IS IT?

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Construction CostsConstruction CostsBuild Costs 40,000ft2 @ £160 £6,400,000Build Costs 40,000ft2 @ £160 £6,400,000PROBLEMS: Better Information base: Reliable Estimates: PROBLEMS: Better Information base: Reliable Estimates: Unexpected changes and problems.Unexpected changes and problems.

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Construction CostsConstruction CostsBuild Costs 40,000ft2 @ £160 £6,400,000Build Costs 40,000ft2 @ £160 £6,400,000Ancillaries 320,000Ancillaries 320,000Fees 800,000Fees 800,000Contingency 320,000 Contingency 320,000 Borrowing @8% on Costs for 9mths Borrowing @8% on Costs for 9mths 470,400470,400 8,310,400 8,310,400

OTHER COST VARIABLES ???? OTHER COST VARIABLES ????

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Developers ProfitDevelopers Profit @ 15% on Value @ 15% on Value 1,800,0001,800,000

PROBLEMS:

-Does the margin adequately reflect risk ?

-Temptation to prune profits if capital values rising in order to raise land value and win the scheme

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Residual Land ValueResidual Land Value

£1,889,600£1,889,600(Less fees, interest on borrowing(Less fees, interest on borrowing

and present value) and present value)

Question of Confidence ?

Another CaseAnother Case

Mixed Use Development ProposalMixed Use Development Proposal– 100 Residential Units 100 Residential Units (Average 700ft2 net) 70,000 ft2(Average 700ft2 net) 70,000 ft2- Office use net 16,000 ft2 - Office use net 16,000 ft2

Town centre fringe location – not primeTown centre fringe location – not prime Offices pre-let to solid covenant at £30.00psf/pa.Offices pre-let to solid covenant at £30.00psf/pa. Developer is competing for the land with others.Developer is competing for the land with others. 30% Affordable Housing Policy – 70-30 split30% Affordable Housing Policy – 70-30 split Obligations £10,000 per unit + some commercialObligations £10,000 per unit + some commercial

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Gross Development ValueGross Development ValueResidential Sales ValuesResidential Sales Values - 70 units x £250psf (Gross/Net 80%) - 70 units x £250psf (Gross/Net 80%) - Capital Value £12,250,000 - Capital Value £12,250,000 - 30 Affordable Units @ 55-65% OMV 3,150,000 - 30 Affordable Units @ 55-65% OMV 3,150,000 Offices Rental Income 16,000ft2 @ £30 480,000paOffices Rental Income 16,000ft2 @ £30 480,000pa - Yield @ 8% - YP Multiplier - Yield @ 8% - YP Multiplier 12.5 12.5 - Capital Value £6,000,000 - Capital Value £6,000,000

Total Gross Development (Capital) Value £21,400,000Total Gross Development (Capital) Value £21,400,000

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Questions ?Questions ?

Quality of comparable residential evidenceQuality of comparable residential evidence Confirmation of RSL offers (conditional ?)Confirmation of RSL offers (conditional ?)

– Grant assumptions – No GrantGrant assumptions – No Grant

Evidence of commercial rents and yieldsEvidence of commercial rents and yields– Investment transactionsInvestment transactions

Exaggerating Gross to Net – better layout?Exaggerating Gross to Net – better layout? Missing itemsMissing items

– Income/ sales from Car ParkingIncome/ sales from Car Parking

– Ground rents from flatted unitsGround rents from flatted units

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Development ValueDevelopment Value £ 21,400,000 £ 21,400,000

Construction CostsConstruction CostsBuild Costs (Gross) Build Costs (Gross) Private Resid 61,250ft2 @ £130psf £7,962,500 Private Resid 61,250ft2 @ £130psf £7,962,500 AH 26,250ft2 @ £120psf £3,150,000 AH 26,250ft2 @ £120psf £3,150,000 Offices 20,000ft2 @ £120psf Offices 20,000ft2 @ £120psf £2,400,000£2,400,000 Total £13,512,000Total £13,512,000

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Construction Costs Construction Costs £13,512,000£13,512,000Ancillaries 5% on Cost 675,600Ancillaries 5% on Cost 675,600Fees 12.5% on Cost 1,689,000Fees 12.5% on Cost 1,689,000Contingency 5% on Cost 675,600Contingency 5% on Cost 675,600Planning Obligations Planning Obligations £10,000 per Residential unit 1,000,000 £10,000 per Residential unit 1,000,000 Commercial space say 200,000 Commercial space say 200,000Borrowing (18mth build)@8% for 9mths Borrowing (18mth build)@8% for 9mths 1,065,0001,065,000

Total CostsTotal Costs £18,817,332 £18,817,332 02/12/2015


Can the costs be justified?Can the costs be justified? What has been included? Exceptional costs?What has been included? Exceptional costs? Code level (CfSH) 3 or 4+ ?Code level (CfSH) 3 or 4+ ? Confusing Gross and Net floorspace ?Confusing Gross and Net floorspace ? Parking costs but no income ?Parking costs but no income ? Where are the savings – fees, borrowing ?Where are the savings – fees, borrowing ? Can the Obligations be substantiated ?Can the Obligations be substantiated ?

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Total CostsTotal Costs £18,817,332 £18,817,332

Profit on Value/ CostProfit on Value/ Cost - 15% on Value - 15% on Value 3,210,0003,210,000

Residual Land Value - £627,332Residual Land Value - £627,332

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Is the return justifiable?Is the return justifiable? Has a profit margin been applied to Has a profit margin been applied to

affordable housing ?affordable housing ? Will the Banks lend?Will the Banks lend?

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OverallOverall Can the financial variables be proven?Can the financial variables be proven? Is there sufficient supporting evidence ? Is there sufficient supporting evidence ? Is there any gap funding ?Is there any gap funding ? Will circumstances improve in later phases?Will circumstances improve in later phases? How does Residual Value compare to real How does Residual Value compare to real

Existing Use Value?Existing Use Value? LPA capacity to claw back shortfalls up to policy LPA capacity to claw back shortfalls up to policy

compliancecompliance Short and longer term strategiesShort and longer term strategies ALL ABOUT REVIEW MECHANISMS ALL ABOUT REVIEW MECHANISMS BUT..BUT..

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Housing and Planning BillHousing and Planning Bill Starter Homes ‘trump card’Starter Homes ‘trump card’ Viability to now include Starter HomesViability to now include Starter Homes Any room for Affordable Rent and Shared Any room for Affordable Rent and Shared

Ownership ?Ownership ? Geographic variations by value and by Geographic variations by value and by

politicspolitics Are Starter Homes actually affordable ?Are Starter Homes actually affordable ? What is the financial appraisal impact to What is the financial appraisal impact to

make them affordable? make them affordable? 02/12/2015

Starter Homes – viability Starter Homes – viability comparisoncomparison

Starter Homes - Viability Comparison

2 bed flat - 725 sq ft (NIA)

Type Total scheme cost (inc' land) Open market value Starter Home Shared Ownership Affordable Rent

Cost/value £ 135,000 £ 200,000 £ 160,000 £ 138,000 £ 80,000 Profit/loss per unit N/A £ 65,000 £ 25,000 £ 3,000 -£ 55,000 Value/cost per sq ft 186 £ 275 £ 220 £ 190 £ 110 Profit/loss per sq ft N/A £ 89 £ 34 £ 4 -£ 76

Housing and Planning BillHousing and Planning Bill

How do the values compare ?How do the values compare ? Local Housing Needs AssessmentsLocal Housing Needs Assessments Local Plan policy on AHLocal Plan policy on AH Whatever happened to Localism and Whatever happened to Localism and

decentralisation?decentralisation? The devil is in the detailThe devil is in the detail The detail through Ministerial Regulation !The detail through Ministerial Regulation !

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ContactsContacts

Chris MarshChris Marsh [email protected] 01233 61257501233 612575 0794006378107940063781 Danny KayeDanny Kaye 0750812414207508124142

02/12/2015

Essex Planning Skills 5 Chris Marsh FRICS MRTPI Daniel Kaye BSc (Hons) MRICS 02/12/2015.

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Transcript of Essex Planning Skills 5 Chris Marsh FRICS MRTPI Daniel Kaye BSc (Hons) MRICS 02/12/2015.