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Lecture 1 (B) - Introduction To Development Appraisal

This document provides an introduction to property development appraisal. It discusses the overall property market and the development market specifically. Property development involves erecting buildings for occupation or sale/investment. Financial evaluation of development projects is an ongoing process as risks are inherent. Common appraisal techniques include the conventional method, discounted cash flow analysis, and sensitivity analysis to assess viability under different scenarios. Feasibility studies also determine if proposed developments are likely to succeed. Valuations consider factors like planning permissions, density, infrastructure, and environmental issues.

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NURAIN HANIS BINTI ARIFF
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240 views17 pages

Lecture 1 (B) - Introduction To Development Appraisal

This document provides an introduction to property development appraisal. It discusses the overall property market and the development market specifically. Property development involves erecting buildings for occupation or sale/investment. Financial evaluation of development projects is an ongoing process as risks are inherent. Common appraisal techniques include the conventional method, discounted cash flow analysis, and sensitivity analysis to assess viability under different scenarios. Feasibility studies also determine if proposed developments are likely to succeed. Valuations consider factors like planning permissions, density, infrastructure, and environmental issues.

Uploaded by

NURAIN HANIS BINTI ARIFF
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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RES 551 (B) DEVELOPMENT APPRAISAL

LECTURE 1 - INTRODUCTION
INTRODUCTION

• Property development is part of the property market which includes a


user market, an investment market and a development market. A
simple model of the overall property market is suggested by Keogh
(1994).

• User Market – Rent, Expected Rent Use value


• Investment Market – Capital Values, Current Yields Capital Values
• Development Market – Land Value, Development Activities
• Property development is the process by which buildings are erected
for occupation or for sale/investment. Owners may build premises for
their own occupation, for example major retailers may erect
supermarkets; alternatively, property developers may construct the
same type of buildings for lease or sale.
• The process may be the same although some aspects of the financial
appraisal may be different. A building offered for sale or investment is
driven by a profit motive, a building for owner-occupation may be
related to the profitability of the enterprise within the building and
thus profit motivation may be redirected or constrained (Isaac et al,
1996)
Financial Evaluation

• Evaluation is a constant process: the developer will not just carry out
one appraisal prior to the acquisition of a development site but will
re-appraise the profitability of the scheme throughout the
development process. Risk is an inherent part of the property
development process and we shall also consider how this is assessed
as part of the evaluation process (Cadman,2002)

• Market research is part of the appraisal process


Appraisal Technique
• The conventional technique of development appraisal is often used in
the evaluation.
• In addition, various cash-flow methods including the discounted cash-
flow techniques are complementary to the conventional method.
• At the final stage, sensitivity analysis and ways in which uncertainty
can be contained in order to reduce risk. Sensitivity analysis was used
in the calculations and cash flows to project the development's
viability
Purpose of evaluation

• Development financial viability and decision makings

• Development Financing
Matters to be considered in the valuation

• An accurate assessment should be made of the form and extent of


physical development that can be accommodated on the site. This
assessment should consider the characteristics of the site and the
surrounding area, supply and demand constraints and the likelihood
of obtaining permission. In more complex cases, it is recommended
that this assessment be undertaken in consultation with appointed
project advisers, such as architects, quantity surveyors and
environmental, planning and energy consultants (RICS,2019)
• Matters that should be considered in detail include:
➢permissible land uses within the particular planning regime
➢potential land uses within the particular planning regime
➢density of development, establishing the bulk, scale and massing,
particularly in urbanised areas subject to different property types
➢topography and site development factors, including availability of
services and infrastructure, ground conditions and development
restraints Valuation of development property 18 RICS guidance note,
global Effective from 1 February 2020
A feasibility study may also be required in the valuation of
development properties for financing purposes. A feasibility study
determines the viability of the proposed property development. The
study may include investment analyses and financial performance to
evaluate as to whether it is likely to be carried out successfully or
pursued under a proposed development plan and may include advice
to further improve the viability of the proposed project development
• building-related issues, such as the period of time estimated to complete
the new buildings, achieving optimum occupational efficiency ratios, car
parking standards and/or restrictions, regulations concerning energy
efficiency and the extent to which the development control system is being
used to help deliver climate change obligations
• development consent issues, such as requirements as to the provision of
developer contributions or planning obligations attached to the permission
to develop
• adjacent land: although a valuation is required of the actual subject
property, there may be a possibility of increasing the development potential
by acquisition of, or merger with, adjacent land. Conversely it may be
necessary to acquire adjacent land, or rights over adjacent land, including
oversailing rights, before the proposed development could take place
• accessibility and developability of the subject property and
• environmental issues that may have a material bearing on the success
of the project. Sufficient enquiries should be made to establish
whether the presence of on-site or neighbouring environmental
features influence the development process, the density or even the
viability of the project.
(MVS 12)
• In the valuation of development properties for financing purposes, a
separate market study may be required. Market study is a study of
the property market in relation to the proposed development. A
market study will take into consideration macroeconomic aspects,
local government policies, market analyses of the property market or
proposed property and marketability factors which include studies of
the location, market conditions and competitive position of the
proposed property in the locality. The objective of a market is to
access the level of demand and supply for various property products
and may include advice ranging from pricing to marketing strategies
to identification of market niches.
Development Financial Assessments

• Conventional Technique
• Profit on Cost
• Profit on Value (Investment)
•
• Discounted Cash Flow
• Net Present Value
• Internal Rate of Return
• Payback
•
• Sensitivity Analysis
Drawbacks of Residual Method

• The conventional method of evaluation has two basic weaknesses.


• First, it is inflexible in its handling of the timing of expenditure and
revenue. As a result the calculation of interest costs is very inaccurate.
• Second, by relying on single-figure ‘best estimates’ it hides the
uncertainty that lies behind the calculation.
Advantages of Discounted Cash Flow

• The cash flow method enables the flow of expenditure and revenue to be spread
over the period of the development, accordingly presenting a more realistic and
accurate assessment of development costs and income against time.
• Therefore, the conventional evaluation to be allocated more accurately over time,
a better assessment can be made of interest costs. The ‘rule-of-thumb’
conventional evaluation, described above, had assumed that building costs would
be spread evenly over the building period.
• In practice, building and other development costs are seldom spread evenly over
the period. Some of the development costs are incurred before or at the start of
the building contract period, e.g. funding fees and some of the professional fees.
It is usual for the majority of professional fees to be incurred during the pre-
contract stage and early in the building contract period, as most of the design and
costing work is carried out then. Only 40% of the building cost has been incurred
after 6 months of the contract—the half way point
• In practice, building and other development costs are seldom spread
evenly over the period. Some of the development costs are incurred
before or at the start of the building contract period, e.g. funding fees
and some of the professional fees. It is usual for the majority of
professional fees to be incurred during the pre-contract stage and
early in the building contract period, as most of the design and
costing work is carried out then. Only 40% of the building cost has
been incurred after 6 months of the contract—the half way point
• THANK YOU

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