School of Architecture & Construction

REFERRED/DEFERRED ASSESSEMENT - SESSION 2007/08 SUMMER 2008

COURSE CODE COURSE TITLE COMP 1361 Studio 3

COURSE COORDINATOR John OLeary

To Students
If you have failed a course or part of a course and have been allowed by the Progression and Award Board to be reassessed in one or several of the courses, this will be indicated in your result letter. On the back of the result letter, the words Failed -retake permitted before the next academic year will appear next to the relevant assessment items or course(s). In that case, you are required to submit coursework and/or to take an examination again as appropriate in August 2008.

Examination timetable
The detailed examination timetable will be posted on the University website towards the end of July. Deferred/referred examinations will be timetabled between 18th to 29th August 2008. The link can be followed from here: http://www.gre.ac.uk/students/exams

Deadline for submitting coursework

Coursework must be delivered by hand no later than Monday 18th August 2008 to the School of Architecture & Construction. If you send your coursework by post, it must be sent by first class recorded delivery (keep a copy of both the postal receipt and the coursework) no later than Monday 18th August 2008 to: Referred/Deferred Coursework School of Architecture & Construction Mansion Site Bexley Road London SE9 2PQ UK

Coursework submission
All coursework must be submitted by the deadline and method as above and must be accompanied by the appropriate electronic header sheet. 1

Postal Submissions
All postal submissions, Coursework and Portfolios, will be receipted with the date of postage as the date of submission. It is the responsibility of the student to ensure that the work is submitted on time by the above method.

Queries
Any queries should be emailed to acqueries07@gre.ac.uk with Your full name Your student ID number Your Programme of Study e.g. BA Architecture The title and code of the course(s) with which you have a query The nature of the query Please note that emails to this address will be answered up to Friday 26th September 2008, after this date enquiries should be sent direct to the Course Coordinator. Staff email addresses and contact numbers can be looked up here: http://www.gre.ac.uk/staff_intranet/directory Please find below details of the coursework to be submitted.

Assessment item

COURSEWORK 1 (20770) Weighted 50% of the course marks Note: scroll further down this document if you need to recover Coursework 2 (20771)

Electronic header sheet number Details of work to be undertaken:

142339

You are to write a report of no longer than 800 words identifying the value of a 2 hectare green field site in an outer London borough which is to be developed for housing at 50 dwellings per hectare. You can decide on the precise combination of dwellings that are be developed on the site from a combination of: 1 bed flats at 50m2, 2 bed flats at 62m2, 3 bed flats at 80m2, 2 bed houses at 68m2 and 3 bed houses at 98m2. You should select a build cost between 900 per m2 up to 1,200 per m2 depending of the quality of the development that you envisage. You can make assumptions about the quality of the locality and the type of customer that your scheme is aimed at. You should factor into your calculations the open market sales values of the properties as follows: 1 bed flats at 160,000 each, 2 bed flats at 180,000 each, 3 bed flats at 190,000 each, 2 bed houses at 190,000 each and 3 bed houses at 210,000 each. Under a section 106 agreement, a housing association will acquire 25% of the properties and manage them as affordable housing. The exchange value of those properties is to be 65% of their open market values as shown above. Excel must be used to produce the site valuation and the notes attached below provide advice on the headings that should be used. The report must describe any assumptions made and/or interpretations that you make of the scenario. A print out from the Excel spreadsheet that you create must be attached as an appendix to the report. The submission should be made in a report cover / folder which must also contain a disk containing an e-copy of your Excel file. The latter must show the use of formulas to link data in different cells. There is no requirement for any drawings or layouts.

Availability of course tutor for consultation: p.j.oleary@gre.ac.uk

Notes to support Coursework 1 on the Residual Method of Valuation

1. Introduction The residual valuation method is used in circumstances where the value of a site, with development potential, is required. A potential developer of a site may want to acquire it to carry out development, but does not want to pay over the odds. Similarly the current owner of a site might carry out a residual valuation to find out what the site is worth to a typical developer i.e. how much could it be sold for. In these circumstances the direct comparison method is not entirely reliable, as all sites are different and have inherently different

development potentials....and therefore different values. 2. Basic Principle In its fundamental form, a residual valuation begins by calculating the worth of the finished scheme: `the Gross Development Value (GDV) and then deducts all of the costs to produce the finished development, to arrive at a residual sum. That residual sum is theoretically the amount available for purchasing the site. Thus: Gross Development Value (GDV) Costs of Producing the Development Residual Sum for Land Purchase 3. Calculating the GDV To calculate the GDV comparable evidence is required, which is converted into convenient units of comparison. The units of comparison can be multiplied by the number of units in the finished development. For example a developer is intending to develop 20 three bedroom semi-detached houses on a site. Current open market comparable evidence suggests that the value of semidetached 3 bedroom houses in that area is 300,000. Thus the GDV of the developers scheme would be 20 x 300,000 = 6,000,000. However, 25% of the units must be sold to a housing association as affordable housing under a planning condition at 1.2 times the cost to build. Thus the adjusted GDV would be: 15 x 300,000 = 5 x 1.2 x 900 m2 x size of units: 110 m2 = GDV = 4,500,000 + 594,000 5,094,000 = = = X Y X-Y

Having established the GDV, the next step is to begin calculating the costs (deductions) beginning with construction costs. 4. Calculating Construction (Building) Costs This is made comparatively easy by average costs of construction in `Spons or BCIS which provides costs per m2 for virtually every type of building. Thus if Spons suggests that the average cost of building a square metre of office building is 900 and a developer is planning to build a 10 houses each of which is 95m2, then the construction costs are likely to be in the order of 900 x 10 x 95 = 855,000. 5. Ancillary Costs As well as the construction costs, there are the costs of connecting up the services (water, gas, electricity) providing landscaping and parking and constructing an access road into the site. If there are derelict buildings on the site, these will have to be demolished and the costs included under this heading. For a straightforward housing development the Ancillary Costs will only be a small proportion of construction costs: 3% to 5%. Where a brown-field site is being developed this aspect of cost may well be higher than 5%. 6. Professional Fees The construction and ancillary costs are not the only cost considerations in the residual valuation. Professional fees for the architect, QS and other professionals involved, have to be considered. The conventional approach is to calculate fees at 12.5% of construction and ancillary costs. 7. Contingencies

Development projects are invariably affected by unforeseen circumstances or `glitches which could not have been predicted at the outset. The more complex the project, the more likely it is there will be difficulties or delays somewhere along the line. In order to anticipate these difficulties, a residual valuation builds in a contingencies sum to anticipate additional (as yet unknown) costs. Allowing for contingencies will protect the developers profit margin, should delays occur or additional expenditure be necessary. Contingencies are normally calculated at between 2% and 5% of total costs (i.e. building costs, ancillaries and professional fees). 8. Finance Costs The developer will probably be borrowing money to pay for the development and there will thus be interest charges to pay. Even if the developer is not borrowing the money, but is using money from reserves, there is the opportunity cost of capital i.e. interest could have been earned. The conventional way of dealing with this in the residual valuation, is to adopt an interest rate which is between 2% and 5% above the Bank of England Base Rate since that represents what a bank would charge a developer for a loan of this sort. The interest rate is applied over half the building period, to account for the fact that the developer will not take out all the money at once, but will borrow the money in instalments to match the rate of construction activity. This is referred to as the gradual `draw down of the loan. Example: if the base rate was 5%, the development period was 12 months and the total costs 1,500,000 interest charges could be calculated as follows: (Total costs x (1+i)n )- Total Costs = Interest Charges (1,500,000 x (1.07)0.5) - 1,500,000 = Interest Charges = 51,612 Additional finance charges might also be calculated for a period after construction activity is finished, while the property is being marketed and sold but remains empty. Conventionally the residual valuation might allow 3 to 6 months for this period for a commercial scheme. With housing projects in a buoyant market, the houses will be sold almost instantaneously after construction, or beforehand off plan and so there is no void period over which interest charges are accruing. 9. Marketing and Sales Fees The finished development has to be marketed and sold and this activity will cost money. The normal practice is to allow 2% to 3% of the sale price of the finished development (i.e. 2 to 3% of the GDV) for the cost of marketing, agents fees and sales transactions. 10. Return for Risk and Profit Developers bear the risks of property development in order to make a profit. Conventionally, the profit margin is somewhere between 15% and 20% of the GDV. If the project looks as if it is risky or will take longer to complete than other projects, then the developer will build in a higher profit margin. If the project is straightforward, the lower end of the profit margin may be more appropriate i.e. 15%. 11. Residual Sum Available for Site Purchase The difference between the GDV and the Total Costs gives a sum of money which will enable the purchase of the site, fees associated with the purchase and interest forgone whilst the site is being developed. The interest allowance is made because the money is sunk into the site for the development period (which may be a year or more) during which there is no income. During that time the developer could have been earning interest on what might be a considerable sum of money. Thus the `sting in the tail of the residual valuation requires the residual sum to be

discounted at an appropriate interest rate, to allow for interest forgone. This is represented by the Present Value (PV) in the example below which is pitched at 7% over an assumed 1 year development period. The formula is 1/ (1 + i)n which in the example below discounts the site value by 0.9346. Site acquisition costs also have to be allowed for, as lawyers will be involved in the transaction (land registry searches and exchange of title) and there will be stamp duty to pay on the transaction. Conventionally these `add-ons are costed at around 5% of the site value. An example of a simple Residual Valuation 25 x 2 bed flats whose end sales value is 180,000 each. GDV = 4,500,000 Deduct Costs: Building Costs for 55m2 flats @ 850 per m2 x 25 = Ancillaries @ 3% of building costs = Professional Fees @ 12.5% of costs = Contingencies @ 3% of costs =

1,168,750

35,063 1,203,813 150,477 1,354,290 40,629 1,394,919

Finance @ 7% of costs over half build period (6 months) =

47,996 1,442,915

Marketing and Sales fees @ 3% of GDV =

135,000 1,577,915

Return for Risk and Profit @ 15% of GDV = Total Costs = Sum available for land purchase i.e. GDV - Total Costs = Site value in 1 years time PV of 1 in 1 year @ 7%:

675,000 2,252,915

2,247,085

0.9346 2,100,126

Less acquisition costs @ 5% of site value: Site Value Today = 12. Conclusion

105,006 1,995,120

Residual valuations are often used to value land which has development potential i.e. where a site is being considered for purchase and development. This type of valuation can also be

used identify the profit margin where the value of the land is fixed or already known. The valuer begins by estimating the Gross Development Value (GDV) of the completed scheme by using comparable evidence. The valuer then inputs a number of variables to produce the `Total Costs of the development. The difference between the GDV and the Total Costs, is a sum of money that can be used to purchase the site, pay interest over the development period and pay the costs of site acquisition. If a developer pays more for the site than the residual sum suggests, the developers profit margin could end up being eroded. Developers can test their residual valuations with a sensitivity analysis which evaluates the effects of change to the variables i.e. what would happen if construction costs went up 15%. Developer use sensitivity analysis to reduce exposure to risk. Because of the number of variables and assumptions involved, valuers can come to different conclusions regarding the value of the same site. In situations where there are disputes about the values arrived at by different valuers appraising the same site, the Lands Tribunal can be called upon to give a judgement.

Assessment item Electronic header sheet number Details of work to be undertaken:

COURSEWORK 2 (20771) Weighted 50% of the course marks 142340

You work for a property investment company which has a target rate of return on its property investments of 9%. A fully tenanted business park unit has come on the market and its asking price is expected to reflect an initial yield of 6.5%. The rent passing on the property has just been fixed at rent review and is 130,000 per annum on FRI terms and this rent will remain unchanged for the next 5 years. You have been asked to evaluate the investment to see if it will meet the companys target rate of return based upon the assumption that the property would be held for 5 years and then sold on. It is anticipated that the capital value of the property will increase by 3% per annum over the holding period of five years. The legal fees and stamp duty associated with purchasing the investment will be 5% of its current value. On disposal there will be some legal fees, marketing and administration costs estimated to total 2% of the buildings value at that stage. Assuming the property was acquired, there would be annual management costs reflecting 1% of the annual rent. Using an Excel spreadsheet produce a discounted cash flow for the five years to assess whether the investment meets the companys target rate of return. Your spreadsheet should identify the Net Present Value of the investment and its Internal Rate of Return. Write a short report to your line manager based upon your evaluation of the property, leading to conclusions and recommendations. The latter should explore whether the property should be purchased or whether negotiations need to take place over the purchase price to render the investment viable from the companys perspective or whether the investment fails by a long way to meet the companys target rate of return and should be passed over. Any assumptions made should appear in your report. 7

Method You should study the examples of the layout and formulas used for Discounted Cash Flow appraisals produced in Excel spreadsheets as shown in Chapter 9 of `Excel for Surveyors by P. Bowcock and N. Bayfield, Estates Gazette (2000). There are copies of this book available in the library, although you should check the universitys web site for summer library opening hours before making a journey (as some days the library is closed for staff training and generally will not be open beyond normal office hours). Your submission must include a disk upon which there should be an e-version of your Excel spreadsheet. The assessor will be looking to see if appropriate formulas have been used to manage the data arising from the scenario.

Availability of course tutor for consultation: p.j.oleary@gre.ac.uk