How to make development appraisals easier (and why that matters)

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Accurate, robust development appraisals are a key part of the development process. To lenders, these appraisals are what separate the good developers from the bad – and you only get one chance to make a first impression.

Oliver Symons 1

Oliver Symons

Plenty of factors can impact a project – some are within your control, others less so. But even macroeconomic issues you can do nothing about need to be accounted for.

That means you need to stress test your development – because you can bet lenders will.

Three big issues your development appraisals need to consider

1) Landowner expectations

Developers who’ve been in the industry a while might remember the old cost truism of third-third-third – a third for land, a third for construction, a third for the developer.

Of course, it’s not been true for a long time. Now, land value is around 40%. Sometimes as high as 50%.

With a constant stream of headlines about record house prices, soaring demand, and too few houses being built, landowners expect more for their land than ever. And, increasingly, they seem to see developers making a profit as taking advantage.

This is especially problematic for smaller developers – even if they can find a site for a fair price, there’s the constant risk of a bigger player with deeper pockets swooping in and gazumping them at the last minute.

That means sensitivity analysis is more important than ever before. You need your numbers to be air-tight so you know exactly how high you can go and still be profitable, and avoid getting swept up in the emotion.

2) Construction costs

Construction might not be a third of the total cost anymore, but prices are still increasing massively.

Supply (and worker) shortages, increased demand from lockdown projects, former commuters looking to add work-from-home space have all driven up construction costs – seeing them increase 14.7% year on year.

There might be a return to normal over the next few months. Or these increased prices might become the new normal.

And there’s still a chance that construction could get even more expensive, like if lockdown restrictions (even in other countries) have a knock-on effect on the supply chain.

Only time will tell what will happen – but you need to show you’re ready for anything.

3) Interest rates

Interest rates have been at record lows for a long time. In fact, some people could have been developers for over a decade without ever experiencing a Bank of England base rate above 1%.

But these rock-bottom rates are hardly the norm. In fact, since 1975:

The mean (average) interest rate = 9.42%
The median (the middle value) interest rate = 10%
The highest interest rate = 17% (on 15 Nov 1979)

Interest rates will go up eventually. How much by? No one knows. But you need to plan for any situation – just like lenders will.

How to get more robust development appraisals – faster

There’s a lot that you need to consider in a development appraisal – from the small things you control, to the macro shifts that can rock the entire industry.

And if the past year has shown us anything, it’s how quickly things can change.

When each appraisal takes hours to complete, it can be a lot of effort to run different scenarios, just in case.

So instead, you need a way to update appraisal details in minutes – or even seconds – to prove to lenders that your project is viable – whatever happens.