viability session 3: the mechanics of viability testing
TRANSCRIPT
Session 3: The Mechanics of
viability testing
A simple development viability
appraisal
• Data Collection
• Calculation (Residual Value, Cashflow)
• Reality Check
• Interpretation
• Use of data
Note: Will discuss consultation later – it is vital
and required!
Data Collection
Rubbish in = Rubbish out
All inputs MUST be sourced!
Ask for information early
Landowners and site promoters should be prepared to
provide sufficient and good quality information at an
early stage……. This will allow an informed judgement
by the planning authority regarding the inclusion or
otherwise of sites based on their potential viability.
Harman Guidance – Page 23
Income Data
INCOME Av Size % Number Price GDV GIA
m2 87 £/m2 £ m2
Market Housing 95.0 70% 61 2,500 14,463,750 5,786
Shared Ownership 95.0 9% 8 1,750 1,301,738 744
Affordable Rent 95.0 21% 18 1,200 2,082,780 1,736
Social Rent 95.0 0% 0 900 0 0
Grant and Subsidy Shared Ownership 0 0
Affordable Rent 0 0
Social Rent 0 0
SITE AREA 2.50 ha 35 /ha 17,848,268 8,265
Income Data
• Basic Prices by £/m2
• Residential Prices – House v flats
• Commercial / non-residential
• Affordable Prices
• New v existing
• Incentives and discounts
• Variance by location or situation?
• Grants, subsidies
Gross internal area?
• BCIS (the costs) as ‘Rate per m2 gross
internal floor area for the building’
• Direct from developers
• Calculate – it will be an estimate
Income Data - Residential
• Land Registry
• Hometrack
• Rightmove / Zoopla / Mouseprice
• Halifax / Nationwide
• CORE
• Developers and RPs
Developer Scheme Place Units Beds Internal GargargeSeparate GarargeFloors House Flat House Flat Price House Flat £/Bedroom
sqft sqft m2 m2 £/m2 £/m2
Worcestershire
Redrow Earls court Farm Worcester Hampstead 5 1 3 1845 359995 d #DIV/0! #DIV/0! 71999
Oxford 4 1 2 1261 284995 d #DIV/0! #DIV/0! 71248.75
Kenilworth 4 1 3 1095 204995 d #DIV/0! #DIV/0! 51248.75
Richmond 4 1 2 2024 469995 d #DIV/0! #DIV/0! 117498.8
Cambridge 4 1 2 1330 299995 d #DIV/0! #DIV/0! 74998.75
Cheltenham 5 1 3 196 444995 d 2270.383 #DIV/0! 88999
Westminster 4 1 2 1600 394995 d #DIV/0! #DIV/0! 98748.75
Warwick 3 1 2 1013 239995 d #DIV/0! #DIV/0! 79998.33
Redrow Hamlet Place Stourport on Severn Pembroke 4 1 2 1112 239995 d #DIV/0! #DIV/0! 59998.75
Salisbury 4 1 2 1564 339995 d #DIV/0! #DIV/0! 84998.75
Cambridge 4 1 2 1330 289995 d #DIV/0! #DIV/0! 72498.75
Redrow Great Park Rubery B45 Stratford 4 1 2 1096 249995 d #DIV/0! #DIV/0! 62498.75
Oxford 4 1 2 1261 267995 d #DIV/0! #DIV/0! 66998.75
Ruthin 1 2 100 269995 d 2699.95 #DIV/0! #DIV/0!
Hampstead 1 3 1845 354995 d #DIV/0! #DIV/0! #DIV/0!
Salisbury 1 2 1330 379995 d #DIV/0! #DIV/0! #DIV/0!
Barratt 01299 288640waters Edge Stourport on Severn Trent 12 3 3 100 188000 t 1880 #DIV/0! 62666.67
Kent 4 3 3 90 186000 t 2066.667 #DIV/0! 62000
Leven 3 3 2 74 171000 t 2310.811 #DIV/0! 57000
River View 11 2 1 57.5 150950 F #DIV/0! 2625.217 75475
River View 11 1 1 40 130950 f #DIV/0! 3273.75 130950
Beaulieu House 3 2 1 52 169950 f #DIV/0! 3268.269 84975
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Mid-Terrace, Cloakroom, 624 Square feet
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A 4 bedroom 3 storey house for sale in LeicesterThe Cheltenham is a 4 bedroom 3 storey house for sale in Leicester which is set over
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Income Data – Non-Residential
• EGi Data / EGI Property Link
• Agents
• Valuation Office Agency
• Developers
EGI – Propertydata
Transaction Property
type Address Street Town Postcode Deal date Property type sub type Size UoM Size(sq ft) Price Yield % per annum per sq m per sq ft
Lease Suite 1, Bank Court, Weldon Road, Loughborough, Leicestershire,
LE11 5RF
Weldon Road Loughborough LE11 5RF 18/07/2012 Office Office (B1a) 265 Net sq m 2,850 Not quoted Not quoted
Sale Ground, 28 Factory Street, Loughborough, Leicestershire, LE11 1AL Factory Street Loughborough LE11 1AL 01/07/2012 Office Office (B1a) 42 Net sq m 454 £25,000 Not quoted
Lease 1a Bakewell Road, Loughborough, Leicestershire, LE11 5QY Bakewell Road Loughborough LE11 5QY 01/07/2012 Office Office (B1a) 34 Net sq m 362 Not quoted £4,000 £118.94 £11.05
Lease Unit 13, Industrial Units, Prince William Way, Loughborough,
Leicestershire, LE11 5DD
Prince William
Way
Loughborough LE11 5DD 01/06/2012 Industrial / Distribution Light Industrial / Business Units
(B1c)
412 Net sq m 4,432 £18 £18,000 £43.70 £4.06
Lease Unit 6, Industrial Units, Prince William Way, Loughborough,
Leicestershire, LE11 5DD
Prince William
Way
Loughborough LE11 5DD 30/05/2012 Industrial / Distribution Light Industrial / Business Units
(B1c)
134 Net sq m 1,437 Not quoted £9,500 £71.15 £6.61
Lease 37a Granby Street, Loughborough, Leicestershire, LE11 3DU Granby Street Loughborough LE11 3DU 15/04/2012 Office Office (B1a) 52 Net sq m 559 Not quoted £4,800 £92.46 £8.59
Lease 39 Granby Street, Loughborough, Leicestershire, LE11 3DU Granby Street Loughborough LE11 3DU 15/03/2012 Office Office (B1a) 126 Net sq m 1,360 Not quoted £11,000 £86.97 £8.08
Sale 17 Forest Road, Loughborough, Leicestershire, LE11 3NW Forest Road Loughborough LE11 3NW 02/03/2012 Office Office (B1a) 148 Net sq m 1,593 £175,000 Not quoted
Sale 202 Ashby Road, Loughborough, Leicestershire, LE11 3AG Ashby Road Loughborough LE11 3AG 01/01/2012 Office Office (B1a) 140 Net sq m 1,511 £265,000 Not quoted
Lease Long Office, One Ash, Loughborough Road, Loughborough,
Leicestershire, LE12 8UE
Loughborough
Road
Loughborough LE12 8UE 01/12/2011 Office Office (B1a) 32 Net sq m 342 Not quoted £4,200 £132.18 £12.28
Lease Long Office, One Ash, Loughborough Road, Loughborough,
Leicestershire, LE12 8UE
Loughborough
Road
Loughborough LE12 8UE 01/12/2011 Office Office (B1a) 32 Net sq m 342 Not quoted £4,200 £132.18 £12.28
Sale Gelders Hall Industrial Estate - Matrix House, Gelders Hall Road,
Shepshed, Loughborough, Leicestershire, LE12 9NH
Gelders Hall Road Loughborough LE12 9NH 15/11/2011 Office, Industrial /
Distribution
Office (B1a), Industrial Park
(B1/2/8)
1,368 Net sq m 14,720 £1,100,000 Not quoted
Lease 35 Granby Street, Loughborough, Leicestershire, LE11 3DU Granby Street Loughborough LE11 3DU 03/11/2011 Office Office (B1a) 172 Net sq m 1,847 Not quoted £16,000 £93.22 £8.66
Lease Shepshed Road, Hathern, Loughborough, Leicestershire, LE12 5LZ Shepshed Road Loughborough LE12 5LZ 02/11/2011 Office Office (B1a) 103 Net sq m 1,110 Not quoted £9,000 £87.19 £8.10
Lease Unit M, Little Moor Lane, Loughborough, Leicestershire, LE11 1SF Little Moor Lane Loughborough LE11 1SF 15/10/2011 Industrial / Distribution Light Industrial / Business Units
(B1c)
102 Net sq m 1,094 Not quoted £6,500 £63.94 £5.94
Lease The Point, Granite Way, Mountsorrel, Loughborough, Leicestershire,
LE12 7TZ
Granite Way Loughborough LE12 7TZ 15/09/2011 Office Office (B1a) 381 Net sq m 4,097 Not quoted £39,000 £102.47 £9.52
Lease 1st Floor, 29 Biggin Street, Loughborough, Leicestershire, LE11 1UA Biggin Street Loughborough LE11 1UA 30/08/2011 Office Office (B1a) 102 Net sq m 1,102 Not quoted £9,000 £87.83 £8.16
Lease 34 Woodgate, Loughborough, Leicestershire, LE11 2TY Woodgate Loughborough LE11 2TY 04/08/2011 Office Office (B1a) 111 Net sq m 1,194 Not quoted £10,500 £94.62 £8.79
Lease Unit 14, Charnwood Business Park, North Road, Loughborough,
Leicestershire, LE11 1LE
North Road Loughborough LE11 1LE 15/07/2011 Office Business Parks (B1b) 95 Net sq m 1,018 Not quoted £12,000
Lease 44b Church Gate, Loughborough, Leicestershire, LE11 1UE Church Gate Loughborough LE11 1UE 11/07/2011 Office Office (B1a) 138 Net sq m 1,490 Not quoted £13,000 £93.86 £8.72
Lease 44 Church Gate, Loughborough, Leicestershire, LE11 1UE Church Gate Loughborough LE11 1UE 01/07/2011 Office Office (B1a) 181 Net sq m 1,943 Not quoted £18,000 £99.67 £9.26
Lease 28 Factory Street, Loughborough, Leicestershire, LE11 1AL Factory Street Loughborough LE11 1AL 01/06/2011 Office Office (B1a) 42 Net sq m 454 Not quoted £6,000 £142.19 £13.21
Sale 88 Hawcliffe Road, Mountsorrel, Loughborough, Leicestershire, LE12
7AH
Hawcliffe Road Loughborough LE12 7AH 13/05/2011 Office Office (B1a) 225 Net sq m 2,426 £183,600 Not quoted
Sale Offices, 3 Cossington Road, Sileby, Loughborough, Leicestershire,
LE12 7RW
Cossington Road Loughborough LE12 7RW 31/01/2011 Office Office (B1a) 140 Net sq m 1,509 Not quoted Not quoted
Lease 11 Hanford Way, Loughborough, Leicestershire, LE11 1LS Hanford Way Loughborough LE11 1LS 21/12/2010 Retail Car Showrooms (B1c) 444 Net sq m 4,784 Not quoted £41,000
Lease 251 Loughborough Road, Mountsorrel, Loughborough, Leicestershire,
LE12 7AS
Loughborough
Road
Loughborough LE12 7AS 13/12/2010 Office Office (B1a) 17 Net sq m 188 Not quoted £3,100 £177.50 £16.49
Investment Sale 19 Baxter Gate, Loughborough, Leicestershire, LE11 1TG Baxter Gate Loughborough LE11 1TG 01/11/2010 Office Office (B1a) 167 Net sq m 1,800 £185,500 Not quoted
Lease Unit B2, Loughborough Motorway Trading Estate - Illuma House,
Gelders Hall Road, Shepshed, Loughborough, Leicestershire, LE12
Gelders Hall Road Loughborough LE12 9NH 27/09/2010 Office Business Parks (B1b) 245 Net sq m 2,638 Not quoted £23,750 £96.88 £9.00
Lease Unit B3, Loughborough Motorway Trading Estate - Illuma House,
Gelders Hall Road, Shepshed, Loughborough, Leicestershire, LE12
Gelders Hall Road Loughborough LE12 9NH 24/09/2010 Office Business Parks (B1b) 120 Net sq m 1,289 Not quoted £11,500 £96.01 £8.92
Lease Park View, One Ash, Loughborough Road, Loughborough,
Leicestershire, LE12 8UE
Loughborough
Road
Loughborough LE12 8UE 13/08/2010 Office Office (B1a) 40 Net sq m 433 Not quoted £3,600 £89.45 £8.31
Lease Long Office, One Ash, Loughborough Road, Loughborough,
Leicestershire, LE12 8UE
Loughborough
Road
Loughborough LE12 8UE 13/08/2010 Office Office (B1a) 64 Net sq m 684 Not quoted £9,600 £151.02 £14.03
Lease 43a-43b Church Gate, Loughborough, Leicestershire, LE11 1UE Church Gate Loughborough LE11 1UE 01/07/2010 Office Office (B1a) 167 Net sq m 1,800 Not quoted £12,000 £71.69 £6.66
Investment Sale 12 Southfield Road, Loughborough, Leicestershire, LE11 2UZ Southfield Road Loughborough LE11 2UZ 15/06/2010 Office Office (B1a) 402 Net sq m 4,327 £712,000 6.61 £49,760 £123.79 £11.50
Lease Unit Q, Little Moor Lane, Loughborough, Leicestershire, LE11 1SF Little Moor Lane Loughborough LE11 1SF 21/04/2010 Industrial / Distribution Light Industrial / Business Units
(B1c)
118 Net sq m 1,268 Not quoted £6,500
Lease Units R & S, Little Moor Lane, Loughborough, Leicestershire, LE11
1SF
Little Moor Lane Loughborough LE11 1SF 12/04/2010 Industrial / Distribution Light Industrial / Business Units
(B1c)
448 Net sq m 4,822 Not quoted £11,000
Lease Unit K, Little Moor Lane, Loughborough, Leicestershire, LE11 1SF Little Moor Lane Loughborough LE11 1SF 01/03/2010 Industrial / Distribution Light Industrial / Business Units
(B1c)
61 Net sq m 655 Not quoted Not quoted
Lease 5 Hanford Way, Loughborough, Leicestershire, LE11 1LS Hanford Way Loughborough LE11 1LS 01/03/2010 Office, Retail Office (B1a), Car Showrooms
(B1c)
1,246 Net sq m 13,412 Not quoted £20,000
EGi -- Comparable Deals Data - Exported 17/09/2012
Total space Rental income
EGI Property Link
Residential vs. commercial
Residential Commercial
Purchaser usually buying a
home they intend to
occupy themselves
Purchaser usually buying a
rental stream as well as the
property itself
One customer: Usually a
purchaser looking for a
new home.
Two customers: Tenant
looking for suitable
premises and investor
looking for a rental stream.
Usually valued using GIA Usually valued using NIA
What is the ‘yield’?
• The rent as a proportion of the purchase price
• There is an inverse relationship between yields &
values, i.e. a higher yield means a lower value & a
lower yield means a higher value.
• Yields are often used in development appraisals to
estimate the value of the completed development
when it is expected to be rented to a tenant (or
tenants). This consequently usually applies to
commercial property, although it can apply to
residential property where it is also rented.
What affects yields?
• Risk & future growth prospects (rental stream & capital
value of property). High risk = high yield. But, the
higher the future growth prospects = lower yield
• Low risk = lower return e.g. savings in an ISA. In a
casino you would be aiming for a higher 'yield' to
compensate for the probability of failure
• For the main investment classes Government Bonds
(gilts) are low risk whereas stocks & shares are more
high risk. Returns on property investment tend to be in
the middle, offering more income & capital growth
potential than gilts and less risk than shares
What affects property yields?
• The tenant - Is it a strong tenant in terms of security of
income (or rent)? Security is something you would
normally expect to pay for, perhaps by accepting a
lower initial return on your investment.
• The area - Is the location suitable for a building of this
quality? Is it declining or improving? Is the access
good?
• The building itself - What is it like? If the tenant goes
bust, how easy will it be to find a new tenant? Do
these and other lease clauses protect your investment
e.g. upward only rent reviews etc.?
Yield example
• Offices are normally bought by investors such as
pension funds. Let us assume a pension fund wants
to buy an office when it is fully occupied by a
tenant(s)…
• The developer should have a firm idea of what rent
the building is likely to achieve e.g. £100,000pa.
• In basic development appraisals, the initial rent is
therefore used to help estimate the development
value. The key question is therefore how much
should this rent should be multiplied by to calculate
what price a purchaser will pay.
Yield example (continued…)
• The “multiplier” is calculated as 1 / yield. Therefore:
Development Value = Initial Rent x (1 / Yield) x 100
• Let’s assume the pension fund requires a return of
6% pa. Therefore the value of the rented office
building as an investment is calculated as follows:
£100,000 x (1 / 6) x 100 = £1.6m
Yield example (continued…)
• The previous scenario did not include assumptions
on future rent or prospects for capital growth of the
asset i.e. it assumed the pension fund would receive
a flat £100,000 pa in perpetuity.
• Let us now assume the office is in a good location
with a good tenant and good prospects for rental
growth e.g. up and coming area, office market
looking healthy locally etc. With this information the
pension fund is likely to accept a lower initial yield
e.g. 5%:
£100,000 x (1 / 5) x 100 = £2m
Yield example (continued…)
• Let us now assume the pension fund are less
convinced that the rent will rise in the future and they
are worried that the tenant found by the developer
are unlikely to stay solvent or remain in the area long
term. With this information the pension fund is likely
to want a much higher yield e.g. 10%:
£100,000 x (1 / 10) x 100 = £1m
• These examples demonstrate the inverse
relationship between yields & values. Clearly it would
make no sense for the pension fund to pay over the
odds for a riskier investment.
Rents, Yield and Capital Value
Development Value = Rent x (1 / Yield) x 100
Yield = (Rent / Value) x 100
Years Purchase (YP) = 1/Yield
Rent to Value
Table 5.1 Capitalised typical rents £/m2
Rent£/m2 Yield Capitalised
Rent £/m2
Large industrial 41 7.0% 586
Small industrial 48 7.0% 686
Distribution 50 6.0% 833
Large office 93 6.5% 1,431
Small office 100 7.0% 1,429
Large retail -
Convenience 130 5.0% 2,600
Large retail - Other 120 7.0% 1,714
Small Retail 105 7.0% 1,500
Leicester Shops 236 7.0% 3,371
Other Shops 150 11.0% 1,364
Hotels 6.5% 2,150
Student Halls 6.5% 2,225
Leisure 75 8.0% 938
Costs
DEVELOPMENT COSTS Planning fee calc
Planning app fee dwgs rate
LAND /unit or m2 Total No dwgs 87
Land 42,499 3,697,391 No dwgs under 50 37 335 12,395
Stamp Duty 184,870 No dwgs over 50 37 100 3,700
Easements etc. 0 Total 16,095
Legals Acquisition 1.50% 55,461 240,330
PLANNING
Planning Fee 16,095 Stamp duty calc - Residual
Architects 6.00% 511,275 Land payment 3,697,391
QS / PM 1.00% 85,213 125,000 0% 1%
Planning Consultants 0.50% 42,606 250,000 1% 3%
Other Professional 2.50% 213,031 868,220 500,000 3% 4%
1,000,000 4% 5%
CONSTRUCTION above 5% 5%
Build Cost - BCIS Based 925 7,645,125 Total 184,870
s106 / CIL 5,000 435,000
Contingency 2.50% 191,128 Stamp duty calc - Add Profit
Abnormals 250,000 8,521,253 Land payment 700,000
125,000 0% 1%
FINANCE 250,000 1% 3%
Fees 10,000 500,000 3% 4%
Interest 7.00% 1,000,000 4% 5%
Legal and Valuation 7,500 17,500 above 5% 5%
Total 35,000
SALES
Agents 2.0% 356,965
Legals 0.5% 89,241
Misc. 5,000 451,207 13,795,901
Developers Profit
% of costs (before interest) 20.00% 2,759,180 Post CIL s106 1,000 £/ Unit (all)
% of GDV 0.00% 0 Total 87,000
Construction
• BCIS
• Site Costs
• Abnormals
• Contingency
BCIS
Rate per m2 gross internal floor area for the building Cost including prelims. Last updated 12-Jan-2013 12:01. Location adjusted to Cumbria (Location index 93, sample 73).
Maximum age of results: Default period
Building Function (Maximum age of projects)
£/m² gross internal floor area
Sample Mean Lowest
Lower Quartile
Median Upper
Quartile Highest
New build
810. Housing, mixed developments (15)
758 383 638 735 849 1660 641
810.1 Estate housing
Generally (15) 739 381 631 721 817 1534 1131
Single storey (15) 814 440 700 786 920 1409 227
2-storey (15) 719 381 625 702 798 1374 817
3-storey (15) 723 477 605 671 808 1534 85
4-storey or above (25) 1038 791 - 949 - 1373 3
810.11 Estate housing detached (15)
744 586 615 668 816 1009 11
810.12 Estate housing semi detached
Generally (15) 738 385 631 722 825 1409 234
Single storey (15) 861 543 728 861 979 1409 47
2-storey (15) 711 385 623 703 795 1043 176
3-storey (15) 646 512 576 617 704 896 11
810.13 Estate housing terraced
Generally (15) 758 382 631 731 856 1534 259
Single storey (15) 805 497 671 752 927 1237 52
2-storey (15) 747 382 634 733 848 1163 171
3-storey (15) 739 482 606 668 780 1534 36
816. Flats (apartments)
Generally (15) 869 441 724 836 970 2674 646
1-2 storey (15) 835 492 720 807 928 1560 177
3-5 storey (15) 856 441 718 835 965 1761 421
6+ storey (15) 1138 662 872 1075 1280 2674 41
818. Housing with shops, offices, workshops or the like (15)
987 495 760 891 1179 2226 48
820.1 'One-off' housing detached (3 units or less)
Generally (15) 1191 523 892 1057 1405 2655 100
Single storey (15) 980 523 852 932 1092 1444 41
2-storey (15) 1236 608 936 1069 1485 2465 42
3-storey (15) 1562 972 1399 1471 1724 2655 13
4-storey or above (25) 1451 947 - 1240 - 2376 4
820.2 'One-off' housing semi- 841 561 745 835 932 1228 103
Construction
• BCIS
• Site Costs – 10% to 20%
• Abnormals – site by site
Highways, flooding
demolition, design,
decontamination etc.
• Contingency – 2.5% Greenfield
5% Brownfield
+7% on horrible sites
Phasing and Build Rate
• Size of site
• Size of developer
• Availability of mortgages
• Pre 2007 45 to 50 per year
• Now? 30 to 35 per year
• Multiple developers
Variables
• Small Changes of cost or income can have a
huge difference in result – the bigger the
numbers the more sensitive.
– 101-100=1 but 102-100=2
– 1% change in price results in a 100%
change in outcome
• Scenarios – cost and price change
policy requirements
Building the model up
and scenario testing
• Discounted Cash Flow
– NPV
– IRR
• Return On Capital Employed (ROCE)
Monitoring Viability
By reference to indices:
Costs BCIS
GDV Land Reg
Halifax / Nationwide
Composite Academetrics
Hometrack
Rightmove / Zoopla /
BUT – have new build followed wider market?
Assumptions and testing
“make some very
cautious and
transparent
assumptions with
sensitivity testing of
the robustness of
those assumptions
it is important that
variations against
baseline costs, as well
as values, are tested.”
(page 27 – Harman)
PPG: How should changes in values
and costs be treated in plan-making?
Plan makers should not plan to the margin of
viability but should allow for a buffer to
respond to changing markets and to avoid
the need for frequent plan updating. Current
costs and values should be considered when
assessing the viability of plan policy. Policies
should be deliverable and should not be based
on an expectation of future rises in values at
least for the first five years of the plan period.
Gross Development ValueAll income from a Scheme
Construction Site Remediation
Abnormals
Etc.
FeesDesign
Engineer
Sales
Etc.
ProfitDevelopers
Builders
LandExisting /
Alternative
Use Value
+ premium
(TLV/EUV+)
Policies/CILCIL, affordable
housing,
CfSH, open
space etc.
Carveth Read:
“It is better to be vaguely right
than exactly wrong”Logic, deductive and inductive (1898), p. 351