2013 Development Appraisal - Cash Flow & Sensitivity Analysis
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A copy of the presentation given to the CPD Foundation on 13th February 2013
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2013 Development Appraisal - Cash Flow & Sensitivity Analysis
- 1. Development Appraisal Cash Flow & Sensitivity Analysis Speaker: Simon Wainwright BSc FRICS 1
- 2. 2013 Lecture Series Lecture Date An introduction to development 7th February 2013 appraisal & residual valuations: Cash flow techniques and 13th February 2013 sensitivity analysis: Possession strategy : 25th February 2013 2
- 3. Development Appraisal Month ā¢ Residual Site Value 1 Month ā¢ Plus Construction Cost 1 - 12 Month ā¢ Plus Finance Cost% 1 - 12 Month ā¢ Less Capital Receipts 12 Month ā¢ Development Profit 12 3
- 4. Development Appraisal GROSS DEVELOPMENT VALUE COST HEADINGS ā¢ Site Cost ā¢ Construction Cost ā¢ Professional Fees ā¢ Marketing Cost ā¢ Finance Cost ā¢ Other Costs OUTPUTS ā¢ Development Profit ā¢ Profit on Cost % ā¢ Profit on Cost IRR (inc/exc finance) ā¢ Yield on Cost ā¢ Profit / Rent Cover ā¢ Profit Erosion / Dissipation 4
- 5. Development Appraisal Capital Value Less Development Cost _________________ Development Profit 5
- 6. Capital Value 6
- 7. Capital Value 7
- 8. 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 8
- 9. Development Costs Site Construction Professional Fees Letting Costs Funding Fees Finance Costs 9
- 10. Site Costs 10
- 11. Construction Costs 11
- 12. Marketing 12
- 13. Funding 13
- 14. Finance 14
- 15. 15
- 16. Sensitivity Analysis RENT PROFIT Ā£ 35.00 Ā£ 37.50 Ā£ 40.00 Ā£ 42.50 Ā£ 45.00 YIELD 7.00% Ā£1,998,642 Ā£3,205,504 Ā£4,412,367 Ā£5,619,229 Ā£6,826,092 7.25% Ā£1,406,122 Ā£2,570,661 Ā£3,735,201 Ā£4,899,741 Ā£6,064,280 7.50% Ā£ 853,103 Ā£1,978,142 Ā£3,103,380 Ā£4,228,218 Ā£5,353,257 7.75% Ā£ 335,763 Ā£1,423,849 Ā£2,511,934 Ā£3,600,020 Ā£4,688,105 8.00% -Ā£ 149,243 Ā£ 904,199 Ā£1,957,642 Ā£3,011,084 Ā£4,064,526 16
- 17. Sensitivity Analysis IRR Yie ld Re nt -5 .0 0 % -2 .5 0 % 0 .0 0 % 2 .5 0 % 5 .0 0 % - 0 .2 5 % 7 .3 8 % 8.1 4 % 8 .89 % 9 .6 1 % 1 0 .3 3 % 0 .0 0 % 5 .9 5 % 6.7 1 % 7 .45 % 8 .1 7 % 8 .8 8 % 0 .2 5 % 4 .5 9 % 5.3 4 % 6 .07 % 6 .7 9 % 7 .5 0 % Profit o n C ost Re nt Yie ld -5 .0 0 % -2 .5 0 % 0 .0 0 % 2 .5 0 % 5 .0 0 % - 0 .2nt % Re 5 4 .4 7 % 4.9 0 % 5 .30 % 5 .6 6 % 6 .0 0 % Yie ld 0 .0 0 % 0 .4 2 % 0.8 3 % 1 .23 % 1 .6 2 % 1 .9 9 % 0 .2 5 % -3 .2 5 % -2.8 8 % -2 .51 % -2 .1 3 % -1 .7 7 %
- 18. Effect of 10% Change in a Variables Letting Period -10% Letting Period +10% Construction period -10% Construction period +10% Pre-construction period -10% Pre-construction period +10% Variable Finance Rate -10% Finance Rate +10% Land Cost -10% Land Cost +10% Building Cost -10% Building Cost +10% Yield -10% Yield +10% Rent -10% Rent +10% -80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% % Profit Change 18
- 19. Plot Ratio 19
- 20. Cost Comparison
- 22. Elemental Viability Residential 29% Office 62% Retail 9%
- 23. Cash Flow 23
- 24. Cash Flow 24
- 25. Cash Flow Cash Flow Cash Flow Date 25
- 26. Cash Flow Results CASH 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 26
- 27. Internal Rate of Return IRR 1 2 3 4 5 17% -Ā£ 100,000 -Ā£ 100,000 -Ā£ 100,000 -Ā£ 100,000 Ā£ 600,000 27
- 28. Internal Rate of Return 28
- 29. Appraisal Software ā¢ Argus Developer Suite ā¢ Interproperty Systems ā Prodev ā¢ Prodeveloper ā¢ Caldes ā¢ KEL Delta ā¢ Aperioware 29
- 30. Follow Us J Peiser Wainwright Website Jpeiserwainwright.com Facebook /jpeiserwainwright LinkedIn Twitter @JPWNews Google+ 30
- 31. Development Appraisal Cash Flow & Sensitivity Analysis Speaker: Simon Wainwright BSc FRICS 31
Editor's Notes
- Basis of Measurement ā Code of Measuring PracticeGross External AreasGross Internal AreasNet Internal Areas
- Development Appraisal ā target profit What basis for site cost / value?Market ValueExisting Use ValueAlternative Use Value Opportunity CostHistoric Cost Assumptions/BasisSite Acquisition CostsStamp dutyAgentās feesLegal feesSurveys Environmental SurveyGround Conditions Report / Soil survey Level SurveyAsbestos ReportPlanning CostsApplication CostsFeesDemolitionVacant Possession Costs Acquisition of leasehold interestTenant's compensation
- QS Cost Estimate Spons /BCIS Tender price discrepancyVAT Cash flow timing effectMiscellaneous Section 106 AgreementCosts Community Infrastructure LevyContingency How many contingencies?Professional Fees1. Architect2. QS 3. Structural Engineer4. M&E Engineer5. Project Management6. Others OthersPlanning consultantInterior designLandscapingAcousticsArchaeologicalListed BuildingsDDALightingTransport / HighwaysRights of LightParty WallDonāt forget the expenses budget!Consider type of building contract and impact on construction cost.Design & Build, Guaranteed Maximum Price, Shell & Core etc.
- Letting Fees1/2/3 agentsVATTiming of paymentMarketingBrochuresCAD Images / Fly-throughModelsReceptionsMarketing suite - staffAdvertisingWeb SiteLetting IncentivesRent free periodFitting out contributionVoid Costs Include in Capital Value?
- Bank Finance v Equity FundingAgents fees 1/2 agentsLegal fees 1/2 lawyersFund's/Bank's supervisionBank valuation feesBank's arrangement/facility feeBankās legal costs
- Site Finance 100% for full periodConstruction cost 50% for full period and fees or S curvesFunding fees Payment assumptionsVoid % Pre-letsInterest compoundedQuarterlyMonthly9% per annumAnnually9.00% pa Quarterly 9.31% pa Monthly 9.38% pa Weekly 9.41% pa
- Lump Sum Profit NCV - TDCĀ Profit on Cost % Profit / TDC"The amount ofdevelopmentprofitexpressed as a percentage of the total development cost"NCV = Net Capital ValueTDC = Total Development CostProfit/rent cover"The number of months rental cover which theprofit represents"Ā£200,000 / Ā£60,000pa = 3.33 years = 40 monthsProfit dissipation/erosion"The number of months it will take for the total development cost to compound to the net capitalvalue allowing for finance costs at the prescribed interest rate"Yield on Cost"The return which the net rental income will show on the total development cost"Breakeven Rent āThe minimum rent required to produce a yield on cost equivalent to the investment yield and yet not produce a lossā
- Sensitivity Analysis can be undertaken on any 2 variablesRentInvestment yieldConstruction costPre-construction periodConstruction periodLetting voidInterim finance rateFloor area
- Scheme RefinementRedecoration & RepairRetrofittingRefurbishmentRedevelopmentDifferent Floor Areas/Costs/ValuesWrong answer?Ā Is the basement is too large, does it produce income or add to the valueIs there too much car parking on your shopping centre, and why should it be free car parkingThe building is too expensive ā whyThe value of the existing retail investment is too high ā can the retailer continue trading whilst the refurbishment takes place around them? Peter JonesPlot Ratio ā GEA:site AreaGross / net floor area ratioCapital value Ā£psm / Ā£psf comparisonCost comparison to other schemesElemental viability analysisMarginal viability analysis
- Value/Cost/Profit by useResidential/Offices/RetailWhich element delivers highest profit-on-cost
- Cash Flow BenefitsĀ·Ā Ā Ā Ā Ā Ā Ā Ā Ā Ā Accuracy of interest calculationĀ·Ā Ā Ā Ā Ā Ā Ā Ā Ā Ā Assess maximum exposureĀ·Ā Ā Ā Ā Ā Ā Ā Ā Ā Ā āWhat ifā analysisĀ·Ā Ā Ā Ā Ā Ā Ā Ā Ā Ā Assess profit in relation to time -IRRĀ·Ā Ā Ā Ā Ā Ā Ā Ā Ā Ā VAT impactCash Flow DisadvantagesTime consuming to enter / amend dataPresentationFormula definitionsPrepare ātraditionalā appraisalDecide cash flow periodStudy programmeDecide on spread of payments / receipts Enter into model
- Cash Flow IssuesRent quarterly in advance and date of paymentAssumptions on transfer to investment a/cPrecise date of payment (interest calculation)Cost inflationRental growthSite purchase transfer date and costChoice of interest rate and compounding periodCash Flow ResultsNet Present ValueInternal Rate of ReturnProfitMaximum cash exposure
- Net Present ValueInternal Rate of ReturnProfitMaximum cash exposureInternal Rate of ReturnThe internal rate of return on an investment or project is the āannualised rate of return" that makes the net present value(NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.