Conducting a development appraisal

You will have seen from stage 4 of the property development process exercise in the previous Step, that a development appraisal is key to assessing the financial viability for the development of a scheme.

To recap, once a site or shortlist of sites has been identified, the developer or investor will undertake an initial financial appraisal of development options. This is often said to be done ‘on the back of an envelope’ and, although it probably involves the use of computer software or a mobile app these days, this term suggests the provisional nature of the early appraisals. As the development proposal gets firmer and more detailed, the appraisals will similarly get more thorough.

At its most basic, a development appraisal will add-up the likely returns from the scheme and subtract the likely costs, leaving a ‘residual’ amount of money that the developer can use to bid for the land. To give an idea of what is involved, we have provided a simplified example of a development appraisal, which is based on a proposed development for 35 residential apartments in the UK.

Put yourself in the shoes of a developer or potential investor, and change the figures highlighted in yellow to see the impact on the ‘residual land value’, and therefore overall scheme viability. How did you find this approach to appraising the costs?

The sample documents are available in the below ‘Downloads’ section and have been provided in both Excel and OpenOffice formats. You will need access to one of these programmes to be able to use the documents.