We are architects and architecture is at the core of what we do but we are also fully aware that great architecture cannot be achieved unless projects are financially viable and that we understand the financial constraints of a development commission. In the current financial climate and with uncertainty over the future of the UK economy post Brexit it is even more imperative to be aware of the financial circumstances for any commission.
When it comes to property development, bricks and mortar have provided good returns for many people over the past couple of decades, whether they be professional property organisations or the more speculative small scale domestic developer. This has prompted many to rely on property as their pension or primary business outlet primarily due to the increases seen in house prices.
According to Nationwide Building Society, the average cost of a typical home in the UK in April 1991 was £53,677, in 2018 this has risen to £214,922 and in London this rise is even greater and a major cause of the current housing crisis.
For those new to property development there are obvious reasons for wanting to rely on property to fund your lifestyle in retirement or to create a new business. Property is a tangible asset; you can place your hands on it. This differs from stocks and shares, government and corporate bonds, and other investment funds which feel less real.
Property often appeals because people like the physical sense of ownership, rather than the notional ownership of an investment shown on a piece of paper or computer screen.
As architects WRAP believe that it’s important to understand the basic principals of what makes a property development viable so that we can assist our clients in making informed design decisions throughout the process.
Here we set out our architects understanding of some of the basic principals of achieving a successful property development.
Understanding context and local policies
It’s always important to establish the legislative and political setting of any potential development. Having an overview of the relevant local planning policies and political persuasions of the sitting councils is beneficial at the outset of any potential property development as it sits as one of the key strategic objectives when setting the brief for the development. Without careful consideration and awareness of local policies it will be difficult to fulfil the development potential and gain critical buy-in from legislative stakeholders.
What is Gross Development Value (GDV)?
To many property developers, GDV is one of the most important performance metrics that they will monitor throughout the course of a project as it helps to highlight the capital and rental value of their property or development project when all redevelopment works have been completed.
Its principal objective is to show if a profit has been, or will be made from the development project, and at what level.
In simple terms, gross development value is the estimated value that a property or new development would fetch on the open market if it were to be sold in the current economic climate.
How to Calculate Gross Development Value
Generally, if a near accurate valuation is to be created for a property development project or investment, then current property sales prices and recent transactions in the area for similar properties would be carefully analysed – this would provide a comparable estimate of what properties in the same area are selling for and therefore what you could expect your property to fetch.
For some property developers however, sales prices aren’t the biggest concern, instead, establishing rental values and recent local lettings of similar properties will be of primary interest. This is because on completion of their project they may want to let the property to tenants either on a residential or commercial basis.
This information can usually be obtained from local lettings agents or specialist firms of valuation surveyors.
This will help to establish how much the developer can expect to take in rent on a per month, per annum etc. basis.
Gross Development Value… a Key Performance Metric
It is the foundation to any property development project appraisal and is the one performance metric that impacts on all other major aspects, such as the acquisition cost of the building or land, the cost of the construction and enabling works; developers profit; and, more importantly, the likelihood of a successful financial outcome.
Residual Method of Appraisal
The method of development appraisal that incorporates the GDV calculation is the residual method of valuation and you can approach this in a couple of different ways.
The most common and most basic formula to estimate the general value is as follows:
Land = GDV – (Construction + Fees + Profit)
Land = Purchase price of land/property/site acquisition
GDV = Gross development value
Construction = Building and construction costs
Fees = Fees and transaction costs
Profit = Developers profit required
Calculating Property Developers Profit
An alternative form of the residual assessment can be used by reconfiguring the above formula to calculate the property developers profit:
Profit = GDV – (Construction + Fees + Land)
The second form of this formula is a more traditional way of assessing the financial viability of a property development project as it helps to highlight the developers appetite for profit level so an assessment can be made at the outset as to the projects viability.
What are WRAP doing
Having an understanding of the above is an important addition to any architects services if they are to succeed in the ever more saturated architecture market. At WRAP we believe that this kind of knowledge needs to be implemented more into architectural education so that new young architects are armed with not only great design thinking when they graduate but also great business acumen. To this end members of WRAP have been actively involved with promoting such thinking at the London School of Architecture.
WRAP have been commissioned by clients that fully understand the property development model but more recently WRAP have been assisting new clients to undertake their first steps into property development and the above knowledge has been well received and has assisted us in designing proposals that are viable and ultimately buildable.
Please see the following projects for examples of how our knowledge of understanding development potential has assisted some of our clients and feel free to get in touch to find out more.