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Development appraisal


A development appraisal is prepared to identify the uses of the land and incorporate with the client's (DK Developments) intensions and needs for producing the building fror occupation. The appraisal will also used to identify the factors which may influence the decision making of the development and study the market demands and relevant risk analysis involved.

Mixed development of office blocks and retails is planned to be developed at the proposed site which is located at Foundtain South East. This appraisal has include the study of the nature of development site, market analysis such as the demands of the market, populations, employment and unemployment rate, gross domestic produce (GDP), inflation rate, interest rate, rental levels, occupancy and vacancy rate at the selected site, etc. Consequently, a proposal will be prepared for the development site to examine the policy context and the uses of the selected land, design concept and the lettable area of the proposed project, rental rate, yield, inflation rate and interest rate which may impose to the appraisal and the development period which must be taken for the development and so on.

In order to acquire the value of the selected land, several appraisals are developed with different methods, such as Residual Site Value (RSV), Construction Costs "S" Curve Cashflor, Discounted Cashflow Appraisal (DCA), Period-by-Period Cashflow, Period-by-period Cashflow + Site Value and Internal Rate of Return (IRR) method.

Simple sensitivity analysis in terms of profit and risk within this development appraisal has been analysied and found that it will be affected by the changes in the values of the input variables, such as rental cost, investment yield, construction cost, finance interest charges and anticipated inflation rate.

By establish the appraisal with Residual Site Valuation (RSV) budget, the result ascertained from RSV is the maximum amount that the developer worth to spend to purchase the site and still achieving the specified profit. This is the common use of a developer's budget in the initial stage where the developer can specify a profit and investment yield which he intends to gain from the development and later work out the maximum amount which the developer can spend for the land cost. If the land cost offered for the developer is greater than the amount ascertained from the RSV budget appraisal, the developer is not recommended to purchase the land unless the land cost can be negotiated until it is less than the result shown in RSV budget.

RSV budget is more flexible and more sensitive compare with other cashflow approaches and it is normally use to calculate the developer's budget before the complete information is obtained.

However, RSV budget unable to provide the data in a form that reflects the progression of the development process, such as period by period basis. Conversely, cashflow approaches can address these issues and the construction periodical cashflow can be visualized through "S" curve.

Several cashflow approaches are adopted to develop the appraisal in order to find out the most adoptable method and most accurate appraisal during the consideration stage on determine the potential development of the proposed site. The cashflow approaches adopted to build up the appraisal are Discounted Cashflow Appraisal (DCA), Perod-by-Period Cashflow, Period-by-Period Cashflow including Site Value and Internal Rate of Return (IRR).

Cashflow approaches able to shows the periodical total outlay, inflated outlay, net cash flow and etc during the development priod. However, enough information must be provided in establishing the appraisal with caswhflow approaches as the cashflow is calculated based on the monthly construction expenses.

By developing the development appraisal for the development at the proposed iste - Fountain South East, RSV (Residual Site Valuation) Budget method is preferable and the client is suggested to use this development appraisal method as the result from the appraisal can provide the maximum amount which the client can spend for purchasing the land in order for him to gain the profit in future which he expected and specified in the development appraisal.


Purposes of preparing the report and develop the development appraisal are :-


Location and Site

The property is located at the redevelopment opportunity sites in Fountainbridge area which is Fountain South East. Fountainbridge occupies a strategically important location where it is located at central area, West of Lothian Road, South of Haymarket and North of Bruntsfield.

Fountainbridge exist with the opportunity to be developed as a quality urban environment, exploiting and enhance its distinctive canal side location and undergoing a rapid change from traditional working class tenements and industry to the modern housing developments. Due to the inco-operated important waterway in Fountainbridge which called Union Canal, the important linkage through the Foundtainbridge area and beyond can be contributed. The canal continues for 32 miles as far as the Falkirk Wheel. It may takes about half an hour bike trip along the canal to Edinburgh's outer limits which is the city bypass.

The existing site is dominated by brewery building which is McEdwan Brewery which expand in Fountainbridge area of Edinburgh in year 1856. The brewery was expand its production until it was producing 2 million barrels of beer a year and much of the products are exported to overseas as well as domestic quaffing.

However, this brewery will be closed due to our proposed wider redevelopment will be carried out at the entire site soon.

The property is located closed to Lochrin basin where the development of new office, leisure and residential are sprung up.


The Fountainbridge located at the Exchange area and it is well served by three main east-west transport routes where the West Approach Road and Dundee Street. Fountainbridge both carry the high volumes of vehicle traffics into the through the area. Further more, the Union canal provides an important pedestrian and cycle link through the area and it also acts as part of the Millennium Link with greater use of boats.

It takes only ten minutes walk from proposed Foundtain South East to Princes Street and Haymarket railway station and only few minutes bus ride to Edinburgh Waverlay Station.

Archaeological Interest

The Union Canal is the valuable asses and protection is required to rese5rve the canal and enhance its archaeological and natural life if it is possible. The Union Canal should be renovated as it can establish the attractiveness of the area for the visitors as well as local residents.

Transportation Requirement

Fountainbridge road is a busy throughfare for car traffic. However, the Council's transportation policies iss seeking to encourage the use of public tranposrt, walking and cycling but discourages the uses of private car dependency. Therefore, provision of direct, wide and well-lit paths must be made to encourage the use of waling and cycling in Fountainbridge area and adequate amount of car parking spaces must be provided in order to avoid the overspill parking onto the neighbouring streets.

market analysis

According to the Economic & Property Market Review of Scotland Summer 2008, from Research Bulletion GVA Grimley, the growth in the Scottish economy is expected will slow to around 1.7% in 2008 and fall to 1.6J% in year 2009. However, the qannual growth is expected to recover to around 2.9% by year 2012

Inflation & interest rates

According to the Economic & Property Markt Review in UK in 2nd Quarter of 2008, from Research Bulletin GVA Grimley, the core inflation and wage inflation are remaining muted.

However, from the research done by GVA Grimley , 3 month LIBOR has increased the rates to 6% even though the base rates remain at 5%. 5 years Swap rates have increase from 5% in mid of April to 6% in late of June which is 20% increase within 2 ½ months. It clearly shows that with the inflation likely to go downhill in the short term, the market interest rates will easily increase and subsequently may cause the world as well as UK economic growth slows and inflation weakens before falling in 2009.

Employment Outlook

According to the Research Bulletin GVA Grimley, the unemployment in the UK is continues to fall and the employment growth remains well at the moment. However, the growth of employment is likely to decline to a fair 0.5% in 2008 and to zero in 2009 due to the overall slowing of economy.

Below is the tabulation table showing the evidence of the Labour Force Survey that the employment rates in Scotland remain higher than the UK with little scope for major growth in employment without a major increase in population or immigration.

According to the Oxford Economic Slims Final Report in June 2008, the outlook for continued growth in employment with the forecasts suggesting a net 105,000 jobs will be formed between 2008/ and 2018 which is lead by the financial and business services and public services sectors. However, the employment rate within the manufacturing sector is forecasted to be regular decline with a loss of over 55,000 jobs in the next ten years.

Figure below shows the total employment within Scotland and UK where Scotland has the fairly strong employment growth from 2000 and the employment has reached to the high record which is 2,680,000 in year 2007


According to the forecasts suggestion from Oxford Economic Slims Final Report in June 2008, the migration into Scotland will be remained at positive and the population within Scotland will grow constantly and reqach to about 5,335,000 in 2018 which is a raise of 190,000 people and as a result these may create the higher demands on employment. The valuations and analysis are shown in the figure below

Rental Growth

As refer to the research done by Economic & Property Market Review in Scotland Summer 2008 from GVA Grimley, the rental growth for occupier market in UK is slowing down. As information provided by IPD, in March 2008, all property rents are arisen by 3.1%, down from a peak of 4% in August 2007, and the rents has arise by only 0.45% in the first three months of 2008. Thw slowdown in all property rental growth might due to the marked cooling in the central London office market. The occupier market and rental growth are expected weaken in 2008 and 2009. A figure of the All Property rental growth will be shown in the following page.

Based on the latest forecasts from GVA Grimley, the office sector will be performed fine in the short to medium term with average rental growth of 2.9% per annum within the period of 2007 to 2011. While the rental growth in the retail sector is expected to average 0.9% per annum and industrial sectors is about 1.5% per annum during the same period. Below is the table showing the average rental growth forecasts in Scotland from 2006 to 2011.

According to the Economic & Property Market Review UK 2nd Quarter of 2008, the rents are still increasing in retail sector but it growth very slow and weak. Within the three months periods which are from March to May in 2008, the rents have only increase by only 0.3%, equal to 1.2% per annum.

However, the rents for central London office are expected has the sharpest downturn with the average rents at the end of 2009 which is more than 5% lower than at the end of 2007. The worse case is the regional office and industrial sectors might face to the problem of almost no rental growth over the next two years (forecast at just 1% over the period). While retail sectors are expected growth a little higher with 2% over the next two years, but it will be still healthy below inflation. The performance of the retail sectors are always affected by the falling prices of housing market, high consumer debt levels, inflation eating into disposable income, credit squeeze, rising costs and increase of the competition from the internet sales.

Provided with the charts and tabulation at below (Rental value and capital value growth, forecast of the rental value growth and All Property Rental value growth forecasts) in order to show the conditions and the status of the rental value growth in the coming year.

As refer to the Figure 4.43 which shows the rental value and capital value growth from May 1998 until May 2008, the rental value growth has increase gradually from negative status in May 2003 to May 2007. However, the chart showing the downturn status of the rental value growth from May 2007 to May 2008. For capital value, the chart shows that the growth of capital value from the highest 15% per annum in May 2006 downturn rapidly to about -20% per annum in May 2008 which is about 30% decline within two years

Figure 4.45 above shows the forecast of the All Property Rental value growth forecasts from 2008 to 2012. It is clearly shows that the rental value will turn down from 2008 to 2009 and it will increase consequently from 2009 to 2010 and the following years.

Property Market

According to Economic & Property Market Review in Scotland Summer 2008 from GVA Grimley, the occupier of office demands is very strong in Edinburgh, especially in the city centre. It was 79,500 sq m in 2007 which is higher compared with the 67,400 sq m in 2006. However, the lack supply of office building in the city centre is still the problem due to the limited new spaces in the 2008. While, retail development activity is limited in Edingburgh. As stated in EPMR Scotland Summer 2008, there are a member of new