Property, Credit crunch and Investment – Part II

Property, Credit crunch and Investment – Part II

This short analysis is prepared to assist a private sector house builder facing the credit crunch. In the next posts we provide strategies and insights in evaluating the development scheme and improving its performances…

The development scheme, realized with a traditional procurement route, consists of 10 storey residential building with retail space at the ground floor. It consists of a NIA of 1790 sqm, excluding 160 sqm of common areas and a total GIA of 2175 sqm. The retail NIA is 170 sqm (2 shops of 70 sqm and 120 sqm respectively) and the residential NIA is 1600 sqm. It has 235 sqm at floor 0 and 190 sqm at each subsequent floor (including stairs and lift). The remaining 40 sqm of the common areas are destined to the small terrace on top of the building. [COMM], [CPD]

Building Shape and Orientation

The building design shape is traditional and with two main views, North and South. The orientation has been choose to optimize costs and parking facilities.

Structural Design Concept

The total building height is 35 mt, we measure internally 3,60 mt for the retail and 2,80 mt for the residential. Traditionally built, external walls are painted.

Car Parking Bay Design Concept

It complies with the Council’s transportation policies and objectives; it is provided in the land around the property and it consists of 15 common car park bays.

Lettable Area

Retail 11%.

Residential 80%. Residential (as statement 106) 9%.


The payment for land, £ 100.000, will be deferred one year or at project’s end, whichever will occur sooner, with a monthly penalty of £ 1.000 in case of delay.


Short-term finance covering 80% of building costs has been granted on the following conditions:

6% year rate, 12 months interests only, Optional conversion to permanent loan, 20 years term.

Rental Rate and Units’ Price

Rents and values for residential and retail units have been estimated from comparables properties assuming contracts 5 yrs FRI for the shops and 5 yrs AST for the apartments. Two units will be rented at reduced price as required by the statement 106 (affordable housing).

Operational Expenses

All the costs have been estimated in £ 43.680 yearly.

Professional Fees and Development Team

Fees are estimated as a fixed percentage of the planned construction costs: 0,5% for planning, 2,5% for architect, 1,5% for project management and development direction, 1,5% for engineer. For simplicity included in construction costs. All the professionals were employed as external consultants.

Tax Aspects and Transaction Fees

The Council Tax for the developed property is in band 3 with a figure of £ 6.500. In the valuation we have assumed an Income tax of 33% and a transaction fee of 5% (paid totally by the buyer) but the tax burden depends mainly on the kind of transaction and legal nature of the parties in transaction. The customer agreed to not account for VAT in the valuation.

Construction Costs, Developer’s Profit and Contractor

Estimated in £ 1.000 per sqm. Developer’s profit has been estimated at 10% of construction costs, slightly reduced due to UK economic conditions. The developer opted for a simplified single stage selective tendering.

Timing and Phasing

Timing has been estimated in 6 months for planning, 12 months for construction and 6 months for letting. All the permissions have been collected in the estimated time. The construction time has been 14 months, delayed of two months because of issues with the removal of wild animals (with a sanction of £ 10.000) from the construction site, thus the sale/lease-up phase shifted of two months. The latter could be shortened to three months but lasted four because of post construction issues (leaks in 2 units, the delay caused a reduction in price of £ 10.000). A proper phasing and staging managed process was not adopted on developer’s assumption that the size of the project did not require it. [RED], [CPD]

Sales and Letting

All the activities have been outsourced to a chartered surveying firm partnered by a local commercial agent charging the developer a total commission of 5% of the transacted value.

· 6 residential units sold in month 16 for £ 594.000

· 6 residential units sold in month 17 for £ 582.000

· 6 residential units sold in month 18 for £ 570.000

· 2 residential units sold in month 19 for £ 110.000

· 2 commercial units sold in month 19 for £ 515.000

Risk Premium

We assume a positive but cautious medium term outlook, and we start from a 2,5% risk premium for residential/retail sector.

· The tenant risk class: unemployment is increasing -> +0,4%

· The lease risk class: slightly below average, upwards increases, 5+5 yrs -> +0,3%

· The building risk class: new -> +0,2%

· The location risk class: no planning restrictions, positive reclassification -> 0,14%

Summing up we have a real estate risk premium of 3,54%. [BAUM], [LING]

See the next part of the post.

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