Scenario
You are an assistant surveyor nearing the completion of your professional training with a national development consultancy. One of your clients, an experienced property developer, has instructed your employer to provide appraisal advice in relation to a 1.3 hectare cleared site in a UK city which they are considering purchasing.
Outline planning permission has been granted for a four-storey office block and 2 x three-storey residential blocks each containing 12 units.
The developer’s proposal is to build, guided by the outline planning permission, the following:
•
a grade A office building with a total GIA of 6,400 sq m over four floors of equal size.
The total NIA for each floor will be 1,400 sq m.
•
two blocks of 12 x high-quality two-bedroom apartments over three floors which equate to a total of 1,800 sq m GIA.
The developer has entered into preliminary talks with a government department with regard to occupation of the office development on completion and the developer is confident that the residential units will sell off plan.
The developer has stated that whilst they have sufficient funds for the initial site purchase, they intend to finance the construction of the project through loan finance. The developer is confident that they can secure development funding at a fixed interest rate of 8.0% per annum.
For the risk of undertaking this development, the developer has stated they require a profit of 15% on the total construction cost of the scheme.
As part of your preliminary desk-top investigations, you have established:
1.
The developer’s architect considers demand is high for high quality two-bedroom apartments in the area and has given an indicative value for the apartments of £250,000 each.
2.
Office rents in the local area are in the region of £300 p.a. per sq m.
3.
A reasonable All Risks Yield for the office development is considered to be 6.75%.
4.
The purchaser’s costs for the office will be 6%. (This is inclusive of SDLT)
5.
Construction costs for the commercial element are currently £2,500 per m2 GIA.
5.
Construction costs for the residential element are currently £1,750 per m2 GIA.
6.
Community Infrastructure Levy does not apply as the local authority has not consulted on, and approved, a charging schedule which sets out its levy rates.
7.
Pre-application discussion with local planning authority suggest no planning obligations apply.
8.
Landscaping and internal circulation roads / car parking costs are £60 per m2.
9.
The construction of the development will take 12 months.
10.
Professional fees (architect, QS, etc. including estate agent) will be 12.5% of build costs.
11.
The contingency sum for this comparatively easy scheme should be 5%.
12.
The developer has a long-term relationship with a solicitor’s practice who have agreed that the fees for the legal work associated with the site acquisition, leasing and selling the development will be £100,000.
13.
Stamp Duty Land Tax on site purchase should be assumed to be a flat rate of 5%.
NOTE: You should use the costs and percentages given in the scenario. If changes are made to the given costs or percentages, a reason must be given. You should clearly state any additional assumptions you consider it necessary to make.
The client wishes to know what offer should be made for the land; additionally, given recent UK interest rate rises, their internal risk management process requires a sensitivity analysis based on the residential sale value in order that comparisons can be made against alternative development opportunities.
Task
Write a report for your client that:
1.
advises them as to an appropriate land value offer;
2.
provides a sensitivity analysis based on residential sale value; and
3.
offers an evaluation of the residual method as a valuation technique.
See Task 1, Task 2 and Task 3 below for details.
Task 1
Using the residual method of valuation, calculate a possible land value. The valuation should be prepared on a spreadsheet such as Microsoft Excel (or similar); with that spreadsheet incorporated into the written report to the client.
Task 2
Bearing in mind the client’s internal risk management process, using the residual calculation created in Task 1, carry out a sensitivity analysis that models the impact of a drop in value of £50,000 per apartment. Present your findings as a spreadsheet with the changes to the Task 1 spreadsheet highlighted in yellow. Your answer should include an evaluation of the impact of the change on land value, if appropriate, suggesting mitigation measures. You should also provide a critique of sensitivity analysis in general as a tool for managing risk.
Task 3
Your line manager is keen for the client to understand what the residual method valuation provides, and what it does not provide. They have asked you to include a section in your report that critically analyses the residual method of valuation.
In addition to the content of the main body, your report must include a cover/title page, executive summary, introduction, conclusion and recommendations.
To support your content, you should draw upon pertinent academic papers, industry and governmental reports.
Reference list
You should include a reference list of at least ten separate relevant and appropriate sources that you have written about and cited within your work.
A bibliography of uncited sources is not required.
