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When developers carry out an initial development appraisal for a potential development project, whether for funding purposes or to work out the residual site value in order to make an offer, it is normal for some assumptions to be made.
In fact, it is not uncommon for a developer to visit the site, undertake a review of site particulars, and then start punching numbers into a generic proforma spreadsheet to create the development appraisal.
The problem is, these assumptions can come with huge risk if they are not managed effectively or do not play out as assumed – i.e. you plan for the best-case scenario but the worst-case becomes reality.
Here are five simple things you can do to reduce risk and improve the robustness of your appraisal; which will give funders and investors confidence in you, the proposed development and the professional approach to the project.
In the early stages of assessing a development, the GDV is usually informed by either the vendor agent, who would have undertaken an appraisal to work out the residual site value for their client, or as a result of high-level advice provided by a commercial or estate agent. Sales figures are vitally important and are based on £/sqft.
It’s important that you do your homework about these values. Most often selling agents provide the Gross Internal Area (GIA) and selling price on their websites and it’s well worth investing a few hours of your time to scour agents’ sites and record sales values in a spreadsheet.
This will enable you to work out an average £/sqft for buildings of a similar size and specification level, which you can compare with the numbers previously provided to you by the vendor’s representatives.
Zoopla and Rightmove are also useful tools that you can use as an additional measure to check properties sold in the area against assumptions that are being made. If time permits, you could also approach several estate agents for their assessment of the market.
GDV for the development appraisal should be based on current value and it is good to make the baseline clear in the development appraisal (for example, ‘3Q20’ = July to September 2020).
For the first draft of your development appraisal, it is prudent to be conservative rather than over-optimistic.
Selling agents and developers estimate build costs based on £/m2 at the development appraisal stage. Those with experience of delivering a consistent product over numerous developments sites with a reliable, established supply-chain will be able determine the £/m2 rate easily. However, developers without this background, simply cannot.
A common issue for both types of developer is comparable data.
In development appraisals or selling agent residual site value assessments, the build cost is usually fully inclusive, which means it includes external works, abnormals, etc. However, reliable cost data such as BCIS (the standardised data used by RICS), does not include external works, facilitating works, abnormalities and so on in the £/m2.
This results in problems when advisers, agents and consultants are throwing build cost numbers around, after all, what do they all really mean?
You get the point!
That is why it’s a great idea to consult with a friendly, experienced, quantity surveyor/cost consultant (QS) firm (like evolution5.co.uk) to provide a high-level £/m2 in an Order of Cost Estimate (OCE) format, which will inform the build cost element or verify assumptions made.
Consultants that you potentially plan to work with on the development project, will usually provide this information free of charge (known as ‘at risk’ because they invest time in you now, in the hope that you will choose to use them on the project).
We also strongly recommend that a more detailed OCE or Cost Plan, depending on the level of information available, is produced by your QS prior to purchase/finalising the facility.
That OCE/Cost Plan should be in elemental format, detailing cost allowances for each build item, but moreover, should give further consideration to external work items such as drainage, attenuation, access roads, boundary treatment, hard and soft landscaping, Section 278 works and so on.
Abnormalities are potentially expensive, site specific risks that may occur on any project. There are several abnormalities that exist for all development projects and these need early review as they can have a considerable cost implication.
Here are a few that crop up commonly but are still considered “abnormal” when using cost data. That means that the cost of dealing with them, must be added to the basic £/m2 rate and external works applied:
The above list is not exhaustive.
Each development project is unique and will therefore require input from different consultants and at a differing level of effort. Specialist consultants may also be required. The average percentage of build cost for projects between £1-10m across all sectors, is around 9.8% ranging typically from 6-12%. Below is a list of consultants to consider when budgeting fees in the development appraisal.
Other development costs can end with a list as long as your arm. Below is a list of some common costs that arise on residential developments, once again, this list is not exhaustive:
As you can see, there are many things to consider at the initial development appraisal stage.
The more robust the development appraisal is, the greater confidence you will enjoy from funders, investors and key stakeholders. Yet, that comes at a cost which, when a project is not certain to go ahead, can be daunting.
Sadly, we often speak to developers who have not been advised to consider some of these very important issues during the development appraisal stage and, as a result, are presented with significant problems at a later date.
They find their costs spiralling out of control and budgets unravelling when they’ve passed the point of no return. Far better to invest sufficient time, effort and resource to formulate a robust development appraisal that will help you build realistic budgets and, ultimately, result in successful project completion.
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