EVELOPMENT APPRAISAL & COST FORECASTING

SECTION A
1.
As part of a larger expansion of property holdings across the Midlands, a UK pension fund is seeking equity participation in city centre retail schemes. An established retail developer is considering a new-build scheme on the primary trading location in Nottingham and requires advice on the maximum site bid to make. The developer intends to purchase the site from its internal funds and there will be no financial opportunity cost attached to it.
Due to the site s prominence within the city centre, the local planning authority has prepared a detailed Site Brief detailing the quantum and form of development proposals it would consider. Unofficially, officers of the LPA have advised that planning permission can be secured for five units of 180m2 ITZA, each with 15m width frontages.
From your research, you have been able to establish the following current information about the retail market:

Rental activity:

Comparable A: 150m2 ITZA at ?2,100/m2
Comparable B: ?283,500 per annum for a 135m2 ITZA
Comparable C: 120m2 ITZA let on fully repairing and insuring (FRI) basis at ?1,950/m2

Investment transaction details:

Unit Date Size (m2 ITZA) Price paid Rent per annum ?/m2 Lease type
One May 06 260 5,812,000 1,900 FRI
Two June 06 145 3,987,500 319,000 FRI
Three June 06 3,503,000 276,750 2,050 FRI

The developer s proposed scheme is steel framed, clad externally with dressed stone at first and second floor levels. The units will include high specification internal environmental control systems along with staff restrooms and WC facilities. Due to the location, the LPA require the provision of a secure delivery yard and associated road improvements that have an estimated cost of ?310,000.

The developer s in-house quantity surveying team have indicated that they successfully complete this form of development at an aggregate build rate of ?1,400/m2 and have allowed a 16 month on-site period from entry. A standard contingency allowance for this form of scheme is 4% of total build cost. The architect s fees for the complete design and supervision will be 6% of total build cost and the in-house QS fees will be 1.2% of total build cost.

Due to perceived risks associated with the project, the Pension Fund are prepared to advance development funding at 610 basis points above LIBOR, which is currently 3.5%. As part of the equity participation scheme, the Pension Fund require the developer a 15% contribution by the developer.

Various professional fees will be based on agreed percentages: solicitors 1.35% of the agreed acquisition price, valuation fee at ?4,600 + VAT, and Stamp Duty for site acquisition will be at 4% of the agreed transaction price (2006/2007 band rate). Letting fees of 8% plus VAT of the settled first year s rent has also been agreed. Your clients require a minimum 29% of gross development value from this form of development.

Using this information, what is the maximum bid you would recommend the developer make in order to secure the site.









2.
Seven months ago, a residential development company acquired an abandoned site on the urban fringe at auction for ?300,000 plus on-costs (Stamp Duty at 3%; legal fees at ?2,600 + VAT; and an inclusive auction premium of 8%).

The proposal is to develop a small block of six flats, each with footprints of 130m2 net internal area. The disposal prices for each flat are expected to be in the region of ?50,000 each and are targeted at the buy-to-let investment market.

Given their historic record and their success, the developer s bankers are able to advance money at base rate (4.75%) plus a 625 basis point loading per annum.

The development company plans to sell the units off-plan, although occupation cannot be achieved until the work is complete. There is a strict duration of 12 months for the whole project. The agent s selling costs have already been agreed at 1% + VAT for each flat. The associated legal costs for each unit are also fixed at 1% + VAT per unit. Inclusive fees for the architects and quantity surveying services are 8% and 1% of the build cost respectively.

Calculate the new-build cost ceiling that needs to be applied if the developer wishes to achieve a 22% return on the investment (22% of forecast gross sales figures).

3.
In 1998 a developer acquired a two-acre derelict site close to the City centre with the intention of developing once a change of planning policy occurred. The price paid for the site was ?470,000 plus on costs of 25 Stamp Duty, agents fees of 1.5% and legal fees of 2,500 + VAT. The acquisition was funded by a 75% 15-year mortgage on a fixed interest rate of 10% per annum.

Following recent revisions to the Local Plan, the local planning authority has redesignated the site and its surrounding area for employment generating activities. The developer has been working on a low-rise business park proposal that includes 7,500m2 of office and production space. The proposed park contains five, two-storey units and car parking for 250 cars. The remainder of the site will be soft landscaped.

Recent open market lettings of this quality of space have achieved ?25/m2 on fully repairing and insuring (FRI) lease terms and the car parking spaces are let at an additional ?500/space per annum. Colleagues in your firm s agency department have indicated that investments with similar characteristics achieving yields of 7.5% are not uncommon.

In order to attract tenants that can offer solid covenants to underpin the investment value, the developer is proposing to include a series of energy saving features and an above0average internal specification, with particular emphasis on the ICT services.

The cost consultants have indicated an inclusive figure of ?1,600/m2 for the development and ?17/m2 for all external works and soft landscaping.

Given the size and experience, the developer has advised that he can secure development funds at 5.15% per annum for the build period, which is estimated to be 21 months.

Assuming there is no movement to any of the input variables, what is the developer s anticipated profit from this scheme?







SECTION B

1a)

Calculate the wall to floor ratios of the building shapes attached in Appendix B1 and conclude by briefly stating what the ratios demonstrate regarding the efficiency of various building shapes. 8 marks

1b)

A housing association is considering two alternative design options. Option X is based on fifty units of two storey, two bedroom semi-detached houses. Option Y is based on fifty, two bedroom apartments included in a three storey single block. The Gross Internal Area of each unit in both designs is the same. Explain how the elements of the two options will vary in terms of cost, particularly cost per m2 of Gross Floor Area.

2a)

Using the information included in appendix B2 update the following estimates, discuss the meaning of your results and the limitations of using the indices provided.

Estimate I.

?23,600,000 Update from 2nd Quarter of 2002 to January 2006

Estimate ii.

?9,500,000. Update from February of 2004 to 1st Quarter of 2007.

2b)

Compare and contrast different types of indices used in cost planning. 17 marks

3a)
You have been asked to provide cost information during the design stage of a new two storey school. Two design options are being considered for the heating system and you are required to provided a whole-life cost analysis.

OPTION A:

This solution includes the use of electric storage heaters. The initial capital cost can be estimated at ?25,000. Each year it is expected that the fuel bills will approximate to ?12,000. Additionally, you should make an annual allowance for general inspection and service of ?500. It is also expected that in years 5, 10, 15 and 20 periodic repairs will be required (for example circuit board failure( in the region of ?1,200 for each of those years.

OPTION B:

The alternative solution uses gas fired central heating. The initial cost is expected to