east midlands councils an introduction to viability ... · hca atlas financial appraisal and...

EAST MIDLANDS COUNCILSAN INTRODUCTION TO VIABILITY

October 2017

2CBRE | DEVELOPMENT VIABILITY IN

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Speakers: Donna Pickersgill BSc Hons, MSc, MRICSCBREAssociate Director - Regeneration and Development Advisory

Martin Vickery BSc Hons MRICSCBRE Director – Project and Cost Management

East Midlands CouncilsAN INTRODUCTION TO VIABILITY


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WHY VIABILITY IS IMPORTANTLegislative Framework and GuidanceInforms land valuation and development proposalsNational Planning Policy Framework – greater emphasis on viability and deliverabilityGrowth and Infrastructure ActAffordable housing and S.106 contributions are negotiableHCA Atlas Financial Appraisal and Viability in the Planning Process 2012RICS Financial Viability in Planning 2012Harman -Viability Testing Local Plans 2012


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RICS Professional Guidance 2012: Financial Viability in Planning 1st Edition 2012:‘A financial appraisal of a development to calculate either:

the residual Site Value (deducting all development costs, including an allowance for the developer’s profit/return from the scheme’s capital value); or

the residual development profit/return (deducting all development costs, including the Site Value/cost from the scheme’s total capital value)

Developer’s Profit is defined as: ‘the amount by which, on completion or partial completion of a development, the estimated value or price realised on sale of a developer’s interest exceeds (or is less than) the total outlay, including such figure for the land as is considered appropriate in the circumstances (including accrued interest).

DefinitionWHAT IS A DEVELOPMENT APPRAISAL?


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WHY ARE THEY USEDDevelopment Appraisals

Feasibility Study – establishing development options in terms of mix and scheme content

Viability Study – viability in planning & argument for conversion/alteration/demolition of historic buildings

Establishing the ‘gap’ – HCA/public sector investment Residual Valuation – establishes the land value for

valuation purposes


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Identifying Residual Land ValueValue of Completed DevelopmentLess construction costs Less Developer’s Profit (fixed %)Less finance cost %Residual Site Value

DEVELOPMENT APPRAISAL

Identifying Developer’s ProfitValue of Completed DevelopmentLess construction costsLess fixed land cost Less finance cost %Developer’s Profit


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Argus Developer HCA Development Appraisal Tool (DAT) Affordable Housing Development Control

Toolkit (GLA) ProDev Bespoke Excel modelling

Available Tools DEVELOPMENT APPRAISAL


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Gross Development Value – of the completed development

– Residential sales value of floor space / number of units– Affordable housing (discounted from market housing values)– Commercial estimated values i.e. capitalised rents– Net of rent free periods, incentives– Ground rents– Other income e.g. car parking, short term income streams

Appraisal InputsDEVELOPMENT APPRAISAL


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ARGUS® Developer screenshots reprinted with permission from ARGUS® Software, Inc.


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Total Development costs – Site acquisition costs (land value or existing use value)– Build costs (high level BCIS, QS cost plan)– Externals (residential)– Professional fees (overall cost or as a % of build cost)– Other construction costs (e.g. car parking, demolition, site

abnormals, infrastructure) – Contingency (% of build costs)– Sales / Marketing costs – Planning obligations (e.g. S106, S278) – Finance

Appraisal InputsDEVELOPMENT APPRAISAL


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Informs cash flow Includes pre-construction lead-in period, construction period and sales/letting

period Phasing

Development Programme DEVELOPMENT APPRAISAL



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Development Cash-flow DEVELOPMENT APPRAISAL



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Development Profit – financial return to developer – reported as % of GDV or % of TDC. – expected level of return variable as dependent on use (e.g. market

expectation on residential = 20% of GDV, commercial 15% to 20% of TDC)

– expected level dependent on risk

Residual Land Value – output where Developer’s profit is fixed as a cost

Appraisal Outputs DEVELOPMENT APPRAISAL


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Example of OutputsDEVELOPMENT APPRAISAL



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Small changes can make large difference to the outputs Can run analysis based on increase / decrease in key inputs such as:

– Rental values – Yields– Build costs– Profit %

Sensitivity Testing DEVELOPMENT APPRAISAL



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Formal report format Advice to local planning authorities, developers and landowners S106 Viability Study - supporting information to planning applications

informing S.106 contributions/affordable housing negotiations Listed Building/Conservation Areas – support planning applications for change

of use/alterations/demolition Affordable Housing Viability Study Local Plan Viability studies CIL Viability Studies Feasibility Studies

REPORTING


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Development Risk Unforeseen site abnormals such as

ground conditions, contamination Delayed programme, weather Title e.g. restrictive covenants Planning Ecology Raising development finance Cost overruns and cost inflation Lettings and sales/market conditions Risk register to clearly set out risk

items

RISK MANAGEMENT AND THE NECESSITY FOR PROFIT

Profit Developer’s expectations of

return related to risk Differing returns for different

uses – commercial/residential Residential 20% GDV Commercial 15%-20% on TDC Market conditions will affect

outturn profits/losses Reduced development

management fee where risk reduced


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Commissioning parties Local planning authorities Landowners Promoters Developers Contractors Funding institutions Housing associations Grant bodies including public sector

PURPOSE OF DEVELOPMENT APPRAISALS AND STUDIES

Opportunities New build development Redevelopment schemes Brownfield and greenfield sites Refurbishment Conversion / change of use Overage Viability in planning Viability reviews for ongoing

developments Public support – gap funding

THANK YOUAny Questions?

[email protected] 0121 616 5208 [email protected] 0121 616 5546

mailto:[email protected]

mailto:[email protected]

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