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School of Architecture & Construction

REFERRED/DEFERRED ASSESSEMENT - SESSION 2007/08SUMMER 2008

COURSE CODE COMP 1361

COURSE TITLE Studio 3

COURSE COORDINATOR John OLeary

To StudentsIf you have failed a course or part of a course and have been allowed by the

Progression and Award Board to be reassessed in one or several of the courses, this

will be indicated in your result letter. On the back of the result letter, the words

Failed -retake permitted before the next academic year will appear next to the

relevant assessment items or course(s).

In that case, you are required to submit coursework and/or to take an examination

again as appropriate in August 2008.

Examination timetable

The detailed examination timetable will be posted on the University website towardsthe end of July. Deferred/referred examinations will be timetabled between 18

thto

29th August 2008. The link can be followed from here:

http://www.gre.ac.uk/students/exams

Deadline for submitting courseworkCoursework must be delivered by hand no later than Monday 18

thAugust 2008 to

the School of Architecture & Construction.

If you send your coursework by post, it must be sent by first class recorded delivery

(keep a copy of both the postal receipt and the coursework) no later than Monday18

thAugust 2008 to:

Referred/Deferred Coursework

School of Architecture & Construction

Mansion Site

Bexley Road

London SE9 2PQ

UK

Coursework submissionAll coursework must be submitted by the deadline and method as above and must beaccompanied by the appropriate electronic header sheet.

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Postal SubmissionsAll postal submissions, Coursework and Portfolios, will be receipted with the date of

postage as the date of submission.

It is the responsibility of the student to ensure that the work is submitted on time by

the above method.

QueriesAny queries should be emailed to

acqueries07@gre.ac.uk

with

Your full name Your student ID number Your Programme of Study e.g. BA Architecture The title and code of the course(s) with which you have a query The nature of the query

Please note that emails to this address will be answered up to Friday 26th September

2008, after this date enquiries should be sent direct to the Course Coordinator. Staff

email addresses and contact numbers can be looked up here:

http://www.gre.ac.uk/staff_intranet/directory

Please find below details of the coursework to be submitted.

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Assessment item

COURSEWORK 1 (20770) Weighted 50%

of the course marks

Note: scroll further down this document if

you need to recover Coursework 2 (20771)

Electronic header sheet number 142339

Details of work to be undertaken:

You are to write a report of no longer than 800 words identifying the value of a 2

hectare green field site in an outer London borough which is to be developed for

housing at 50 dwellings per hectare. You can decide on the precise combination of

dwellings that are be developed on the site from a combination of: 1 bed flats at

50m2, 2 bed flats at 62m

2, 3 bed flats at 80m

2, 2 bed houses at 68m

2and 3 bed

houses at 98m2.

You should select a build cost between 900 per m2

up to 1,200 per m2

depending

of the quality of the development that you envisage. You can make assumptions

about the quality of the locality and the type of customer that your scheme is aimedat.

You should factor into your calculations the open market sales values of the

properties as follows: 1 bed flats at 160,000 each, 2 bed flats at 180,000 each, 3

bed flats at 190,000 each, 2 bed houses at 190,000 each and 3 bed houses at

210,000 each. Under a section 106 agreement, a housing association will acquire

25% of the properties and manage them as affordable housing. The exchange value

of those properties is to be 65% of their open market values as shown above.

Excel must be used to produce the site valuation and the notes attached below

provide advice on the headings that should be used. The report must describe anyassumptions made and/or interpretations that you make of the scenario. A print out

from the Excel spreadsheet that you create must be attached as an appendix to the

report. The submission should be made in a report cover / folder which must also

contain a disk containing an e-copy of your Excel file. The latter must show the use

of formulas to link data in different cells. There is no requirement for any drawings

or layouts.

Availability of course tutor for consultation:

p.j.oleary@gre.ac.uk

Notes to support Coursework 1 onthe Residual Method of Valuation

1. Introduction

The residual valuation method is used in circumstances where the value of a site, with

development potential, is required. A potential developer of a site may want to acquire it to

carry out development, but does not want to pay over the odds. Similarly the current ownerof a site might carry out a residual valuation to find out what the site is worth to a typical

developer i.e. how much could it be sold for. In these circumstances the direct comparison

method is not entirely reliable, as all sites are different and have inherently different

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development potentials....and therefore different values.

2. Basic Principle

In its fundamental form, a residual valuation begins by calculating the worth of the finished

scheme: `the Gross Development Value (GDV) and then deducts all of the costs toproduce the finished development, to arrive at a residual sum. That residual sum is

theoretically the amount available for purchasing the site. Thus:

Gross Development Value (GDV) = X

Costs of Producing the Development = Y

Residual Sum for Land Purchase = X-Y

3. Calculating the GDV

To calculate the GDV comparable evidence is required, which is converted into convenient

units of comparison. The units of comparison can be multiplied by the number of units in

the finished development.

For example a developer is intending to develop 20 three bedroom semi-detached houses

on a site. Current open market comparable evidence suggests that the value of semi-

detached 3 bedroom houses in that area is 300,000. Thus the GDV of the developers

scheme would be 20 x 300,000 = 6,000,000. However, 25% of the units must be sold to a

housing association as affordable housing under a planning condition at 1.2 times the cost

to build. Thus the adjusted GDV would be:

15 x 300,000 = 4,500,000 +

5 x 1.2 x 900 m2

x size of units: 110 m2

= 594,000

GDV = 5,094,000

Having established the GDV, the next step is to begin calculating the costs (deductions)

beginning with construction costs.

4. Calculating Construction (Building) Costs

This is made comparatively easy by average costs of construction in `Spons or BCIS which

provides costs per m2

for virtually every type of building. Thus if Spons suggests that the

average cost of building a square metre of office building is 900 and a developer is

planning to build a 10 houses each of which is 95m2, then the construction costs are likely

to be in the order of 900 x 10 x 95 = 855,000.

5. Ancillary Costs

As well as the construction costs, there are the costs of connecting up the services (water,gas, electricity) providing landscaping and parking and constructing an access road into the

site. If there are derelict buildings on the site, these will have to be demolished and the costs

included under this heading. For a straightforward housing development the Ancillary Costs

will only be a small proportion of construction costs: 3% to 5%. Where a brown-field site is

being developed this aspect of cost may well be higher than 5%.

6. Professional Fees

The construction and ancillary costs are not the only cost considerations in the residual

valuation. Professional fees for the architect, QS and other professionals involved, have to

be considered. The conventional approach is to calculate fees at 12.5% of construction and

ancillary costs.

7. Contingencies

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Development projects are invariably affected by unforeseen circumstances or `glitches

which could not have been predicted at the outset. The more complex the project, the more

likely it is there will be difficulties or delays somewhere along the line.

In order to anticipate these difficulties, a residual valuation builds in a contingencies sum to

anticipate additional (as yet unknown) costs. Allowing for contingencies will protect the

developers profit margin, should delays occur or additional expenditure be necessary.

Contingencies are normally calculated at between 2% and 5% of total costs (i.e. building

costs, ancillaries and professional fees).

8. Finance Costs

The developer will probably be borrowing money to pay for the development and there will

thus be interest charges to pay. Even if the developer is not borrowing the money, but isusing money from reserves, there is the opportunity cost of capital i.e. interest could have

been earned.

The conventional way of dealing with this in the residual valuation, is to adopt an interest

rate which is between 2% and 5% above the Bank of England Base Rate since thatrepresents what a bank would charge a developer for a loan of this sort. The interest rate is

applied over half the building period, to account for the fact that the developer will nottake out all the money at once, but will borrow the money in instalments to match the rate

of construction activity. This is referred to as the gradual `draw down of the loan.

Example: if the base rate was 5%, the development period was 12 months and the totalcosts 1,500,000 interest charges could be calculated as follows:

(Total costs x (1+i)n

)- Total Costs = Interest Charges

(1,500,000 x (1.07)0.5

) -1,500,000 = Interest Charges = 51,612

Additional finance charges might also be calculated for a period after construction activity

is finished, while the property is being marketed and sold but remains empty.

Conventionally the residual valuation might allow 3 to 6 months for this period for a

commercial scheme. With housing projects in a buoyant market, the houses will be soldalmost instantaneously after construction, or beforehand off plan and so there is no void

period over which interest charges are accruing.

9. Marketing and Sales Fees

The finished development has to be marketed and sold and this activity will cost money.

The normal practice is to allow 2% to 3% of the sale price of the finished development (i.e.

2 to 3% of the GDV) for the cost of marketing, agents fees and sales transactions.

10. Return for Risk and Profit

Developers bear the risks of property development in order to make a profit.Conventionally, the profit margin is somewhere between 15% and 20% of the GDV. If the

project looks as if it is risky or will take longer to complete than other projects, then the

developer will build in a higher profit margin. If the project is straightforward, the lower

end of the profit margin may be more appropriate i.e. 15%.

11. Residual Sum Available for Site Purchase

The difference between the GDV and the Total Costs gives a sum of money which will

enable the purchase of the site, fees associated with the purchase and interest forgone whilst

the site is being developed.

The interest allowance is made because the money is sunk into the site for the developmentperiod (which may be a year or more) during which there is no income. During that time the

developer could have been earning interest on what might be a considerable sum of money.

Thus the `sting in the tail of the residual valuation requires the residual sum to be

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discounted at an appropriate interest rate, to allow for interest forgone. This is represented

by the Present Value (PV) in the example below which is pitched at 7% over an assumed 1

year development period. The formula is 1/ (1 + i)n

which in the example below discounts

the site value by 0.9346.

Site acquisition costs also have to be allowed for, as lawyers will be involved in the

transaction (land registry searches and exchange of title) and there will be stamp duty to

pay on the transaction. Conventionally these `add-ons are costed at around 5% of the site

value.

An example of a simple Residual Valuation

25 x 2 bed flats whose end sales value is 180,000 each. GDV = 4,500,000

Deduct Costs:

Building Costs for 55m2flats @ 850 per m

2x 25 = 1,168,750

Ancillaries @ 3%of building costs = 35,063

1,203,813

Professional Fees@ 12.5% of costs = 150,477

1,354,290

Contingencies@ 3% of costs = 40,629

1,394,919

Finance @ 7% of costsover half build period

(6 months) = 47,9961,442,915

Marketing and Salesfees @ 3% of GDV = 135,000

1,577,915

Return for Risk andProfit @ 15% of GDV = 675,000

Total Costs = 2,252,915

Sum available for land purchasei.e. GDV - Total Costs = 2,247,085

Site value in 1 years timePV of 1 in 1 year @ 7%: x 0.9346

2,100,126

Less acquisition costs@ 5% of site value: 105,006

Site Value Today = 1,995,120

12. Conclusion

Residual valuations are often used to value land which has development potential i.e. where

a site is being considered for purchase and development. This type of valuation can also be

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used identify the profit margin where the value of the land is fixed or already known.

The valuer begins by estimating the Gross Development Value (GDV) of the completed

scheme by using comparable evidence. The valuer then inputs a number of variables to

produce the `Total Costs of the development. The difference between the GDV and the

Total Costs, is a sum of money that can be used to purchase the site, pay interest over the

development period and pay the costs of site acquisition.

If a developer pays more for the site than the residual sum suggests, the developers profitmargin could end up being eroded.

Developers can test their residual valuations with a sensitivity analysis which evaluates theeffects of change to the variables i.e. what would happen if construction costs went up 15%.

Developer use sensitivity analysis to reduce exposure to risk.

Because of the number of variables and assumptions involved, valuers can come to

different conclusions regarding the value of the same site. In situations where there are

disputes about the values arrived at by different valuers appraising the same site, the Lands

Tribunal can be called upon to give a judgement.

Assessment itemCOURSEWORK 2 (20771) Weighted 50%of the course marks

Electronic header sheet number 142340

Details of work to be undertaken:

You work for a property investment company which has a target rate of return on its

property investments of 9%. A fully tenanted business park unit has come on themarket and its asking price is expected to reflect an initial yield of 6.5%. The rent

passing on the property has just been fixed at rent review and is 130,000 per

annum on FRI terms and this rent will remain unchanged for the next 5 years.

You have been asked to evaluate the investment to see if it will meet the companys

target rate of return based upon the assumption that the property would be held for 5

years and then sold on. It is anticipated that the capital value of the property will

increase by 3% per annum over the holding period of five years. The legal fees and

stamp duty associated with purchasing the investment will be 5% of its current

value. On disposal there will be some legal fees, marketing and administration costs

estimated to total 2% of the buildings value at that stage. Assuming the propertywas acquired, there would be annual management costs reflecting 1% of the annual

rent.

Using an Excel spreadsheet produce a discounted cash flow for the five years to

assess whether the investment meets the companys target rate of return. Your

spreadsheet should identify the Net Present Value of the investment and its Internal

Rate of Return. Write a short report to your line manager based upon your

evaluation of the property, leading to conclusions and recommendations. The latter

should explore whether the property should be purchased or whether negotiations

need to take place over the purchase price to render the investment viable from the

companys perspective or whether the investment fails by a long way to meet thecompanys target rate of return and should be passed over. Any assumptions made

should appear in your report.

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Method

You should study the examples of the layout and formulas used for Discounted

Cash Flow appraisals produced in Excel spreadsheets as shown in Chapter 9 of

`Excel for Surveyors by P. Bowcock and N. Bayfield, Estates Gazette (2000).There are copies of this book available in the library, although you should check the

universitys web site for summer library opening hours before making a journey (assome days the library is closed for staff training and generally will not be open

beyond normal office hours).

Your submission must include a disk upon which there should be an e-version of

your Excel spreadsheet. The assessor will be looking to see if appropriate formulas

have been used to manage the data arising from the scenario.

Availability of course tutor for consultation:

p.j.oleary@gre.ac.uk