【正文】 construction costs and fees, growth in rents and values ? Detailed projection of costs and revenue over the development period ? Once land price is known the cashflow can be used to monitor actual costs pared to the estimates and thus how the developer’s profit might be affected ? Examine viability in more detail and using more conventional financial concepts (NPV, IRR) ? Valuation method bees an appraisal tool... ? Developers ? Lenders (who may be financing the development) ? Investors (who may be acquiring the scheme on pletion) For whom? DCF procedure (source: GMCE) 1. Forecast expected cashflow 2. Determine TRR 3. Discount (1) at (2) to PV ? ?? ? ? ?? ? ? ?? ? ? ?? ?ttttrECFErECFErECFErECFEV0010102020010011...11 ????????? ??Where CFt = cashflow in period t V0 = value at t = 0, . present value E0 [r] = expected average multiperiod return (per period) at t = 0 (. now) t = exit period (. end of holding period) such that CFt includes capitalised exit value in addition to ine cashflow in that period Diff between standing investment and development cashflows ? Cashflow expenditure occurs over time ? Debt financing of construction almost universal ? Phased risk profile。 high during construction and maybe letting period and reduced once let Valuation appraisal... 39 Appraisal questions Prefinance: ? Discounting the cashflow (which includes land price) at the developer’s target rate, what is NPV/IRR? ? Discounting the cashflow (which doesn’t include land price) at the developer’s target rate, what is the NPV (. the land price but without finance costs)? Postfinance: ? Having discounted the cashflow (which includes land price) at the finance rate, what profit is left? ? With profit included as a lump sum in the cashflow and discounting at the finance rate, what is the land price (with finance costs)? (cf. residual) 40 Cash Flow Example ? 100% debt ? Nominal quarterly interest rate ? All building costs assumed to occur halfway through building period – Slightly different from assuming half costs over whole building period ? When finance rate and target rate are the same and scheme is 100% debt financed... – Comparable to residual ? Now spread costs more realistically… ? Additional assumptions, . forecasts – Cost inflation forecasts, broken down by land use – Value inflation forecasts, broken down by land use NB. NPV assumes 1st cash flow is period 1 be careful to block period ONE to end and then add on period Zero outside NPV calculation Choice of method... ? Residual method – valid and useful but has drawbacks ? Cash Flows: – can deal greater plexity, different cost and ine patterns and fluctuations: they are more flexible – can be used for land valuations and development appraisals – Enable valuers to be explicit about the breakdown of costs and revenue, providing a reasonably accurate assessment of moary flow over a specified time period 42