A developmental appraisal is a type of valuation that estimates the future value of a property after renovation and redevelopment while considering the real estate market.
Unlike other types of valuations, a developmental appraisal is an approximation meant to provide useful information to investors about the feasibility of a project and possible profitability. While it is not expected to be exact, surveyors must be thorough, consolidating all foreseeable repair and renovation costs within their calculations to give investors the best insight.
This process is complex, with several challenges that must be overcome to ensure prompt delivery of an accurate final valuation report. In this study, we go through one such case of a recent residential developmental appraisal of a property with a multi-story Victorian terraced house, from the efforts of our surveyors to the issues and concerns.
The Client
Our client was part of an investor group looking to ascertain the true value of an isolated area of the property, specifically the lower ground floor hallway, which still belonged to the landlords – a third party in this case.
This investor was looking to avoid the pain of paying too much for this space, while the landlords, on the other hand, wanted to obtain the highest price possible so that they could sell with a profit.
However, our objective as surveyors was to determine the true market value for the property and respective lower ground floor hallway.
It is necessary to mention an important lesson learnt as we continue to discuss this case, which is obligations to third parties – the landlords in this case – falls outside the scope of our service as it was not stated or initially agreed upon. Furthermore, this issue forms part of the RICS RED BOOK guidelines.
The Property
XX Queen’s Gate Place
The property we were asked to appraise was the lower ground floor, i.e., the basement of a six-story house built sometime between the 1860s - 1900s. Known as XX Queen's Gate Place, this property was in prime central London, close to many local amenities and transport links, making it an ideal space to be reconverted into a flat. It had traditional construction, which included:
- A flat concrete felt roof
- Fair-faced solid brick walls approximately 280 mm thick
- Partly surfaced with stucco rendering
- Timber framed single glazed sliding sash windows
The area in question was once a school, comprising a hallway, associated class and staff rooms, separate boys and girls WCs, and three vault storage facilities. The construction features of this area are given below:
- Ceilings are of plasterboard construction, skim plastered and painted throughout
- Inside walls are of solid and stud work construction, skimmed plastered and painted
- Splashback tiling in the sanitary areas
- Access to the lower ground floor patio forecourt
Email from client
Floor plan of the basement
It is important to note that gathering accurate historical data about buildings as old as Queen's Gate Place can be challenging. While property information is available online, there can be discrepancies for such 100+-year-old properties. It is useful to reference multiple sources to ensure that all the information you provide in your valuation report is correct.
Interior of Vaults
Particulars of the Property
Referring to the Valuation Office Agency (VOA) floor areas and title register, we were able to obtain the following property details:
| Address | XX Queens Gate Place, London |
| Lower ground floor area | 84.5 m2 |
| Hallway floor area | 32 m2 |
| Leasehold | 999 years from XX June 1978 |
| Last sales information | £2,350,000 on XX April 2021 |
Table 1.1 particulars of the property
However, this area differs from the landlords’ floor area which equaled 247 m2 in total and 123.5m2 for the lower ground floor area. Ultimately the landlords’ floor areas were found to be the most accurate.
Surveyor Inspection
Once the terms of engagement were agreed upon and we were hired, our surveyor visited Queen's Gate Place on 1st March 2023 to do a complete inspection of the entire property, taking note of specific areas in the property that were damaged to determine the state of repair.
In his expertise, the general condition was to be as expected, given the age and construction of the property, without any significant defects.
However, our surveyor noted a few areas of concern, including:
- Water damage and dampness to some of the interior wall surfaces require complete repair during the redevelopment
- Stains were noted in isolated areas, particularly the front gutter, and flaky paint was noted to flank wall downpipes. General remedial attention with bituminous paint is recommended to ensure seal and prevent leaks.
- Electrical metres would need to be relocated for the property to become a truly residential space.
- Hairline cracks on some wall surfaces are particularly prominent between the kitchen and extension, but these are not structurally significant and can be filled.
Nevertheless, existing defects were of limited interest as full back-to-brick refurbishment was anticipated.
Interior rooms
Method of Valuation
Our surveyor used the guidelines dictated by the Appraisal and Valuation Manual: Practice Statements and Guidance Notes of the Royal Institution of Chartered Surveyors, also known as the Red Book.
Furthermore, our surveyor used a comparable method of valuation that took into account the following factors:
- Comparable sales evidence of similar properties, such as
- Location
- Appearance
- Size
- Condition
- Discount and premium allowances for an adjusted valuation range
- Construction costs as per our database and other reputable resources
- Present market conditions and growth
- Economic climate, such as:
- Supply chain issues following Brexit
- Inflation and increased energy costs
For this property, sale evidence showed strong market growth of 10% a year to date, according to local real estate agents, and this can be attributed to the lack of this type of property coming to market and fueling demand.
Therefore a development appraisal was necessary, as it serves as an objective visibility test to verify the feasibility of the development project to meet its costs, including planning, building costs, and financial obligations, whilst ultimately returning a profit to the developer.
Furthermore, marriage value also had to be determined because each party should profit from the proposed scheme. As defined by RICS: an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.
Issues with Comparable Evidence
One of the most challenging aspects of a developmental appraisal is defining properties that can be used as appropriate points of comparison. While there were other flats within this building, each was a different size, a common issue with older buildings converted into flats.
Consider the table of comparable evidence for the lower ground floor, which clearly shows the differences and size and date, which affect the final sales price:
| Address | Sales Price | Date | Source | Size | |
| XY Queen's Gate Place | £3,649,900* | May 2022 | On the lower ground floor | 64m2 | This property is significantly smaller than XX Queen's Gate |
| Flat X, YY Queen's Gate Place | £1,215,000 | April 2022 | On the third floor | 72.81m2 | This property is smaller and was sold almost a year ago |
| YX Queen's Gate Place | £3,100,000 | September 2021 | On the third and fourth floor | 184.29m2 | This property is 100 m away, XX Queen's Gate and larger, but closer to the whole demise. It was sold over a year ago. |
Table 1.2 Comparable Properties
*This sales price is an estimation considering it was valued at £775k/ £12109m2 nearly 10 years in May 2013, and according to ONS (Office for National Statistics), values have risen by around 48%, which equates to circa £1,148m/ £17,937m2. Furthermore, a valuation rate of £22485m2 was adopted for this appraisal due to high initial acquisition costs.
Similar issues were also seen for the valuation of the vaults. As there was no comparable vault onsite, other locations that were approximately 100 m away were used.
| Address | Sales Price | Completion Date | Source | Size | |
| XX & XY Stanhope Gardens, | £26,500/ £3,345m2 | September 2020 | First Floor | 7.92m2 | This storage unit is situated within the building and is larger than the one at XX Queen's Gate |
| XX & XY Stanhope Gardens | £27,500/ £3273m2 | September 2020 | Second Floor | 8.4m2 | This storage unit is also situated within the above building and is larger |
Table 1.3 Comparable Properties for Vaults
Not only are the sizes of the comparable values different, but the valuation per m2 is from nearly three years ago, thus not accounting for current market inflation.
According to our surveyor, the hallway value was derived from 40% of the marriage value, which is the uplift between the gross development value of the lower ground floor without its gross development cost, and his final developmental appraisal for XX Queen's Gate Place was £1,900,000, with the following break up:
- Hallway value offer £27,887
- Pay £61,000 maximum
- Build cost £2,500m2
- Developers profit of 10%
- Lower ground floor value £1,174,500
- Vault value each £15,000
- Total offer:£73,000
He also suggested that the lower ground floor should be sold above £1,900,000 to make a profit, and another viable option was to split the area into two flats, selling each for £1,100,000.
Noteworthy Challenges Along the Way
Apart from the issues highlighted above regarding the sales data and comparative evidence, we faced a few other challenges during this appraisal:
- Establishing hallway value as a market value of the property had to be ascertained first
- Conducting a development appraisal to establish the gross development value of the project and whether or not it was feasible
- Working the marriage value to ensure that all parties involved with scheme would receive their due share in terms of value
Furthermore, following initial appraisal, opposing parties wanted sensitivity analysis of the valuation based on different scenarios
| Property | Floor Area | Valuation |
| Lower ground floor appraisal x 1 flat | 84m2 | £1,900,000 |
| Lower ground floor and ground floor appraisal x 1 unit | 247m2 | £4,075,000 |
| Lower ground floor split into x 2 flats | 110m2 | £2,200,000 |
Table 1.4: Sensitivity Analysis of Valuation
Clarifying Investor's Requirements
Over the course of our correspondence with the investors and their agency, we learned that they had different floor areas apart from the lower ground floor hallway to be developed and the investors wanted to include the ground floor and the basement area in the developmental appraisal..
Additional space that was to be included in the development appraisal
Additional space that was to be included in the development appraisal
Yet our estimations only covered the lower ground floor, i.e., the basement. Naturally, this changes the size of the property, increasing it considerably and requiring a repeat visit to the valuation appraisal.
Furthermore, the additional space had to be recalculated, which altered the valuation unit rate of £/m2. A Quantum Allowance had to be made for the larger floor area such that the valuation rate of £/m2 for larger than average sized properties results in lower levels of value per unit area than normal sized properties. For instance, the average size of a flat is circa 65m2, whereas the change in data meant we were now dealing with 247m2.
This issue was handled by supplying all parties with valuation sensitivity analysis for the scheme based on different scenarios, namely, floor area sizes and the number of units, as mentioned in Table 1.4 above.
Multiple Valuations Confusion
Another concern that kept coming up was the difference between our valuations and that of other real estate agents who had also been contacted to give their appraisals. Interestingly, this concern is quite common as most people don't realise that estate agents have different calculation criteria than surveyors do regarding valuations as their objective is to win instructions, but ours, as valuers, is to remain impartial.
In addition, these agents generally rely on their previous sales experience and capabilities, with a degree of overestimation. RICS surveyors, on the other hand, must follow the Red Book guidance and pertinent sales evidence, which generally results in a true market value comparatively lower than an estate agent’s estimation. Ultimately, clients are confused, leading them to request additional valuation breakdowns to understand the discrepancies.
Resolving the Concerns
Email from client
In such situations where requirements change, we still focus on meeting our client's expectations to give them the most accurate valuation possible. Therefore we revised our valuation to address the investors' concerns and consider the entire 247m2 property.
It is important to remember that as the property size increases, there will be changes to the developmental appraisal, but it is not necessary that the change will be proportional. Here, construction and renovation costs greatly depend on the damage in the new area and the market prices at the time of appraisal.
Furthermore, given our current economic climate, where costs have been seen to change month by month, there can be considerable variations in valuations, and why we specify that our valuations are valid for a 3 – 6 month period.
Conclusion
Development appraisals are a complex form of property valuation and include elements of prediction and extrapolation. Surveyors must carefully research the sales information of the property in question and comparable properties in the area.
Furthermore, every corner of the property needs to be examined and studied, inside and out, to determine damaged areas that need to be rebuilt and the costs associated with that kind of repair.
Finally, communication is key. Not only does a surveyor need to know the exact specifics of the property that needs to be valued to the exact m2, but the client also needs to understand the basics of a surveyor's estimate and why it cannot be compared to a real estate agent.
Any miscommunication affects the final valuation and can result in multiple reports, which can add to an investor's confusion, especially if they do not fully understand the valuation process. It is important for a surveyor to be aware of these challenges and work to overcome them as quickly as they can so they can give their client accurate information without the extra work and revisions.
Recent Comments