Development Appraisal

1. Development Appraisal Chia Fah Choy MSc, BAppSc (Hons) Assistant Professor, BE, FES, UTAR

2. The Property Development Process

3. Property Development Factors of Production The Parties in the Development Process Development Process

4. Factors of Production Capitalfor purchase of land and materials Labourto erect a building and manage the process Land for the site Entrepreneurial talentto initiate the process and bring the pieces together

5. The Parties in the Development Process The clients The planning authority The professional advisers The contractor The community The funders

6. Development Process Completion Inception

7. Development Process • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition Completion Inception

8. Development Process • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition • Produce sketch plans to discuss with planning authority • Type and scale of development

9. Development Process • Development appraisal • Produce sketch plans to discuss with planning authority • Type and scale of development

10. Residual Method Profit • Development appraisal Development Value Building Cost - =

11. Residual Method Development Value Building Cost RM1,000,000 RM300,000 Profit RM1,300,000 - =

12. Residual Method Building Cost Gross Internal Floor Area Cost per square metre = X

13. Residual Method Construction Cost RM1,000,000 Gross Internal Floor Area 10,000 m2 Cost per square metre RM100/m2 = X

14. Residual Method Databases and Source-books RM1,000,000 10,000 m2 RM100/m2 = X

19. Development Process • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition • Development appraisal • Produce sketch plans to discuss with planning authority • Type and scale of development • Outline Permission • Type and density of the development

20. Development Process • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition • Development appraisal • Detailed Permission • Type and density of the development • Detailed drawings • Produce sketch plans to discuss with planning authority • Type and scale of development • Outline Permission • Type and density of the development

21. Development Process • Detailed Appraisal • Preliminary estimate • Unit • Floor area • Cube • Approximate quantities • Elemental comparative • interpolation • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition • Development appraisal • Detailed Permission • Type and density of the development • Detailed drawings • Produce sketch plans to discuss with planning authority • Type and scale of development • Outline Permission • Type and density of the development

22. Development Process • Detailed Appraisal • Preliminary estimate • Unit • Floor area • Cube • Approximate quantities • Elemental comparative • interpolation • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition • Development appraisal • Raised Finance • Purchase the site • Construction cost • Ancillary cost • Detailed Permission • Type and density of the development • Detailed drawings • Produce sketch plans to discuss with planning authority • Type and scale of development • Outline Permission • Type and density of the development

23. Development Process • Building Contract • Construction • Valuer or agent • Marketing strategy • Detailed Appraisal • Preliminary estimate • Unit • Floor area • Cube • Approximate quantities • Elemental comparative • interpolation • Need for the space • Direct demand from a potential owner-occupier • Indirect demand as assessed in market condition • Development appraisal • Raised Finance • Purchase the site • Construction cost • Ancillary cost • Detailed Permission • Type and density of the development • Detailed drawings • Produce sketch plans to discuss with planning authority • Type and scale of development • Outline Permission • Type and density of the development

24. Development Value Residual Method Existing Use Value Building Cost Profit Development Value Building Cost Profit - - = =

25. Development Value Residual Method Existing Use Value Building Cost Land Value Profit Development Value - - =

26. Variables of Development Value • Cost of Construction • Size • Shape • Height • Type of buildings • Planning constraints • Landscaping • Site conditions • Provision of services • Access Value of Site Location Use Topography Legal constraints Ground conditions Services Access • Value of Development • Demand • Use • Density • Design • Layout • Infrastructure

27. Perimeter length enclosing 2500m2 r=28.2m 50m 100m 25m 25m 50m Perimeter = 177m Perimeter = 200m Perimeter = 250m Perimeter = 250m

28. Area of Perimeter length 200m 50m 25m Area = 1875m2 Area = 2500m2

30. Approaches on Valuation • Residual valuation • GDV is assessed by • Capital comparison approach • Investment method Comparative approach Direct comparables of sales

31. Valuation Methods The comparative method The contractor's test (a cost–based method) The investment method The profits method The residual valuation

32. Development Appraisal • Planning policy • Planning history • Statutory undertakers • The site

33. Planning policy • Statutory development plans • Relevant planning and development briefs • Design guides • Planning policy guidance notes • Zoning designations • Density standards • Conservation policies • Highway proposals • Attitudes toward planning agreements

35. Ownership Acquisition Boundaries Area Topography Landscape Stability Access Layout Buildings Services Archaeological remains Contamination Physical factors which may affect development value The Site

36. The Residual Valuation

37. Development Value and Building Cost

39. 9,881,143 Gross Development Value 4,400,000 Building Cost

40. Fees • The fees may be assessed at 12.5% of costs to include architects’, structural engineers’ and quantity surveyors’ fees.

41. 9,881,143 Gross Development Value 4,400,000 Building Cost 550,000 Fees 12.5%

42. Finance Charges • An interest on the total building cost for half the building period. • The total cumulative cost is represented by the S curve of construction cost over the building period. • The fees are front ended, the interest is estimated as being on the total fee over ⅔ of the building period. • The interest rate can be assessed as a margin (say 3%) over the BLR, currently 6.72% (Jun 2006)

44. 9,881,143 Gross Development Value 4,400,000 Building Cost 550,000 Fees 12.5% Interest on costs 330,000 Building costs 4,400,000 x 1/2 x 10% x 18/12 55,000 Fees 550,000 x 2/3 x 10% x 18/12

45. Contingencies • Depending on the nature of the project, the contract for construction and possible risk of variation of cost. • Based on total cost of building, including external works and fees and interest charges say 0-3%

46. 9,881,143 Gross Development Value 4,400,000 Building Cost 550,000 Fees 12.5% Interest on costs 330,000 Building costs 4,400,000 x 1/2 x 10% x 18/12 55,000 Fees 550,000 x 2/3 x 10% x 18/12 5,335,000 550,000 Contingencies 3%

47. Letting fees • Generally these are 10% of the initial rents but if there are joint agents, as on a larger scheme, they will operate jointly for a total fee of 15% of the rents. • Advertising, depending on the project, is (say) a spot of 0.5-1.0% of the gross development value.

48. 9,881,143 Gross Development Value 4,400,000 Building Cost 550,000 Fees 12.5% Interest on costs 330,000 Building costs 4,400,000 x 1/2 x 10% x 18/12 55,000 Fees 550,000 x 2/3 x 10% x 18/12 5,335,000 Contingencies 3% 550,000 103,752 Letting fees 691,680 x 15% 98,811 Advertising fees 9,881,143 x 1% 5,697,613 Developer’s profit 20% 1,139,523 Cost plus profit 6,837,136 3,044,007 Value of Site