Real Estate Development Appraisal and Analysis Report

This report focuses on the appraisal and analysis of a real estate development project, using the Term and Reversion Method and the Layer/Hardcore Method. It includes valuation interpretation, key assumptions, DCF appraisal, and results interpretation.

real estate development
APPRAISAL AND ANALYSIS REPORT
Executive Summary
Market concentration of real estate in the UK is
higher as compared to that in Australia and the
US. Here a few number of firms control substantial
share in the market. This has resulted because of a
tight control on land and this leads to planning
constraints. Eventually, this leads to merger and
acquisition of small and medium companies, often
by the large builders. This has become a means to
gain access to more developable land and of
accumulating strategically based land banks.
Investors are employing different methods of
evaluating the investment value of their assets and
this depends mainly on the internal funding
provided by them and the loan amount borrowed.
Based on these assumptions, the current case is
being assessed by using the ‘Term and Reversion’
and ‘Layer / Hardcore’ methods to evaluate the
‘Market Value’ of the asset under consideration.
STUDENT
CEM 335

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Contents
Executive Summary.........................................................................................................0
Introduction.....................................................................................................................2
Preliminary Financial Appraisal....................................................................................2
Valuation Interpretation.................................................................................................2
Appraisal Interpretation.................................................................................................2
Key Assumptions.............................................................................................................3
DCF Appraisal.................................................................................................................4
Analyses Interpretation..................................................................................................4
Results Interpretation.....................................................................................................4
Resolution to Grant Full Planning.................................................................................5
Section 106 Agreement....................................................................................................5
Conclusion........................................................................................................................5
LIST OF REFERENCES................................................................................................6
APPENDIX - A................................................................................................................8
Table – 01: Data & Results........................................................................................8
Table – 02: Capital Rate Valuation............................................................................8
Table – 03: Term & Reversion Method.....................................................................9
Table – 04: Hardcore/Layer & Top Slice Method.....................................................9
Table – 05: DCF Valuation using Term & Reversion.............................................10
Table – 06: Projected Free Cash Flows....................................................................10
Table – 07: Discounted Projected Free Cash Flows to Present...............................11
Table – 08: Projected IRR based on DCF Valuation...............................................11
Table – 09: Appraisal of Internal Rate of Return (IRR)..........................................12
Table – 10: Revenue Assumptions – Private Residential: Block-A........................12
Table – 10: Revenue Assumptions – Private Residential: Block-B.........................13
Table – 11: Revenue Assumptions – Affordable Residential: Block-A..................13
Table – 12: Revenue Assumptions – Commercial Space: Block-A & B.................14
APPENDIX - B..............................................................................................................14
Figure – 01: Accommodation Schedule - 1..............................................................14
Figure – 02: Accommodation Schedule - 2..............................................................15
Figure-03: The Site Plan..........................................................................................15
Figure-04: Site Masterplan.......................................................................................16
Figure-06: Level-1 Plan...........................................................................................17
Figure-08: Level 16 Plan..........................................................................................18
Figure-09: Level 17-25 Plan....................................................................................18

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REAL ESTATE DEVELOPMENT:
APPRAISAL AND ANALYSIS REPORT
Introduction
Rental values have the tendency of occasional ups and downs, as a result the contractual
rent or ‘Passing Rent’, which is the rent fixed between the parties and is recorded in the
lease document, shall always be different from the market value of the rent. In cases
where the passing rent is lower than the market rent rate, the investment is considered to
be ‘reversionary’. In this report, focus is on two most widely used methodologies, the
‘Term and Reversion Method’ and the ‘Layer/Hardcore Method’ to determine the
‘Market Value’ of the asset in which the investor wants to invest, says Weber, (2015).
Preliminary Financial Appraisal
Valuation Interpretation
In this report both the above noted methods have been illustrated, explained and used.
Hence, it becomes easy to understand the tables and the results derived through Tables-
01 & 02 shown below in the Appendix. Here, the value of the property which has been
shortlisted for purchase shall be calculated by assuming that its ‘Passing Rent’ shall be
£31,622,760 per annum and this report also assumes that this shall revert to the assumed
market rent which is valued at £33,994,467 per annum, in approximately 7 years, as per
Nelson & Katzenstein,, (2014).
Appraisal Interpretation
The appraisal of the asset to be purchased is commencing with a summary of details of
the listed property as shown in Tables-03 & 04 below in the Appendix. It is pertinent
point out that under the similar investment conditions, this investment being made
appears to be similar to a ten-year government bond, explain Aalbers, van Loon &
Fernandez, (2017). This comparison is being made as an illustration. The Government
Bonds offer a yield of 4-5% and for determining the IRR of the selected property in this
report, the selected discount rate is 4.38% as per Weber (2016). However, if the same
investment

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was to be made by the investor while keeping an initial yield of 20%, it would be
evident that the investor was planning with an additional risk while calculating the cash
flow of the investment, so as to keep it over the yield of the government bond, explains
Fainstein, (2001).
Key Assumptions
In the case of the selected property in this report, the Passing Rent has been kept below
the anticipated market rent for a similar asset. The details of the planned development of
apartments and the commercial space in the proposed building to be constructed at the
proposed site have been explained in Tables-10, 11 and 12 which have been appended
in the appendix at the end of this report. It is safe to assume, as per Jadevicius, Sloan &
Brown, (2017), that the Demolition Expense of the existing structure will be £25,000.
Also appended are the “Accommodation Schedule” as Figures-01 & 02. The Site Plan
& Masterplan of the proposed site have also been appended as Figures-03 & 04, along
with the Floor Plans of the two towers labelled as Figures-05 to 09,
The Present Value (PV) of the projected estimations have been placed at 5.10% of £1 as
shown in Table-02. Table-01 shows that the initial yield will be 5.971%, whereas the
reversionary yield will stand at 6.14%. Based on the approach adopted, as explained by
Jadevicius & Huston, (2017) and shown under the ‘Term and Reversion Method’,
shown in Table-03, the total derived cash flow shall be considered as being ‘sliced
vertically’.
Although the required IRR given by Oasis Homes, the investment company, should be
between 15 and 25%, the derived Growth Per Annum of the project comes to 17.15%
based on the data provided and shown in Table-01, assert Archer & Cole, (2014).
An alternative approach which has been adopted is also generating the same result. The
alternative approach adopted is the ‘Hardcore/Layer Method’ and in contrast to the
Term and Reversion Method, where the Cash Flow is ‘Sliced Vertically’, here the cash
flow is being ‘sliced horizontally’. This result has been shown in Table-04, as detailed
by Henneberry & Rowley, (2002).

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It is essential to mention here, as per Aalbers, van Loon & Fernandez, (2017), that the
5.10%, yield under all-risks, is only a notional indicator. The purpose of this is to imply
that actual rental growth is bound to increase with the income generated during the
holding period and this will help the investor in producing a high capital gain in case the
resale is considered by the investor, as per Henneberry & Rowley, (2002). On the basis
of these observations, it can be safely assumed that investor shall be receiving a higher
rate of return, somewhere between 15% and 25% p.a., asserts Fanning, (2007).
DCF Appraisal
Analyses Interpretation
The results of the interpretation analysis of the selected asset have been tabulated in
Table-05, 06 and 07. It is pertinent to state that in majority of analysis done of real
estate investment cases, assert Antwi & Henneberry, (1995), tendency of the investors is
to adopt the quantitative approach. In this report also, the same approach has been
adopted. The Market Value Assessment of the asset selected for investment has been
done by using the market and investment criteria, as per Ball, (2003). In the analysis,
the report applies measures to each of the individual items of uncertainty as have been
listed above and a risk analysis has been conducted for making an assessment as to
whether the Oasis Homes is prepared to accept the inherent uncertainties at the price
which it is paying for the asset selected, says Ball, (2003).
Although the adopted risk analysis approach for this report finds wider implications,
this report has based it on the practised cash flow approach. It must be noted that the
analysis have the tendency of varying from the basic ‘upside, downside, best case’ if a
detailed sensitivity analysis of all the individual input variables are not taken into
account asserts Ball, (2012). The individual input variables include rental values, rental
growth, vacancy periods and exit yields, but a wider list can be ascertained depending
on the investment criteria of the investor. This report has made use of risk scoring
models, such as ‘Term and Reversion’ and ‘Hardcore/Layer & Top Slice’, as per
Levitin & Wachter, (2013).
Results Interpretation
In this report, allowance has been made in the enhanced purchase price, so as to
accommodate the cost of refurbishing the premises after expiry of the current lease. This

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is not meant to remove the uncertainty of the premises’ obsolescence as well as any
future vacancy periods, but this will definitely help Oasis Homes to make an assessment
about this future impact on the Target Return and to decide what is acceptable,
according to Coiacetto, (2006). During the tenure of the loan there can be instances of
vacancy before expiry of the loan term, but this should not concern the lender, as
possibility of any time-lapse in re-letting will be very short, asserts Chevin, (2013).
Even if there is a small downfall in the assets’ ‘Market Value’ during the period of the
loan, there is very low possibility of Oasis Homes not able to repay the loan as Oasis
Homes has a very strong IRR throughout the borrowing period and meeting the interest
payments also remains comfortable during the loan period, as per Henneberry &
Rowley, (2002). Hence, despite the occurrence of vacancy, Oasis Homes’ cash flow
shows that the company has a very low probability of default and this report can assure
with certainty that Oasis homes carries a ‘low risk’ profile, say Archer & Cole, (2016).
Resolution to Grant Full Planning
Please refer to document titled Planning Permission in the attached folder titled “The
Planning Application”.
Section 106 Agreement
It is essential that Oasis Homes prepares and submits its Final Bid for the acquisition of
the asset as per the terms and conditions required under the 'Section 106 Agreement'
and as mentioned under Section 106 of the Town and Country Planning Act, 1990. This
will make the bid as a legally binding contract and shall impose legal restriction or
obligation on the local planning authority for granting the planning permission.
Planning obligations being legal obligations are embedded in all land trades and are
entered into for mitigating impact of a development proposal. Hence, planning
obligations are legally enforceable and binding. Any unilateral undertaking, which is
given by the local planning authority is not binding on the local planning authority. As
per Section 106, a Voluntary Planning Agreement (VPA) has to be entered into by the
Local Planning Authority, such as Department of Planning and Environment and Oasis
Homes.

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Conclusion
Reasonable margins have been included to cover any uncertainty occurring due to
vacancy period, as the extent of necessary refurbishment costs have been made. Though
these are important issues which both the lender and the investor need to take into
consideration all through the loan period. Consideration has also been taken for
refurbishing the vacant offices and their re-letting at a higher rental, in case the void
period exceeds 3 months, according to Grover & Grover, (2013). To take into
consideration such a scenario, provision has been made by Oasis Homes to consistently
achieve an IRR of around 17%, although this is only one among many possible
outcomes, out of which some may prove to be less favourable.
LIST OF REFERENCES
Aalbers, M.B, van Loon, J. and Fernandez, R. 2017. The Financializsation of a social
housing provider, International Journal of Urban and Regional Research 41 (4): 572 –
587. DOI: 10.1111/1468-2427.12520
Antwi, A., and Henneberry, J. 1995. Developers, non‐linearity and asymmetry in the
development cycle. Journal of Property Research, 12(3): 217-239.
Archer, T. and Cole, I. 2016. Profits before Volume? Major house builders and the
crisis of housing supply. Sheffield Hallam University Centre for Regional Economic
and Social Research, Sheffield.
Archer, T., and Cole, I. 2014. Still not plannable? Housing supply and the changing
structure of the housebuilding industry in the UK in ‘austere’ times. People, Place and
Policy, 8(2): 93-108.
Ball, M. 2003. Markets and the Structure of the Housebuilding Industry: An
International Perspective. Urban Studies, 40 (5-6): 897-916.
Ball, M. 2012. Housebuilding and housing supply. In: D.F. Clapham, W.A.V. Clark
and K. Gibb (eds) The SAGE handbook of housing studies. Sage, Los Angeles. pp. 27-
47.

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Chevin, D. 2013. Social hearted, commercially minded: a report on tomorrow’s
housing associations. The Smith Institute, London.
Available at: http://www.smith-institute.org.uk/wp-content/uploads/2015/10/Social-
hearted-commercially-minded.pdf.
Coiacetto, E. 2006. Real estate development industry structure: Consequences for urban
planning and development. Planning, Practice & Research, 21(4): 423-441.
Fainstein, S.S. 2001. The City Builders: Property development in New York and
London, 1980-2000. Univ Pr of Kansas, Kansas.
Fanning, S.F. 2007. Market Analysis for Real Estate - Concepts and Applications in
Valuation and Highest and Best Use. Appraisal Institute, Chicago.
Grover, R., and Grover, C. 2013. Property cycles, Journal of Property Investment &
Finance, 31 (5): 502-516.
Henneberry, J., and Rowley, S. 2002. Developers decisions and property market
behaviour. Development and developers: Perspectives on property, 96-114.
Jadevicius, A. and Huston, S.H. 2017. "How long is UK property cycle?" Journal of
Property Investment & Finance, 35 (4): 410-426.
Jadevicius, A., Sloan, B. and Brown, A. 2017. Century of research on property cycles: a
literature review, International Journal of Strategic Property Management, 21(2), 129-
143.
Levitin, A.J. and Wachter, S.M. 2013. The Commercial Real Estate bubble. Harvard
Business Law Review. Vol 3 (2013): 83-118.
Nelson, S.C. and Katzenstein, P.J. 2014. Uncertainty, risk and the financial crisis.
International Organization 68, Spring 2014, pp. 361–392.
Weber, R. 2015. From Boom to Bubble: How Finance Built the New Chicago.
University of Chicago Press, Chicago.
Weber, R. 2016. Performing property cycles. Journal of Cultural Economy, 9(6): 587-
603.

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APPENDIX - A
Particulars Amount
Estimated Rental Value (ERV) 33,994,467£
Rent Passing (Contract Rent) p.a. 31,622,760£
Years to Rent Review/Lease End 7
Cap Rate/Initial Yield 5.10%
Risk Free Rate 6.00%
Risk Premium 2.50%
Required Return 20.00%
Rent Review Period/Lease Period 10
Implied Growth over Review Period 386.78%
Implied Growth Per Annum 17.15%
Initial Yield 5.71%
Yield on Reversion 6.14%
REAL ESTATE DEVELOPMENT
RESULTS
VALUATION AND APPRAISAL REPORT
DATA & RESULTS
TABLE - 01
Table – 01: Data & Results
Particulars Amount Total
Rent Passing (Rent as per Contract) 31,622,760£
Cap Rate 5.10%
CAPITAL VALUE 620,054,118£
Rent Uplift (Top Slice) 2,371,707£
Cap Rate 5.10%
PV of £ 1 @ 5.10% 0.7060
CAPITAL VALUE 32,830,073£
TOTAL 652,884,191£
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
CAP RATE VALUATION
TABLE - 02
Table – 02: Capital Rate Valuation

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Particulars Amount Total
Rent Passing (Rent as per Contract) 31,622,760£
Year Purchase (YP) @ 6.00% 5.5824
CAPITAL VALUE 176,530,308£
Estimated Rental Value (ERV) 33,994,467£
Year Purchase (YP) Perpetual @ 6.00% 16.6667
PV of £ 1 @ 5.10% 0.6651
CAPITAL VALUE 376,804,368£
TOTAL 553,334,677£
TERM
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
RESULTS USING THE TERM & REVERSION METHOD
TABLE - 03
REVERSION
Table – 03: Term & Reversion Method
Particulars Amount Total
Rent Passing (Rent as per Contract) 31,622,760£
Year Purchase (YP) Perpetual @ 6.00% 16.6667
CAPITAL VALUE 527,046,000£
Rent Uplift 2,371,707£
Year Purchase (YP) Perpetual @ 6.00% 16.6667
PV of £ 1 @ 5.10% 0.6651
CAPITAL VALUE 26,288,677£
TOTAL 553,334,677£
HARDCORE/LAYER
TOP SLICE
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
RESULTS USING HARDCORE/LAYER & TOP SLICE METHOD
TABLE - 04
Table – 04: Hardcore/Layer & Top Slice Method

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Particulars Amount Total
Rent Passing (Rent as per Contract) 31,622,760£
Year Purchase (YP) @ 20.00% 3.6046
CAPITAL VALUE 113,987,140£
Projected ERV 102,930,450£
Year Purchase (YP) Perpetual @ 6.00% 16.6667
PV of £ 1 @ 20.00% 0.2791
CAPITAL VALUE 478,766,657£
TOTAL 592,753,797£
TABLE - 05
REVERSION
TERM
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
DCF VALUATION USING TERM & REVERSION
Table – 05: DCF Valuation using Term & Reversion
Particulars Amount
Rent Passing (Contract Rent) p.a. 31,622,760£
Required Return 20.00%
Rent Review Period/Lease Period 10
First Year 37,947,312£
Second Year 40,603,624£
Third Year 43,445,878£
Fourth Year 46,487,089£
Fifth Year 49,741,185£
Sixth Year 53,223,068£
Seventh Year 56,948,683£
Eight Year 60,935,091£
Ninth Year 65,200,547£
Tenth Year 69,764,585£
TOTAL 454,532,476£
TABLE - 06
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
PROJECTED FREE CASH FLOWS
Table – 06: Projected Free Cash Flows

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Particulars Amount Rate Value
Rent Passing (Rent as per Contract) 31,622,760£
First Year 33,836,353£ 0.9174 31,042,526£
Second Year 36,204,898£ 0.8417 30,472,938£
Third Year 38,739,241£ 0.7722 29,913,802£
Fourth Year 41,450,988£ 0.7084 29,364,925£
Fifth Year 44,352,557£ 0.6499 28,826,119£
Sixth Year 47,457,236£ 0.5963 28,297,199£
Seventh Year 50,779,242£ 0.5470 27,777,984£
Eight Year 54,333,789£ 0.5019 27,268,297£
Ninth Year 58,137,154£ 0.4604 26,767,961£
Tenth Year 62,206,755£ 0.4224 26,276,806£
TOTAL 286,008,556£
TABLE - 07
DISCOUNTED PROJECTED FREE CASH FLOWS TO PRESENT
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
Table – 07: Discounted Projected Free Cash Flows to Present
Particulars Amount Total
Rent Passing (Contract Rent) p.a. 31,622,760£
Required Return 20.00% 5.3893
Rent Review Period/Lease Period 10
DCF Valuation 170,424,540£
PROJECTED IRR based on DCF Valuation
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
TABLE - 08
Table – 08: Projected IRR based on DCF Valuation

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Particulars Amount Total
Discount Rate Selected 4.38%
First Year 1.0438 33,836,353£ 32,416,510£
Second Year 1.0895 36,204,898£ 33,230,184£
Third Year 1.1372 38,739,241£ 34,064,281£
Fourth Year 1.1871 41,450,988£ 34,919,315£
Fifth Year 1.2391 44,352,557£ 35,794,096£
TOTAL 170,424,385£
TABLE - 09
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
APPRAISAL OF INTERNAL RATE OF RETURN (IRR)
Table – 09: Appraisal of Internal Rate of Return (IRR)
Monthly Annualy
1 B / 2 P 3 800.00£ 2,400.00£ 28,800.00£
2 B / 3 P 4 1,000.00£ 4,000.00£ 48,000.00£
2 B / 4 P 7 1,100.00£ 7,700.00£ 92,400.00£
3 B / 5 P 2 1,500.00£ 3,000.00£ 36,000.00£
3 B / 5 P Duplex 0 1,700.00£ -£ -£
SUB-TOTAL 16 17,100.00£ 205,200.00£
REAL ESTATE DEVELOPMENT
REVENUE ASSUMPTIONS - PRIVATE RESIDENTIAL
TABLE - 10
1 Bedroom Apartments
2 Bedroom Apartments
3 Bedroom Apartments
VALUATION AND APPRAISAL REPORT
BLOCK - A
UNIT TYPE TOTAL UNITS Rent/mth/Unit TOTAL RENT AMOUNT
Table – 10: Revenue Assumptions – Private Residential: Block-A

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Monthly Annualy
1 B / 2 P 83 800.00£ 66,400.00£ 796,800.00£
2 B / 3 P 52 1,000.00£ 52,000.00£ 624,000.00£
2 B / 4 P 38 1,100.00£ 41,800.00£ 501,600.00£
3 B / 5 P 2 1,500.00£ 3,000.00£ 36,000.00£
3 B / 5 P Duplex 2 1,700.00£ 3,400.00£ 40,800.00£
SUB-TOTAL 177 166,600.00£ 1,999,200.00£
GRAND TOTAL 193 183,700.00£ 2,204,400.00£
TABLE - 10
BLOCK - B
UNIT TYPE TOTAL UNITS Rent/mth/Unit TOTAL RENT AMOUNT
1 Bedroom Apartments
2 Bedroom Apartments
3 Bedroom Apartments
Table – 10: Revenue Assumptions – Private Residential: Block-B
Monthly Annualy
1 B / 2 P 11 450.00£ 4,950.00£ 59,400.00£
2 B / 3 P 9 750.00£ 6,750.00£ 81,000.00£
2 B / 4 P 20 850.00£ 17,000.00£ 204,000.00£
3 B / 5 P 9 1,000.00£ 9,000.00£ 108,000.00£
3 B / 5 P Duplex 0 1,200.00£ -£ -£
GRAND TOTAL 49 37,700.00£ 452,400.00£
BLOCK - A
REAL ESTATE DEVELOPMENT
REVENUE ASSUMPTIONS - AFFORDABLE RESIDENTIAL
2 Bedroom Apartments
3 Bedroom Apartments
1 Bedroom Apartments
VALUATION AND APPRAISAL REPORT
UNIT TYPE TOTAL UNITS Rent/mth/Unit TOTAL RENT AMOUNT
TABLE - 11
Table – 11: Revenue Assumptions – Affordable Residential: Block-A

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Monthly Annualy
Commercial 9,466.00 255.00£ 2,413,830.00£ 28,965,960.00£
GRAND TOTAL 9,466.00 2,413,830.00£ 28,965,960.00£
REAL ESTATE DEVELOPMENT
VALUATION AND APPRAISAL REPORT
REVENUE ASSUMPTIONS - COMMERCIAL SPACE
BLOCK - A & B
TABLE - 12
SPACE Area in sq. m. Rent/mth/sq. m. TOTAL RENT AMOUNT
Table – 12: Revenue Assumptions – Commercial Space: Block-A & B
APPENDIX - B
Figure – 01: Accommodation Schedule - 1

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Figure – 02: Accommodation Schedule - 2
Figure-03: The Site Plan

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Figure-04: Site Masterplan
Figure-05: Ground Floor Plan

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Figure-06: Level-1 Plan
Figure-07: Level 3-9 Plan

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Figure-08: Level 16 Plan
Figure-09: Level 17-25 Plan