Real Estate Development Appraisal and Analysis Report

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).