# Every development undertaken

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### Introduction

Every development undertaken must be economically viable, if the development is not viable then the company will face economic disaster and have a poor investment on its hands, this means that a lot of time and money will be lost. To ascertain if the development will make profit we will use a method known as a 'residual valuation'.

The purpose of a residual valuation is to find the maximum value of the development and to find the profit that is expected from the development. It is can also be used to find a 'cost ceiling' so that a budget can be managed.

### The equation

The residual valuation can be expressed as a simple equation;

Calculate the Gross Development Value A

Deduct all costs B

Residual Value C

• is the Gross Development Value; this is the capital value of the development which is found by direct comparison to similar developments.
• is the cost of the development this includes;
• the Costs of construction per m2
• Fees;
• Finance costs;
• is the Residual Value

The Residual Valuation

The purpose of a residual valuation is to put together an estimate of the costs in the development and use these costs to find an affordable land price for the development. But if the price of the land is fixed it can be used to determine an appropriate level of profit for the development.

The key areas that are used are as follows;

Net development value;

• Income - This is the return that the building would produce if it was rented, this is calculated on the net usable floor space that can be used
• Investment yield - an investment yield reflects a number of factors including comparison to other developments, cost of maintenance and future rental ability. The Year's Purchase (YP) is found from this.

Building costs

The buildings cost is found by using the internal area, this will be less that then external area and are usually in price per sq meter. The prices are found by taking the overall floor area and multiply that by the Building Cost per sq meter, this produces the Building cost. Contingency at around 10% as well as Road and site works costs and statutory costs such as legal fees, are included to make up the total building cost.

Professional Fees

Each profession has a different percentage that they take of the total building cost. Architects are normally between 5 -15% of the building cost, and the Quantity surveyor and Engineering are between 3-10% each.

Planning, building control and Site investigation Fees

fees are part of the initial development process and will insure that the development is legally developed in area. The fees are paid to the local government in this case it is the Carrickfergus planning office the fee is &pound;932. Building control fees are assed on the final development. In this case we will assume that they are &pound;2,000. Site investigation fees are for ground investigation, land and soil surveys. It will be assumed that they come to a round figure of &pound;2,500.

Site acquisition costs

These are made up of Agents fees at around 1%, Legal fees at around 1% and stamp duty at around 1% of the land purchase price.

Finance costs

It is common for developers to borrow capital from investors such as building societies and banks. This involves an arrangement fee for the finance that has been borrowed for the development depending on the method of finance. This is usually between 3 and 10% of the amount borrowed. The capital is borrowed by at a percentage of interest. The interest is used to calculate the cost over the length of the project from inception, to completion, including letting and rental.

The interest is calculated and can be compounded weekly, monthly, quarterly or yearly.

The compound formula is:

= ((1.2395 - 1) x 1,800,000) x 1/2

= ((1+i)n (amount borrowed)*0.5)

Where i = interest;

n = number of period e.g. month, quarter, year, etc

So, for a 15 month project with an interest rate of 5% and borrowing 1,800,000 the formula would be;

= ((1+0.05)15 x1, 800,000)*0.5

= *0.05

=

Marketing Fees

This fee will be used to market the development to potential renters and buyers through sales and letting agents.

• Letting agent's fee - The fee charged to rent the property, this will be around 10% of the total rental value
• Letting agent's legal fee - at around 5% of the rental value.
• Sale agents fee - this is at around 1% of the Net Development Value
• Sale legal fee - this is at around 1% of Net Development Value.

Developer's profit

The Developers profit is a percent of the 'total development costs' or the 'net development value'. The Profit is directly linked to the amount of risk involved in the development, so the higher the profit the higher the risk for our development generally around 20%.

Building and Rental Values

Our development consists of apartments and a retail unit. We had to carry out research to find the price that it costs to construct these building types.

Using the ''BCIS Tender Booklet'' and we found that;

Retail Units = &pound; per sq. m

Residential Apartments = &pound; per sq. m

This means that the price of our retail unit is;

&pound; x 361 = &pound;

And the price for the apartments will be;

&pound; x = &pound;

KSDN Construction has decided to sell the four 2 bedroom apartments for a quick return on our investment.

Other similar properties in the area where found through local estate agents;

Insert info

This means we can expect a return of around &pound;200,000 per apartment.

We have decided to rent our retail unit so that we can have a gradual return over a longer period of time. The rental value per sq meter for retail units was found by contacting local estate agents. These were found to be;

&pound;15 per sq meter per month.

This means we can expect a return of

15 x 361 =&pound; per month

The Residual Value Calculations