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Scope and purpose of the book
This book sets out to provide development-modelling solutions for the twenty-first century. In this it might appear to be little different from the other traditional titles but actually it has a different philosophy from the books that have preceded it.
The approach reflects the fact that anyone setting out to do a development appraisal will not use the traditional approaches using a simplified manual calculation with valuation tables but will use a spreadsheet or proprietary software system. All the existing development appraisal books have their origins in the 1970s and 1980s and are thus outdated. This book takes a very fresh approach, illustrating development modelling from theory to actual current practice.
Using spreadsheets and proprietary models has greatly extended the appraiser's ability to carry out complex development appraisals yet the models that are used have often been produced on an ad hoc basis by trial and error, which in turn leads to the potential for error. This text aims to fill in the gaps between theory and practice by illustrating the solutions to many typical appraisal problems faced in practice using the tools that the industry itself would use.
Three solutions are considered; Excel, Estate Master DF and Argus Developer, although, for reasons that will be outlined in the text, concentration is made on the latter two models.
The structure of this book
The book is divided into two parts.
The first part looks at the theory of development appraisal and the construction of feasibility studies. It looks briefly at the nature of development, the parties involved and the role of development appraisal in the development process. Then the process of building the appraisal commences, starting with a brief look at the goals of developers and how this affects the appraisal. A key area is then considered: an examination of the factors that constrain a development, essentially those factors that define the envelope of the scheme ā this is not just confined to the physical envelope but the use type and potential users and occupiers as well. This is important: development is a creative process; the developer has to use their imagination to visualise what might be built on a particular site or in a locality. Often this concept is already defined by planning and legal constraints but frequently it is not and it is often left to whoever is doing the initial appraisal to determine the approximate envelopes.
Once this is done a broad idea of the overall development scheme will have been established. The next step looks at the gathering of the data that will construct and inform the appraisal itself. A wide variety of information is required and whilst a fully comprehensive list is impossible in a single text given the varied types of property and development that takes place, the reader will gain a good feel for the type of data gathering required and, perhaps more importantly, the reasons for its collection.
The final section of part one looks at the mechanics of the construction of development appraisals themselves. This starts with an examination of the simplest and most traditional of the approaches, the residual approach, and then moves onto cash flows. It concludes with an examination of an essential component of development appraisal, sensitivity analysis.
Part two of the book moves from the abstract and theory to the practicalities of development appraisal in the twenty-first century. Virtually all appraisals are produced using computers, either using spreadsheets such as Excel or using one of the proprietary systems such as Argus Developer and Estate Master DF. This part is, therefore, split into three, the first covering Excel, the second devoted to appraisals using Argus Developer and the final part constructing appraisals using Estate Master DF. No dedicated text exists for either of the last popular systems and it is felt that both students and practitioners will gain an insight into both systems by the examples illustrated here.
I would like to acknowledge the kind permission of Argus and Estate Master for the use of the images used in Chapters 12 and 13 respectively, and, indeed, for allowing me to write this book with total editorial freedom.
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Part One
Principles of development modelling
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Definition of property development
Before we can start on a book that concentrates on development financial feasibility studies we need to establish some definitions.
The first is to try to define what property development is. You might think that is simple; property development is about building things surely? Well, whilst that is often true this does not encompass all development forms; some development involves no new construction but the adaptation and/or alteration of an existing structure. Whatever, this is clearly development. Similarly, many entry level projects in the residential markets involve little more than redecoration.
āDevelopmentā is defined by statute in the Town and Country Planning Act 1990 s55(1), as āthe carrying out of building, engineering, mining or other operations in, on, over or under land, or the making of any material change in the use of any buildings or other landā.
That is quite a wide definition, but does little to actually define the activities involved. Wikipedia is quite helpful in this regard. Its definition is:
Real estate development, or property development, is a multifaceted business, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of improved land or parcels to others. Developers are the coordinators of the activities, converting ideas on paper into real property.
(httĀp:/Ā/enĀ.wiĀkipĀediĀa.oĀrg/ĀwikĀi/RĀealĀ_esĀtatĀe_dĀeveĀlopĀment,
accessed February 2013)
In 2002 and in the second edition in 2008, in Contemporary Property Development, the definition I used was:
Property development is taken in general to be the process that involves the transformation of property from one state to another.
(T.M. Havard (2008), Contemporary Property Development
(2nd edn), London: RIBA Bookshops, p.1)
The point I was trying to make then and which is still as valid now is that property development is a broad subject. There are many different types of property development projects. As a result every development appraisal is also individual.
The property markets and development
Laymen and the media often refer to the āproperty marketā, treating it as a single entity. This is of course far from the case; there are in fact numerous property markets, in fact it can almost be infinitely sub-divided. The residential market is distinct from the commercial. Residential property can split into its sub-types; detached houses, semi-detached, terraces, flats, houses in multiple occupation (HMO) etc. Each type can be split into user/occupier type ā retirement, single-family, starter homes, urban professionals, second homes, student lets etc. A further sub-division is possible by way of location ā country level, region, town/city, suburb, street etc., all of which can influence value, saleability and market performance generally. When you add the fact that several interests can exist in the same property ā freeholder, head lessee, tenant, subtenant, licensee etc. ā then some of the complexity can be understood.
Each of these markets can and will behave differently. Each will have their own market dynamics, with different supply and demand balances and, potentially, their own development markets. It is well beyond the scope of this book to provide a full analysis of the property markets; however, an appraiser/developer must have a good feel for this area if they are to be able to efficiently produce accurate development feasibility studies.
Property developers
Similar to the above section, it is largely beyond the scope of a book that concentrates on development feasibility studies to cover the development sector in depth; however some coverage will be given here.
Residential development in the UK is dominated at the volume end by the major house builders and construction companies. According to www.theconstructionindex.co.uk, at the end of 2012, the twenty leading companies in the UK were as shown in Figure 2.1.
Beneath this list, however, are numbers of small building companies who undertake development and myriad small developers undertaking single refurbishment projects (but which are also classified as development). Whilst volume house building is a major industry requiring major investment, the small-scale residential refurbishment represents the entry level into the industry.
Also in house building there are the social housing developers, currently dominated by the housing associations. These not-for-profit organisations...
