Viability Session 3: The Mechanics of viability testing

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

ASHLEY Barratt HomesWhether you are looking for your perfect first home or looking for a more manageable

property this two double bedroom home has everything you need. With an open plan

lounge/dining area with separate fully fitted kitchen provides the perfect entertaining

space on the ground floor which also has a useful downstairs WC. The first floor is

home to two double bedrooms and separate bathroom.

Mid-Terrace, Cloakroom, 624 Square feet

http://www.barratthomes.co.uk/new-homes/warwickshire/H438401-Bluebell/plot-125

http://www.barratthomes.co.uk/new-homes/warwickshire/H438401-Bluebell/plot-125

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

3 levels offering great flexibility in accommodation, ensuite to master bedroom a

further family bathroom and shower room on the second floor. A spacious kitchen also

with utility and living room. Good sized garden parking with a single garage

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



Loughborough

Road


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,


Loughborough

Road




Loughborough

Road


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


• 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


• 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

Viability Session 3: The Mechanics of viability testing

Government & Nonprofit

Transcript of Viability Session 3: The Mechanics of viability testing