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Development AppraisalCash Flow & Sensitivity Analysis

Speaker: Simon Wainwright BSc FRICS

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2013 Lecture SeriesLecture Date

An introduction to development appraisal & residual valuations:

7th February 2013

Cash flow techniques and sensitivity analysis:

13th February 2013

Possession strategy : 25th February 2013

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Development AppraisalMonth 1

• Residual Site Value

Month 1 - 12

• Plus Construction Cost Month 1 -

12

• Plus Finance Cost%

Month

12

• Less Capital Receipts

Month 12

• Development Profit

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Development Appraisal

GROSS DEVELOPMENT VALUE

COST HEADINGS• Site Cost• Construction Cost• Professional Fees• Marketing Cost• Finance Cost• Other Costs

OUTPUTS• Development Profit• Profit on Cost %• Profit on Cost IRR (inc/exc finance)• Yield on Cost• Profit / Rent Cover• Profit Erosion / Dissipation

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Development Appraisal

Capital Value

Less Development Cost_________________

Development Profit

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Capital Value

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Capital Value

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Purchase Costs

Stamp Duty 4.0000% Agents Fees 1.0000% Legal Fees 0.5000% VAT @ 20.0% on Fees 0.3000%

_______5.8000%

Purchase costs = 5.8000% of Net Capital Value

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Development CostsSiteConstructionProfessional FeesLetting CostsFunding FeesFinance Costs

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Site Costs

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Construction Costs

12Marketing

13

Funding

14Finance

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Sensitivity Analysis

YIE

LD

RENT

PROFIT £ 35.00 £ 37.50 £ 40.00 £ 42.50 £ 45.00

7.00% £1,998,642 £3,205,504 £4,412,367 £5,619,229 £6,826,092

7.25% £1,406,122 £2,570,661 £3,735,201 £4,899,741 £6,064,280

7.50% £ 853,103 £1,978,142 £3,103,380 £4,228,218 £5,353,257

7.75% £ 335,763 £1,423,849 £2,511,934 £3,600,020 £4,688,105

8.00% -£ 149,243 £ 904,199 £1,957,642 £3,011,084 £4,064,526

Sensitivity Analysis

IRR-5.00% -2.50% 0.00% 2.50% 5.00%

-0.25% 7.38% 8.14% 8.89% 9.61% 10.33%0.00% 5.95% 6.71% 7.45% 8.17% 8.88%0.25% 4.59% 5.34% 6.07% 6.79% 7.50%

RentYield

RentYield

Profit on Cost-5.00% -2.50% 0.00% 2.50% 5.00%

-0.25% 4.47% 4.90% 5.30% 5.66% 6.00%0.00% 0.42% 0.83% 1.23% 1.62% 1.99%0.25% -3.25% -2.88% -2.51% -2.13% -1.77%

RentYield

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Effect of 10% Change in a Variables

-80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0%

Rent +10%

Rent -10%

Yield +10%

Yield -10%

Building Cost +10%

Building Cost -10%

Land Cost +10%

Land Cost -10%

Finance Rate +10%

Finance Rate -10%

Pre-construction period +10%

Pre-construction period -10%

Construction period +10%

Construction period -10%

Letting Period +10%

Letting Period -10%

% Profit Change

Var

iab

le

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Plot Ratio

Cost Comparison

Marginal Viability

Elemental Viability

Office 62%Retail 9%

Residential 29%

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Cash Flow

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Cash Flow

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Cash FlowCash Flow

Date

Ca

sh F

low

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Cash Flow ResultsCASH FLOW TOTALS IRR IRR

  Total Development Cost (pre finance) (1,637,514,964) (112)  

  Net Cash Flow (pre-finance) 399,693,816 9.51% 0.76%

  Interest (203,383,117)    

  Net Cash Flow (post-finance) 196,310,699 4.49% 0.37%

  Cumulative Cash Flow (post-TfL)      

  Development Profit 196,310,699    

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Internal Rate of ReturnIRR 1 2 3 4 517% -£ 100,000 -£ 100,000 -£ 100,000 -£ 100,000 £ 600,000

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Internal Rate of Return

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• Argus Developer Suite• Interproperty Systems – Prodev• Prodeveloper• Caldes• KEL Delta• Aperioware

Appraisal Software

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Development AppraisalCash Flow & Sensitivity Analysis

Speaker: Simon Wainwright BSc FRICS