Development Appraisal Chia Fah Choy MSc, BAppSc (Hons) Assistant Professor, BE, FES, UTAR

The Property Development Process

Property Development Factors of Production The Parties in the Development Process Development Process

Factors of Production Land for the site Capital for purchase of land and materials Labour to erect a building and manage the process Entrepreneurial talent to initiate the process and bring the pieces together

The professional advisers The Parties in the Development Process The clients The planning authority The contractor The community The funders

Development Process InceptionCompletion

Development Process InceptionCompletion Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition

Development Process Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition Produce sketch plans to discuss with planning authority Type and scale of development

Development Process Produce sketch plans to discuss with planning authority Type and scale of development Development appraisal

Development Value Building Cost Profit - = Development appraisal Residual Method

Building Cost RM1,000,000 Development Value Profit RM1,300,000 RM300,000 - = Residual Method

Building Cost =X Gross Internal Floor Area Cost per square metre Residual Method

Construction Cost =X Gross Internal Floor Area Cost per square metre 10,000 m 2 RM1,000,000 RM100/m 2 Residual Method

10,000 m 2 RM1,000,000 RM100/m 2 =X Residual Method Databases and Source-books

Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition Development Process Produce sketch plans to discuss with planning authority Type and scale of development Development appraisal Outline Permission Type and density of the development

Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition Development Process Produce sketch plans to discuss with planning authority Type and scale of development Development appraisal Outline Permission Type and density of the development Detailed Permission Type and density of the development Detailed drawings

Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition Development Process Produce sketch plans to discuss with planning authority Type and scale of development Development appraisal Outline Permission Type and density of the development Detailed Permission Type and density of the development Detailed drawings Detailed Appraisal Preliminary estimate Unit Floor area Cube Approximate quantities Elemental comparative interpolation

Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition Development Process Produce sketch plans to discuss with planning authority Type and scale of development Development appraisal Outline Permission Type and density of the development Detailed Permission Type and density of the development Detailed drawings Detailed Appraisal Preliminary estimate Unit Floor area Cube Approximate quantities Elemental comparative interpolation Raised Finance Purchase the site Construction cost Ancillary cost

Need for the space Direct demand from a potential owner-occupier Indirect demand as assessed in market condition Development Process Produce sketch plans to discuss with planning authority Type and scale of development Development appraisal Outline Permission Type and density of the development Detailed Permission Type and density of the development Detailed drawings Detailed Appraisal Preliminary estimate Unit Floor area Cube Approximate quantities Elemental comparative interpolation Raised Finance Purchase the site Construction cost Ancillary cost Building Contract Construction Valuer or agent Marketing strategy

Development Value Building Cost Profit - = Residual Method Development Value Existing Use Value Profit = - Building Cost

Development Value - Residual Method Development Value Existing Use Value Profit = - Land Value

Value of Site Location Use Topography Legal constraints Ground conditions Services Access Value of Development Demand Use Density Design Layout Infrastructure Cost of Construction Size Shape Height Type of buildings Planning constraints Landscaping Site conditions Provision of services Access Variables of Development Value

Perimeter length enclosing 2500m 2 Perimeter = 200m 50m r=28.2m Perimeter = 177m 100m 25m Perimeter = 250m 25m 50m

Area of Perimeter length 200m Area = 2500m 2 50m 25m Area = 1875m 2

Comparative approach Direct comparables of sales Residual valuation GDV is assessed by Capital comparison approach Investment method Approaches on Valuation

The investment method Valuation Methods The comparative method The contractor's test (a cost–based method) The profits method The residual valuation

Development Appraisal Planning policy Planning history Statutory undertakers The site

Planning policy Statutory development plans Relevant planning and development briefs Design guides Planning policy guidance notes Zoning designations Density standards Conservation policies Highway proposals Attitudes toward planning agreements

The Site Ownership Acquisition Boundaries Area Topography Landscape Stability Access Layout Buildings Services Archaeological remains Contamination Physical factors which may affect development value

The Residual Valuation

Development Value and Building Cost Gross Area (m 2 ) Nos % of Circulation Area Net Area (m 2 ) Rental ($/m 2 ) Rental ($) Building Cost ($/m 2 ) Building Cost ($) Office 5,280 20% 4, , ,640,000 Supermarket 3,000 10% 2, , ,000 Shops % 2, , ,000 Surface Carpark ,000 Rooftop Carpark ,000 Demolition and Site Preparation 100, ,680 4,400,000

Gross Development Value 9,881,143 Building Cost 4,400,000

Fees The fees may be assessed at 12.5% of costs to include architects’, structural engineers’ and quantity surveyors’ fees.

Gross Development Value 9,881,143 Building Cost 4,400,000 Fees 550, %

Finance Charges An interest on the total building cost for half the building period. The total cumulative cost is represented by the S curve of construction cost over the building period. The fees are front ended, the interest is estimated as being on the total fee over ⅔ of the building period. The interest rate can be assessed as a margin (say 3%) over the BLR, currently 6.72% (Jun 2006)

Gross Development Value 9,881,143 Building Cost 4,400,000 Fees 550, % Interest on costs Building costs 4,400,000 x 1/2 x 10% x 18/12 330,000 Fees 550,000 x 2/3 x 10% x 18/12 55,000

Contingencies Depending on the nature of the project, the contract for construction and possible risk of variation of cost. Based on total cost of building, including external works and fees and interest charges say 0-3%

Gross Development Value 9,881,143 Building Cost 4,400,000 Fees 550, % Interest on costs Building costs 4,400,000 x 1/2 x 10% x 18/12 330,000 Fees 550,000 x 2/3 x 10% x 18/12 55,000 5,335,000 Contingencies 550,000 3%

Letting fees Generally these are 10% of the initial rents but if there are joint agents, as on a larger scheme, they will operate jointly for a total fee of 15% of the rents. Advertising, depending on the project, is (say) a spot of % of the gross development value.

Gross Development Value 9,881,143 Building Cost 4,400,000 Fees 550, % Interest on costs Building costs 4,400,000 x 1/2 x 10% x 18/12 330,000 Fees 550,000 x 2/3 x 10% x 18/12 55,000 5,335,000 Contingencies 550,0003% Letting fees 103, ,680 x 15% Advertising fees 98,811 9,881,143 x 1% 5,697,613 Developer’s profit 1,139,52320% 6,837,136 Cost plus profit Value of Site 3,044,007