Financial Appraisal of a Development Opportunity - CEM335 Report

This report presents a financial appraisal of a proposed commercial and residential real estate development project in London. The analysis includes estimations of revenue and costs, utilizing data from real estate websites and literature, and incorporates a discounted cash flow (DCF) technique to assess the project's financial viability. The report details revenue assumptions for private and affordable residential units, as well as commercial units, alongside construction and other development costs. Key financial metrics such as the Internal Rate of Return (IRR), Net Development Value (NDV), and Profit on Cost are calculated to determine the project's profitability and overall performance. The appraisal considers various costs including land acquisition, construction, and funding, and provides a development program outlining project timelines. The conclusion highlights the project's viability, estimating a moderate profit margin and an IRR of 22.55%, supported by the assumption of securing necessary approvals and fulfilling social housing obligations. The report also includes a Section 106 agreement and a resolution to grant full planning permission. The report includes an appendix with a table of estimated accommodation schedule and a report quality assurance form.

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Financial Appraisal of the Development Opportunity

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Executive Summary
The main purpose of this real estate report includes:
 To conduct financial appraisal of the project
 Estimated development cost of the project
 Estimated revenue from the project
 Financial analysis of development opportunity with DCF technique
 Interpret the outputs of development appraisal models.
 Estimating viability of proposed project
 Project viability does exist as per the estimation of the study

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Table of Contents
1. Introduction...................................................................................................................3
2. Revenue and Cost Assumptions and Justification.....................................................3
3. Financial Appraisal and other development cost.................................................................4
4. Summary Appraisal.............................................................................................................5
5. Result Summary..................................................................................................................6
6. Development Programme...................................................................................................6
7. Section 106 Agreement and Resolution to grant full Planning................................7
8. Conclusion.....................................................................................................................7
References................................................................................................................................8
Appendix...................................................................................................................................9
1. Introduction

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There is growing recognition at the local, regional and national level that the UK is currently
in the grip of a housing crisis, where the demand for good quality and affordable housing
currently outstrips supply. Taking above points into consideration this proposed commercial cum
residential project was planned in London. The main purpose of this study is to conduct appraisal
of this project development opportunity. The purpose of this financial viability assessment is to
support in the planning of the project. This report sets out the details of what is proposed and
provides a financial assessment of those proposals.
2. Revenue and Cost Assumptions and Justification
All values related to revenue and cost is estimated after going through some of the real-estate
websites and web searching. All figures are purely estimated figure based on my understanding
and reading of literature, which was found on various web portals (OnTheMarket, 2019),
(Foxtons.co.uk. 2019).
The key assumptions for the proposed scheme are summarised below:
Appraisal Inputs Rate Amount
Revenue
Private Units £ 781 per sq ft £ 45,940,000
Affordable Units (assuming social
rent and intermediate tenure)
£ 235 per sq ft £ 5,568,559
Commercial Units £22.50 per sq ft 6%- 6.5% yields
12 months’ rent free
£ 3,931,510
Costs
Construction Costs £254.55 per sq ft (on total GIA) -£30,587,000
The total cost estimate, excluding fees and contingency, is reported as £30,587,000 which
equates to £254.55 per sq ft (gross) (Zoopla.co.uk, 2019).
Revenue Assumptions
The key revenue assumptions included in the appraisal are as follows:
Private Residential Units
The comparable evidence informing our opinion of value for the 81 private residential
units is summarised within Appendix of this report.
We have assumed that 50% of the private units are sold off-plan, with the revenue
received at practical completion. The remainder of the units are sold over 12 months
post-completion, at an average rate of circa 3-4 units per calendar month.

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Affordable Residential Units
We have assumed that 30% of the affordable housing package price will be received at
the approximate golden brick stage (an incentive). The remaining balance (70%) will be
distributed via s-curve in staged payments over the construction period.
Cost Assumptions
The key cost assumptions based on the web portals rate and evolved rate from those rate
included in the appraisal are as follows:
Construction Costs
The build costs are in accordance with the Cost Plan provided in development plan of
company as per the government rile and regulation for this kind of development.
Finance
An assumption of 5% for finance is considered appropriate for a scheme of this nature, and
could be higher.
Estimated Profit
17.5% profit on GDV is assumed in respect of the private units; 15% profit on GDV in
respect of the commercial units; and 6% profit on GDV in respect of the affordable
units, which is considered appropriate in order to reflect the minimum level of return
that a prospective purchaser or developer would require for a scheme of this nature. This
also necessary for developers’ financial viability.
3. Financial Appraisal and other development cost
Justification of revenue and cost estimates (including growth if appropriate):
The report has taken into consideration current-day costs and values. The benchmark return used
in assessing the Scheme in this report is the profit on cost. In order to inform various stakeholders
this report has relied upon information provided by various real-estate portals. The Scheme has
been appraised on the basis of what is being proposed, and changes to the floor space from
residential to commercial, it would result in a change in how the income would be derived
(Rightmove.co.uk, 2019). The headline costs associated with the Scheme are set out in this
section. The main elements considered are:
Development Costs (estimated)
Item Unit Cost
Land and Acquisition £ 5,700,250
Design and Professional services £ 3,454,600

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Demolition and Services infrastructure £ 480,164
External works £ 833,840
Construction £ 28,159,306
Development fees £ 603,000
Marketing and Sales fees £ 1,457,180
Contingency £ 1,380,000
Funding costs £ 4,151,129
Total: £ 46,219,469
As it can be clearly seen that total development cost of the project is estimated to be £
46,219,469 of which most of was in construction cost all others are much lesser than Land
Acquisition cost and construction cost.
4. Summary Appraisal
Revenue (Estimated)
Sales Valuation Currency Units ft² Rate ft² Unit Price Gross Sales
Private Residential £ 81 58859 780.51 567160 45940000
Affordable Residential £ 30 23658 235.38 185619 5568559
Totals £ 111 82517 51508559
Investment Valuation
Commercial - Unit 1
Market Rent
£ 19125 YP @ 0.065 15.3846
(1yr Rent Free) £
PV
1yr @ 0.065 0.939 276273
Commercial - Unit 2 £
Market Rent
£ 62708 YP @ 0.065 15.3846
(1yr Rent Free) £
PV
1yr @ 0.065 0.939 905850
Commercial - Unit 3 £
Market Rent
£ 27113 YP @ 0.065 15.3846
(1yr Rent Free) £
PV
1yr @ 0.065 0.939 391658
Commercial - Unit 4 £
Market Rent
£ 37530 YP @ 0.065 15.3846
(1yr Rent Free) £
PV
1yr @ 0.065 0.939 542145
Commercial - Unit 5 £
Market Rent
£ 21308 YP @ 0.065 15.3846
(1yr Rent Free) £
PV
1yr @ 0.065 0.939 307801
Commercial - Unit 6 £
Market Rent
£ 95895 YP @ 0.06 16.6667
(1yr Rent Free) £
PV
1yr @ 0.06 0.9434 1507783
Total 3931510

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GROSS DEVELOPMENT VALUE £ 55440069
Purchaser's Costs £
0.065
1 255941
NET DEVELOPMENT VALUE OF
ASSET £ 55184128
NET REALISATION £ 55184128
Performance Measures
Profit on Cost% 19.40%
IRR 22.55%
Rent Cover
(Estimated) 33 years 12 months
Internal Rate of Return is estimated to be at 22.55% after calculating all the input and output of
the project. Net development value of the project is estimated to be at £55184128.00 and Net
realisation is estimated at £55184128.00.
5. Result Summary:
An appraisal summary of the proposed development project is as given below:
Viability Result of the proposed project
Scenario Description Residual
Land Value
(RLV)
Blended
Profit Level*
Benchmark
Value
Difference between RLV
and Benchmark Value
Proposed
scheme
30 affordable units/
81 private units / 6
commercial units
£5,187,617 19.40%
on cost
£6,300,000 -£1,112,383
It can be deduce from above table that for this project blended profit level estimated to be
19.40% which is a decent number taking all other things into consideration, like following social
obligations as well as meeting all the government prescribed regulations.
6. Development Programme
Developer has estimated construction period of 19 month. This much build period is appropriate
for a scheme of this size and nature. Detail of the assumed development programme as given
below:
Development Plan
Development Stage Duration (months)

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Purchase 1
Pre-Construction 3
Construction 19
Sale 13
7. Section 106 Agreement and Resolution to grant full Planning
Historically this was through 'Section 106' agreements negotiated between local authorities and
developers although the Planning Act 2008 introduced a new way of doing this - the Community
Infrastructure Levy, or CIL. It is assumed that the Applicant will obtain or has already obtained
Social Housing Relief on the basis of the level of affordable housing that is provided in the event
the level of affordable housing changes, this will impact on the level of relief which is obtained
(Tendringdc.gov.uk, 2019).
Commencement of development in regards to CIL is in accordance with Section 56 (4) of the
Town and Country Planning Act 1990 (Teeslaw.com, 2019), which asserts that commencement
is any material operation on the site. In this case, have assumed that commencement of
development is at commencement of demolition. The site has a resolution to grant full planning
permission forthe demolition of the existing industrial units and redevelopment to provide a
building ranging from one to nine storeys in height accommodating 1093 sqm of commercial and
residential floor space at various levels.
8. Conclusion
This project, which consists of commercial and residential, projected to be a viable for builder
after taking all types of construction into consideration. Builder is estimated to make profit,
though it is estimated that, it would not be with big margin. Developer has in placed all types of
approval needed for the project to start construction. IRR is estimated to remain at 22.55% and
profit on cost is expected to remain at 19.40% for the given project. This project fulfil all its
requirement, keeping everything into consideration , that is, social as well as financial viability,
which is good, even if its return is estimated to be moderate.
References

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Christiesrealestate.com. (2019). London - Real Estate and Apartments for Sale | Christie's International Real Estate.
[online] Available at: https://www.christiesrealestate.com/sales/london-lv-eng [Accessed 23 Aug. 2019].
Foxtons.co.uk. (2019). Instant Online Valuation | Foxtons. [online] Available at:
https://www.foxtons.co.uk/valuations/both/online/home-masthead-centered-button-large-instant-valuation/
[Accessed 25 Aug. 2019].
OnTheMarket. (2019). London Property | OnTheMarket. [online] Available at:
https://www.onthemarket.com/property/london/ [Accessed 25 Aug. 2019].
Rightmove.co.uk. (2019). London property - Flats and houses for sale or to rent in London. [online] Available at:
https://www.rightmove.co.uk/property/London.html [Accessed 23 Aug. 2019].
Tendringdc.gov.uk. (2019). What are Section 106 Legal Agreements?. [online] Available at:
https://www.tendringdc.gov.uk/planning/planning-applications/what-are-section-106-legal-agreements [Accessed 23
Aug. 2019].
Teeslaw.com. (2019). What's the difference between Section 106 Agreements and Cambridge City's proposed CIL? |
Tees. [online] Available at: https://www.teeslaw.com/article/whats-difference-between-section-106-agreements-and-
cambridge-citys-proposed-cil [Accessed 23 Aug. 2019].
Zoopla.co.uk. (2019). Office space calculator - Zoopla. [online] Available at:
https://www.zoopla.co.uk/commercial/space-calculator/ [Accessed 25 Aug. 2019].
Appendix
Table

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Estimated Accommodation Schedule
Estimated Residential Unit
Development site plan Map

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SIGNED ………………………………………………... DATE………………