Module Assignment – Residual valuation
A prospective developer has identified a site in a Liverpool City Centre which they consider to have development potential as office space. You have been asked to carry out a residual valuation for the developer in order to guide her decision as to the financial viability of the site.
The site extends to 0.59 acres (0.24 hectares) and is currently used as surface car parking. Should they pursue the project the developer would seek planning permission for the site to accommodate 1250m2 of office space of which 1090m2 would be lettable floorspace.
The projected development period has an estimated completion period of 27 months, of which the pre-build phase is anticipated to last 10 months. The building contract is projected to take 14 months and 3 months has been estimated by the developer as a potential letting void in which sales professionals will market the building.
The developer has arranged finance with a bank at 1.15% per month. Construction costs have been estimated at £750 per m2. The developer requires a profit of 15%.
Professional fees are currently estimated at 8% of building costs. A promotion and marketing fee has been agreed with a commercial agency at £24,000: £8,000 per month for the final 3 months of the development period over which the developer has hired a sales team to promote the building to its target market. The developer is alert to the risks involved in undertaking a development of this nature at the current time and has asked that the valuation should include a realistic contingency fee. Agents’ fees for letting the building are 10% on initial rent.
The developer is confident that the location of the site means that it should command premium rates for office space. They believe this to be around £190 per square metre. However they are keen for up to date market intelligence on what might be a realistic rate of return including the degree to which subsequent rental voids in the form of ‘rent holidays’ might be necessary to populate the building in the first instance.
Finally, the local planning authority are likely to ask that a section 106 agreement is negotiated to mitigate the impact of the development. The developer’s previous experience would suggest that the net result of this negotiation will constitute the equivalent of 2.3% of the total development value and will be payable upon its completion. Given the provincial location of the development, however, the developer will try to negotiate this section 106 liability to be as low as possible.
In compiling your valuation you should consider whether the information you have received from the developer includes everything that you would want to take into account.
Prepare a short report (no greater than 1,500 words excluding presentation of calculations) which comprises a residual valuation, a commentary on the choices you have made in the compilation of the valuation and a recommendation to inform the developer’s decision whether or not to pursue the scheme.
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