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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
02/12/2015
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
02/12/2015
The Residual ValuationThe Residual Valuation
02/12/2015
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
02/12/2015
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
02/12/2015
COMPLETED DEVELOPMENT VALUE
-
CONSTRUCTION COSTS, FEES ETC.
-
DEVELOPER’S PROFIT
=
RESIDUAL LAND VALUE
(Must exceed Existing Use Value)
02/12/2015
COMPLETED DEVELOPMENT VALUE
-
CONSTRUCTION COSTS, FEES ETC.
PLANNING OBLIGATIONS
-
DEVELOPER’S PROFIT
=
RESIDUAL LAND VALUE
(Must exceed Existing Use Value)REDUCTION
02/12/2015
COMPLETED DEVELOPMENT VALUE
-
CONSTRUCTION COSTS, FEES ETC.
PLANNING OBLIGATIONS
AFFORDABLE HOUSING
-
DEVELOPER’S PROFIT
=
RESIDUAL LAND VALUE
(Must exceed Existing Use Value)
REDUCTION
02/12/2015
COMPLETED DEVELOPMENT VALUE
-
CONSTRUCTION COSTS, FEES ETC.
PLANNING OBLIGATIONS
AFFORDABLE HOUSING
-
DEVELOPER’S PROFIT
=
RESIDUAL LAND VALUE
(Must exceed Existing Use Value)
REDUCTION
Percentage/ Tenure
02/12/2015
COMPLETED DEVELOPMENT VALUE
-
CONSTRUCTION COSTS, FEES ETC.
PLANNING OBLIGATIONS
AFFORDABLE HOUSING
-
DEVELOPER’S PROFIT
=
RESIDUAL LAND VALUE
(Must exceed Existing Use Value)
REDUCTION
Percentage/ Tenure and new initiatives ?
02/12/2015
COMPLETED DEVELOPMENT VALUE
-
CONSTRUCTION COSTS, FEES ETC.
PLANNING OBLIGATIONS
AFFORDABLE HOUSING
CIL
-
DEVELOPER’S PROFIT
=
RESIDUAL LAND VALUE
(Must exceed Existing Use Value)
02/12/2015
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 !
02/12/2015
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)
02/12/2015
What’s the problem ?What’s the problem ?
02/12/2015
Development ValueDevelopment ValueRental Income 32,000ft2 @ £30 960,000paRental Income 32,000ft2 @ £30 960,000pa
02/12/2015
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
02/12/2015
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
02/12/2015
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
02/12/2015
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
02/12/2015
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
VERY SENSITIVE VARIABLE INDEED VERY SENSITIVE VARIABLE INDEED ESPECIALLY …. ESPECIALLY ….
02/12/2015
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
02/12/2015
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?
02/12/2015
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 £6,400,000PROBLEMS: Better Information base: Reliable Estimates: PROBLEMS: Better Information base: Reliable Estimates: Unexpected changes and problems.Unexpected changes and problems.
02/12/2015
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
OTHER COST VARIABLES ???? OTHER COST VARIABLES ????
02/12/2015
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
02/12/2015
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
02/12/2015
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
02/12/2015
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
02/12/2015
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
02/12/2015
Development ValueDevelopment Value £ 21,400,000 £ 21,400,000
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
Questions ?Questions ?
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 ?
02/12/2015
Development ValueDevelopment Value £ 21,400,000 £ 21,400,000
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
02/12/2015
Questions ?Questions ?
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?
02/12/2015
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..
02/12/2015
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 !
02/12/2015
ContactsContacts
Chris MarshChris Marsh [email protected] 01233 61257501233 612575 0794006378107940063781 Danny KayeDanny Kaye 0750812414207508124142
02/12/2015