Category: Development

residual land value

ProVal LS update v20.03.02

ProVal LS update v20.03.02

SDS trainer Katherine Chapman talks you through some of the new features in the latest ProVal update, including the exciting new Appraisal Wizard for creating quick appraisals.

We have taken the opportunity to include two major new features in this version:

  • There are now shortcuts to create a new appraisal from a template and for recently opened appraisals, which are accessible from the ProVal Home Screen.
  • There is a new Appraisal Wizard for creating quick appraisals. To make best use of this Wizard your Unit Defaults should contain an entry for each type of unit you develop, e.g. 1-bed flat, 2-bed house, etc. and for each tenure that you build.

If you don’t yet have ProVal and would like to see more please call us or book a demo now.

If you are a customer and would like to do the latest update click here.

residual land value

How do you calculate residual land value?

How do you calculate residual land value, and how can it help housing associations win more land bids?

In economic terms, land is worth what someone will pay for it. As land is a limited resource, the person who can pay the most for a piece of land will win when competing against others. The process by which the land price is arrived at is a key difference between housing associations and private developers.

Private developers trade in land; housing associations are investors in property.  This fundamental difference means that they have different criteria for assessing land value, which sometimes favours the private developers, and sometimes the housing associations. 

Historically, the more agile nature of the private developer has usually been to their advantage as there is more freedom placed with the land buyer, plus, the assessment of the land value is typically more straightforward. Speed is not the only factor though. Vendors want to maximise the sale value, so the housing association sometimes has an advantage here, as the assessment method they use can lead to a higher land value than the private developer. Before we get into how such situations arise let’s take a look at the typical private developer valuation process.

Firstly, the private developer will research their market thoroughly and choose a mix of properties that have the highest value in the most marketable configuration, whilst considering planning constraints. They spend a lot of time on this part of the process. The outcome is the gross development value, or, the total sales receipts from selling those properties.

The next stage is to work out how much it will cost to build the properties. These costs can be broadly categorised into works costs, technical fees, abnormals, marketing, etc. Every cost is analysed to make sure nothing is spent that doesn’t need to be. In addition to the actual costs the developer will make an allowance for an acceptable profit margin, usually around 20%, but varying according to the risk.

gross margin

The residual land value is what’s leftover once you deduct the costs/profit margin from the gross development value.  For a private developer, the maths is easy: sales income less expenditure equals residual land value. Once the properties are sold then they move on to the next development.

For a housing association there is another key consideration – many of the properties will be rented and/or shared ownership. So, the future rental income (and possible staircasing) needs to be taken into account, as does grant from any funding bodies.

The way we value future incomes and costs is by using the concept of net present value (NPV).  This is the process of assessing the future value of the net rent as if you had received all the income on day one. A housing association can, therefore, convert 30+ years of future net rental income into a single value in today’s money.  The NPV of the net rent can be combined with grant income and initial sales tranche (if shared ownership) to produce a proxy gross development value (“GDV”):

Gross Development Value = NPV of Net Rent + Grant + Initial Sales Tranche

From this point onward the maths is the same as for the private developer; costs are subtracted from GDV to establish the residual land value:

Residual Land Value = Gross Development Value – Build Costs – Professional Fees – Interest

So how do the differing approaches make some sites more suited to private development and some to social development? The answer is that the sites with the greatest potential sales value will usually look better in the private model. It’s the sites that would command the lower house prices that will generally look better to the housing associations, because they can take into account the future rental stream, plus they may also receive grant for such sites. Luckily for the private developers, these future income streams are capped, so if there is sufficiently high value in outright sales, it will exceed the value of the future income.

The science on this is straightforward, the art is in determining the best possible mix of units for a site. Getting this mix right is the domain of the land buyer, not the architect, and is the key to maximising the residual land value, which will in turn give the housing association the best chance of a successful bid. 

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Phil Shelton

Phil Shelton

Phil Shelton is the Chief Executive at SDS. He has extensive experience in assisting housing providers to deliver their development programmes through software development, training, consultancy and reporting, at both strategic/board and operational levels. He has an MBA from Cranfield School of Management and is a member of the Institute of Directors and the Learning and Performance Institute. He is a volunteer consultant with the Cranfield Trust, which provides pro bono services to charities across the UK. He has been previously knighted, although sadly only in the Principality of Sealand (as a birthday present), rather than the UK!

More From SDS

A day in the life of a viability workshop

If you’ve ever wondered what it would be like to attend our viability workshop, carry on reading as we take you through what a typical day participating is like.

The workshop takes you through the full range of appraisal dynamics – not just the financial – that need to be considered when you’re assessing a housing scheme. Below is an account of what happened at a session held at a well-known affordable housing provider.

The day starts with a group of enthusiastic attendees from Development, Asset, Planning and Regeneration departments, all eager to take part in the flipchart discussions, games and training modules that were planned for the dayBy the end of the day, a host of topics and activities had been covered, with lively discussions on both affordable and private housing.

To start, the group are split into two teams ready for the first task:

1. Development Table Task

Designed to find out what development actually means to them, both competitive and lively teams had a good range of knowledge and terminology and were confident in expressing ideas.

2. The Tale of Two Cashflows and introducing Whitney Houston

Moving onto the good old flipchart, referencing affordable housing development viability as ‘The Tale of Two Cashflows’ was very well received and led to discussions about NPV and IRR. 

Why Whitney Houston??

The answer – ‘One Moment in Time’, which focused on how results from different points in time can be compared on the same basis (apples with apples). The ‘Business Plan Basket’ diagram highlighted the wider picture of multiple projects that make up a viable programme, combined with the responsibilities of the Board/Cabinet, leading to discussions about the importance of the Development Strategy.

3. ProVal Place - Phase 1

This sample site proved valuable for new and existing Proval users.  The teams discussed 14 mixed tenure units using the development input from the ‘Tale of Two Cashflows’ diagram, with useful hints and tips given on quick scheme input.

4. Development Risk

The teams demonstrated a good level of awareness on a range of potential development risks and appreciated how a ‘Risk Matrix’ is important in gauging and managing risk through appropriate actions and controls.

5. The Identity Game

This brought out the competitive edge in both teams and highlighted the importance of good branding, which in turn lead to discussions on marketing by housebuilders and the future profile of both local authorities and housing associations as they engage in more commercial tenures.

6. Private Development

Here we discussed why private housebuilders have a different approach to development. We refer to private developers as ‘Traders’ as they deal with short term cashflow, whilst local authorities and housing associations are ‘Investors’, engaging in long term cash flow and ultimately long term reputation. However, these distinctions are becoming subtler as we see wider ranges of tenures being engaged by both sides.

7. ProVal Place - Phase 2 & 3

By using some observations and ideas raised in ProVal Place 1, the potential private sector areas of the scheme were reviewed and suggestions made on how a private developer may reassess opportunities and take the scheme forward.

8. The Gearing Trap

Here we evaluated the importance of gaining maximum sales on the high risk area of private development, with links to profitability and the opportunity to maximise land offers. The gearing effect of a small change in sales value having a disproportionate effect on the residual land price or profit margin was demonstrated and discussed.

9. Mix Optimisation

The concept of plot density for different house types and understanding profitability per type resulted in some great discussions. This, in turn, led to an evaluation of ‘Mix Optimisation’ for a one-acre site and a range of residual land offers to demonstrate the benefits of early evaluation and understanding house types and their costs.

Participants gain a wider appreciation of Development Strategy, Viability, the role of the Business Plan and Board/Cabinet, and the importance of understanding development risk.  

To book your own workshop email alison@s-d-s.co.uk or call 01483 27844

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Alison Shur

Alison Shur

Ali has worked in the social housing sector for over 10 years, gaining experience in ensuring that local authorities and housing associations have the right tools and support they need to achieve their development goals. As a seasoned marketer and project manager she is passionate about advancing the social housing agenda, finding out how SDS can match their expertise to the needs of the sector.

Outside of the office, Ali spends her free time walking her dog, Chewie, and can otherwise be found cutting the rug on a Latin dancefloor somewhere!

More From SDS

5 tips for appraising a scheme

Appraising a scheme is a vital first step in the development process, but before you pass a scheme make sure you have considered these 5 tips, to set you up for success. Some may seem obvious but you’d be surprised how often they are overlooked.

1. Meets the Development Strategy

The scheme must also meet the strategy which has been outlined. Have too many changes been made in order to make the scheme viable? If so, it may no longer meet the objectives originally set

2. Is the necessary grant/subsidy available

So your scheme meets the strategy and generates the best NPV outcome, but can it be financed?

3. No adverse affects on the business plan

All appraisals should be in line with the organisation’s objectives and help achieve the goals, whether these are financial, social or strategic.

4. Carries acceptable risk

Like with anything the rewards should always exceed the risks. Therefore the risks must be identified, managed and contingencies put in place.

5. Has an acceptable cost/value ratio

The cost of the scheme and its implementation including resources must not outweigh the benefits. Therefore all costs should be justifiable.

Submitting the best schemes for approval is important. As a solid appraisal can help mitigate some of the risks involved with developing. SDS ProVal is the ultimate financial viability tool that ensures a profitable and successful scheme.

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Laura Matthews

Laura Matthews

Laura is SDS Marketing Manager specialising in digital, social and content marketing. Her passion for helping people in all aspects of marketing flows through in the expert industry coverage she provides. Her work involves overseeing all aspects of SDS marketing including online, offline and events. Promoting; development appraisal, land valuation, development viability amongst many other areas.

Connect with Laura on LinkedIn www.linkedin.com/in/laura-matthews-sds/ or follow on Twitter @LauraSDS.

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How an accurate appraisal helps mitigate risk

Providing the best housing with the lowest risk requires a crystal ball, but since those don’t exist what is our next best option? The answer is – A robust appraisal.

The key focus in appraising potential schemes is to establish if it is financially viable or not.

The financial appraisal is integral to the development process. Business decisions must be made on accurate data and recognised viability standards with key performance indicators such as NPV, IRR, or payback year. Ideally, viability by tenure and unit will be an output allowing development professionals to optimise the mix of tenures and units in their schemes.

NPV is possibly the most important metric used to demonstrate whether long term income will pay for the project. Using appraisal software like ProVal gives you the flexibility to try different tenure mixes to determine the most suitable mix, whether this is for social need or profit. This can be viewed by tenure or unit and will make several thousand calculations without a delay as you focus on the key metric. Including the ability to forecast the repayment year for the loan.

ProVal can be utilised to test the sensitivity (“what if” calculations) to understand the wider impact of changes in cost and value parameters affecting the viability of schemes. Scenarios can be put against the project for example; decrease in sales value, building costs, changes in the market, voids, bad debts or delays in construction. The risk of each of these and their impact on the project can then be weighed and decisions/contingencies can be made.

The confidence a robust accurate appraisal gives enables better value for money, more confidence in bidding for land and the trust the project will meet social and financial outcomes.

By not completing a thorough financial appraisal of your proposed development you are leaving yourself vulnerable to many risks, the biggest being the project will end up in a loss and never pay for itself or meet the need. Luckily there is software specifically designed for the social housing industry which can be utilised to help mitigate some of the development risks.

ProVal, used by 250 firms around the UK, is widely respected as the industry standard and market leader for viability. Many of our clients find it invaluable for submitting bids to the HCA, and it made light work of re-assessing NPV after the recent rent-reduction announcement. ProVal will indicate if a scheme is viable; can be made more efficient, or indeed if the proposed financial input can be best spent on a different scheme.

For more information or to arrange a demonstration of ProVal contact us on 01483 278444 or email sales@s-d-s.co.uk

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Laura Matthews

Laura Matthews

Laura is SDS Marketing Manager specialising in digital, social and content marketing. Her passion for helping people in all aspects of marketing flows through in the expert industry coverage she provides. Her work involves overseeing all aspects of SDS marketing including online, offline and events. Promoting; development appraisal, land valuation, development viability amongst many other areas.

Connect with Laura on LinkedIn www.linkedin.com/in/laura-matthews-sds/ or follow on Twitter @LauraSDS.

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home building

Councils considering home building

Major seminar for councils considering home building

Major seminar for councils considering home building We were thrilled to welcome 24 housing’s journalist Bill Tanner to our specialist Local Authority seminar. The event collated emerging evidence of what it takes to get councils building homes again – and how.

Home Building

A major seminar in London (Feb 28th) looks at the future for councils considering home building – bringing together emerging evidence of the case for such an approach.

Key sector speakers will explore issues including local housing companies, HRA new build, use of Right to Buy receipts, and shared ownership.

The seminar is set against the budget announcement of £1bn added borrowing for HRA new build in high demand areas, and a newly released report on investment in the Private Rented Sector (PRS) that opened channels for councils, developers and investors to work alongside each other on next generation of private rented housing.

With a stated commitment to raise housebuilding levels to 300,000 a year, chancellor Philip Hammond used his autumn budget to increase the borrowing cap for councils in some areas to £1bn.

In his budget in November, Hammond said councils in high need of more housebuilding could bid for an increase in the amount they could borrow to fund construction, up to a total of £1bn.

Though the Local Government Association welcomed acknowledgement of the problems facing councils, it said the increase did not go far enough.

The Commons treasury select committee has already said the borrowing cap restricts the number of homes that local authorities could deliver, and to achieve the government target of 300,000 new homes per year, the cap should be abolished.

More than 217,000 new homes were built across the UK in the year to April 2017 – 15% more than in the previous year but well short of that 300,000 target.

The Housing and Finance Institute has also warned that ministers must do more to meet their annual target for new homes built, making three recommendations to boost numbers – one of which is to help public and private groups join up to finance new building.

It also recommends the government make housing a specific national infrastructure priority and focus more efforts on flexible and cheaper modular methods of construction.

Research by the New Local Government Network (NLGN) reveals affordable housing efforts would benefit from a reconsideration of the borrowing cap.

To NLGN, an increased capacity to borrow, among other measures, would give local authorities the autonomy to build housing where it is needed.

The research, commissioned by the National Housing Federation, outlines the collaboration between local government and housing associations, who are committed to providing affordable housing in line with current demand.

NLGN director, Adam Lent, said: “As the country faces the biggest housing crisis in a generation, local authorities are best placed to determine local demand in housing need and meet it.

“As such the government should remove the barriers that prevents both housing associations and councils collaborating and innovating together.”

The NLGN report identifies practical models that could capitalise on such a policy change, with further recommendations that would see an increase in affordable housing stock.

While such changes could make an immediate difference, the report further highlights the need to develop a housing strategy beyond 2020, which looks beyond home-ownership to all types of tenure.

The NLGN also recommended that:

  • Local leaders, such as elected mayors, more proactively assemble and package up publicly-owned sites in ‘bundles’ for development across a city or area, with the view to drive quality development in areas which have traditionally suffered from low quality housing
  • The government continues to implement the proposed rent policy (and increase) of CPI + 1% for social and affordable rents from 2020, as per the initial rent settlement, to allow housing associations and councils to invest in new homes with confidence
  • The government provides a clear and sustainable funding solution to supported housing as a matter of urgency, with a supported housing allowance set at a higher level than the Local Housing Allowance, and sheltered accommodation removed from the proposed policy changes.

Research for the report was carried out over June-August last year based on 171 responses from councils and 142 responses from housing associations.

Responses were representative by region, type of council – excepting upper tier counties, which are not responsible for housing – and whether councils are stock-retaining or not.

A report recently released by Sigma Capital highlighted the need for dedicated vehicles to now accelerate the delivery of private rented family housing.

Some of the UK’s leading institutions have already invested in Sigma’s The PRS REIT plc – including Aviva, AXA, Hendersons, Deutsche Bank and Homes England.

The report; ‘How local authorities can foster investment by corporate landlords in new private rental housing’, prepared by university professors, Tony Crook and Peter A. Kemp, pitched councils as ideally placed to create a modern, private rental offering by working closely with investors and developers.

This report pitched the potential for residential property companies to bring development expertise and development finance to working with local authorities, which can use planning powers, land banks and long-term pension funding to cut housing shortages.

The report makes the case for  a ‘more modern’ form of private landlordism that involves corporate owners operating on a substantial scale and investing long-term in purpose designed and built homes let on long-term tenancies – but meeting the needs of both short and long-term tenants alike.

To the report, many of the barriers that once prevented the emergence of this corporate sector have now been removed.

The long-term income returns that can be earned from an efficiently constructed and managed newly built sector are attractive to many developers and their funders, including pension and life funds because the long-term returns match their liabilities.

Most of the tax and legal impediments to the emergence of this corporately owned PRS sector have been largely removed and the government has set up a special fund to help ‘kick start’ new building for the PRS.

But potential investors cannot find the large scale well managed portfolios  they need to make their investments work.

Nor do they want to take on the tasks and risks of creating these new developments themselves.

What they want instead is to be able to acquire newly built and fully let portfolios producing the income returns they want.

The report pitches a partnership take on development risk – something it says residential property companies and councils are well placed to do.

Working together, councils and property companies are said to have the opportunity to create a portfolio of newly built PRS accomodation, meeting a wide range of housing needs – helping councils meet their strategic housing requirements and assist households who are unable to buy their home and are not a priority for social rented housing.

A new-build PRS sector constructed through such partnerships is said to reduce overall housing shortages and subsequently ease increases in house prices, rents and housing benefit payments.

By adding to the housing stock in this way, councils are seen as better placed to remove the poorest PRS properties owned by rogue landlords because their tenants will have somewhere else – higher quality, more secure and better managed – in which to live.

 

The original article can be found at http://www.24housing.co.uk/news/major-seminar-for-councils-considering-home-building/

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Laura Matthews

Laura Matthews

Laura is SDS Marketing Manager specialising in digital, social and content marketing. Her passion for helping people in all aspects of marketing flows through in the expert industry coverage she provides. Her work involves overseeing all aspects of SDS marketing including online, offline and events. Promoting; development appraisal, land valuation, development viability amongst many other areas.

Connect with Laura on LinkedIn www.linkedin.com/in/laura-matthews-sds/ or follow on Twitter @LauraSDS.

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Housing development

What to look out for in development

So you want to develop? What to look out for...

If you’re a Local Authority in the early stages of re-engaging with housing development activity, then you know you’re not alone. At least half of UK authorities have already started, or are actively pursuing, delivering their own homes again after changes in Government policy.

There are questions you need to consider before developing;

  • Why do we want to do it? This should never be ‘because we can’ or ‘because everyone else is doing it’ or ‘because we’ve been told we must’
  • What targets do you have to meet? What are these and will developing help you meet them?

How you answer the whys should have a major influence on how you set about developing as it’s far too risky and complex as there are so many things that could go wrong if you don’t have the right expertise at your disposal.  

Make sure you understand what’s happening in your local housing market and how that fits in with national trends.Consider what might happen if you just left it to the market.

Want to develop?

What are the problems you’re trying to solve?  

Perhaps you need to generate some income, perhaps you have a growing homelessness problem. It could be that you have a proven need for market rental homes in your area but a smaller than average private rental sector (PRS). On the other hand, you might have plenty of shared ownership properties coming through S.106 Agreements, but not enough Social or Affordable Rent to meet the needs of your waiting list. Others have little or no affordable housing being built, either because of viability issues or stalled sites.

Are there any types of activity that you definitely would not do? Why not?

For example, under what circumstances, if any, might you consider a compulsory purchase? Perhaps there’s a decent sized site within your boundaries that is zoned for housing or even has an existing consent, but a developer is sitting on it. Are there any circumstances in which you’d consider attempting to force their hand?

The chances are, you’re facing a combination of issues that you’d like to tackle and there are probably a variety of solutions open to you. It could be that each problem has a choice of solutions and delivery mechanisms. At the same time, it’s also probable that your resources are limited and you’ll need to prioritise. Don’t be tempted to have a go at everything in a scattergun approach, as you’re much less likely to succeed without organised focus.

Look at your local metrics and itemise your most pressing issues. Then prioritise those issues in order to generate clarity about how you’re going to employ your resources to best effect. Progress a reasoned strategy and get the widest possible buy-in to it before you commence any development activity in earnest. Don’t be tempted to skip this part, or wait until later, or let it evolve at random. It’s too easy to get side-tracked into pet projects that eat your resources without delivering what you most need.

Are you a leader or a follower?

There are always new ways to do things, and only some of them are better. Some of your peers have already been through this process ahead of you and will be prepared to share what they’ve got right and wrong so far. Be prepared to do some myth-busting too. You may be working with senior colleagues or local politicians who aren’t up-to-date with policy and legislation changes and may need updating on what and how they can develop. You could be proposing to spend big money, and it’s important that the carefully calculated and sensitivity-tested investment rewards are presented alongside the proposals to take out a large Public Works Loan.

Development

Your circumstances will differ depending on whether you’ve already done a stock transfer, you have an Arms Length Management Organisation (ALMO) or you still own and manage your own housing stock. How you go about setting up will be informed in part by this. If you don’t want your new stock to be eroded through Right to Buy, then you will want any new homes to be owned by a separate entity to the Council. However, the Council may be the major investor in the new homes so will need to have sufficient control to protect that investment, including ensuring good quality; cost-effective management and maintenance are in place. Once you have a clear idea of what you want to deliver and why you’ll need the services of an experienced legal advisor to decide on the most appropriate set-up mechanisms.

You or your delivery partners should invest in an industry-standard financial appraisal system (such as SDS ProVal or SDS LandVal software products and training) and make sure your decision-makers have a good grasp of what they’re looking at when you’re presenting financial summaries. A financial appraisal will allow you to model a variety of potential changes (such as build costs or rental values) and assess their impact so you can make informed decisions. It will also allow you to look at the development period and long-term cash flow, and build in whole life costings. You may be happy to invest more capital in order to deliver lower running costs for your occupiers, and it would make a lot of sense to invest up-front in exchange for lower long-term maintenance liabilities.

Ask yourselves what your Authority’s risk appetite is. How much can you afford to speculate? Just as you might have cautious colleagues to convince, it’s just as possible that you will have a few more ‘gung-ho’ collaborators who might get a bit carried away without fully understanding all of the implications. Having access to the right expertise is essential in order to ensure a sufficiently robust review and challenging approach. Make sure you rapidly acquire or have good access to people with expertise who can assist you in guiding the process at an officer and member level.

You need some proper procedures in place tailored to this type of activity, and these need to mesh with your Financial Regulations and Standing Orders. You could be committing substantial sums as custodians of public money, so structure an appropriate decision-making hierarchy. SDS offers a Housing Development Manual as an annual subscription service which has been specifically put together for Local Authorities. This gives you lots of information and supporting documents to guide you through the development process. It will also help less experienced staff gain a better understanding of what needs to be done and considered through the life of a project.

Working in partnership can be a great way of combining your needs and strategy with the skills and capacity of others. This could be through a Development Agency arrangement with a locally active Registered Provider (housing association), or some form of Joint Venture.  

If you are externally resourcing the bulk of your delivery efforts, then you should aim to be a ‘good client’. Of course, you will be open to advice and guidance, but you need to have formed the clearest possible idea of what you want and be able to convey that to your partner organisation(s). In the early days, you won’t have your own housing specification or ‘Employer’s Requirements’. You may be comfortable to adopt those of your partner, but make sure you know what you’re getting. It can be excessively expensive to change items or layouts mid-building contract. Make sure your housing and maintenance colleagues have been sufficiently involved at the early stages so that any particular requirements they have been incorporated up-front. Equally, those colleagues need to understand the consequences of intransigence. It is wise to incorporate a ‘design freeze’ stage into your projects and have a named project sponsor or ‘lead client’ who has the final say.

Depending on your strategy, you may be inviting approaches from developers to work with you to bring the delivery forward of new homes on sites. This can have multiple benefits for your Authority. As well as getting homes delivered more quickly, construction is great for the economy and offers the opportunity to incorporate local labour requirements and apprenticeship opportunities. Once word gets out that you’re keen to work with builders and developers, you should be keenly aware of what you bring to the party and make sure your negotiation fairly recognises the contribution of all parties. Once again, you will need experienced people acting for you in this type of negotiation.

Perhaps a developer controls some housing development land but is holding off on commencing construction because they don’t anticipate sufficient consumer demand.  You could become a guaranteed purchaser for an agreed proportion of the homes up-front, which de-risks a chunk of the developer’s outlay, making the scheme much less risky for them to proceed with. As part of that deal, you might agree to make stage payments during the construction period, further reducing the developer’s interest costs. They will also avoid incurring marketing costs or sales incentives on the homes you’re buying, and the risk of sales delays. In this case, it is best to negotiate your purchase price from a ‘cost plus’ rather than ‘market value discount’ basis. This could be an open-book calculation.

There might be a piece of land with high up-front infrastructure costs that are stalling progress. In this case, you might offer a loan to the developer that only becomes repayable once the scheme reaches a sales stage. In this case, your contribution has created an opportunity for the developer to bring forward profits and perhaps grow their company more quickly that than they could have otherwise done. Your loan rate is likely to be significantly lower than standard bank lending rates for this type of activity. As well as realising a fair return for your investment, you will also need to carry out appropriate due diligence to satisfy yourself that the proposal is sound and you have full confidence in the developer’s capacity to deliver.

StockProfiler

Another way of tackling a site that has stalled due to infrastructure costs would acquire an interest in it and deliver all of that infrastructure yourselves. You could then sell it as serviced plots to developers, which may also provide an opportunity to break the site up into smaller sections. This could have the added benefit of creating opportunities for smaller local developers, and give you more control over the speed of delivery.

You have various sources of funding open to you (Homes England, Public Works Loans, Local Enterprise Partnerships) and they will all come with their own set of funding conditions that it’s important you keep track of and comply with.  

The Homes and Communities Agency administer a wide variety of funding streams as grants or loans. They have a large document online called the Capital Funding Guide, as well as a fairly rigorous annual audit process. Even experienced Registered Providers can fall foul of these requirements from time to time, and these sorts of mistakes can have serious consequences (including having to repay grants or access to future funding being withdrawn). In order to meet the relevant funding requirements, there really is no substitute for experience, and this applies from the very start to the very end of the development process.

You may also be able to fund projects through partnership or sale and lease-back arrangements with other investors such as pension companies or hedge funds. There are already schemes in management that have been delivered through these routes, but it is by no means a mature market. If you are considering these types of options, make sure you carry out a thorough analysis of the deal. These options can have a lot of appeal. The development process could be entirely delivered outside of your organisation, avoiding the need for you to carry internal expertise. You may be offered full nomination rights to the homes provided for, say, 40 years and then be able to acquire them outright for next to nothing at the end of that period. The flipside of this is that you have to commit to paying an inflation-proofed rent for those 40 years, and you will have to take a view on what is likely to happen to rental rates relative to overall inflation rates. If the rents you can collect should ever fall below the rent you have to pay, how will you mitigate for the difference?

There’s a lot of interest in PRS (Private rented sector) schemes at the moment, particularly driven by a growing acceptance that many ‘Millennials’ will never be able to afford homeownership and will be ‘Generation Rent’ for much or all of their lives. This may well be right, but in the shorter term, thought should be given to any and all medium to large-scale PRS proposals. There’s a world of difference between a block of 80PRS flats in a city centre near a transport hub, and a block of 25 PRS flats in a smaller town several miles from the bus or train station. You may need to phase lettings to cope with the workload, allow for the practicalities of multiple move-ins and not crash your own local rental market. Will you use probationary tenancies at the same time as a promising long-term security of tenure? How will you deliver cost-effective management and maintenance?

There are some hidden dilemmas in all of this. House prices are widely unaffordable due to lack of new supply. Therefore it follows that a big boost in supply should improve affordability. It must be remembered that affordability is the other side of the same coin as house values and rent levels. It can be argued that affordability is such a chasm that we are a very long way away from reaching an impasse. However, if you were to be wildly successful in your area, you should at least consider any potential impacts on your future income stream, and on the wealthier members of your local electorate.

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Laura Matthews

Laura Matthews

Laura is SDS Marketing Manager specialising in digital, social and content marketing. Her passion for helping people in all aspects of marketing flows through in the expert industry coverage she provides. Her work involves overseeing all aspects of SDS marketing including online, offline and events. Promoting; development appraisal, land valuation, development viability amongst many other areas.

Connect with Laura on LinkedIn www.linkedin.com/in/laura-matthews-sds/ or follow on Twitter @LauraSDS.

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Getting to grips with NPV

NPV is an acronym for Net Present Value, which is a method of assessing the value of money received in the future. This blog will help you understand it.

“The value of money changes over time”

We all know about inflation. Currently in the UK inflation is roughly 2% per year. This means that a grocery trolley at a supermarket may cost £100 now, but come this time next year that same trolley will cost £102. Things generally get more expensive over time.

Another way of looking at it is that next year’s £102 is only worth £100 today.

Once you grasp the concept that money received in the future has a lower value today, you’re done!

Let’s explore this further.

The concept applies to both income and expenditure, assets and liabilities. Arithmetically, you may choose to think of income as positive numbers and expenses as negative numbers, or the other way round. It doesn’t matter. Both positive and negative numbers shrink when you adjust backwards in time, and grow when you adjust forward in time.

How do you adjust for time?

This is a relatively complicated mathematical formula, which is why we let our computer models do this for us. If you want to do it yourself, you will need a business / scientific / engineering calculator (not a standard office calculator) or a spreadsheet.

Now don’t be frightened by this formula, because you don’t need to remember it, and if you do manage to remember it, it won’t greatly increase your understanding of NPV, but we give it here just for your amusement if nothing else…

NPV results by unit, tenure and whole scheme

Going backwards in time:

PV = FV / ( (1 + APR) ^ (t) )

 In this formula:

PV is the Present Value

FV is the Future Value, at some time in the future

APR is the Annual Percentage Rate, where a value of 0.05 means 5% and t is the number of years from today of the Future Value.

Going forwards in time:

FV = PV * ( ( 1 + APR) ^ (t) )

 So where does the “Net” come into Net Present Value then?

The Present Value (PV) is a single value at a point in time. In our supermarket example above, the Present Value of next year’s receipt of £102 is £100. The Net Present Value (NPV) is the sum of a series of Present Values, for example, rental income over five years. In that example, the NPV would be the sum of the Present Values for years 1, 2, 3, 4 and 5.

Rental income example

Imagine you are building a house to rent and you want to work out whether the rental income that you are going to receive during the first 30 years is worth more than the cost of building the house. Assuming the rent will be paid on a monthly basis, that is 30 years x 12 months = 360 individual payments.

Let’s say you start renting out your new house on 1 January 2020. Initially, the rent is £500 per month (paid at the end of the month) and every subsequent year you inflate the rent by 3% (i.e. CPI+1%). Therefore, in the second year the rent will be £515 per month and in the third year it will be £530.45 and so on.

To simplify things we will work with 30 calculations; each calculation representing one year of income. So we are assuming, for this example, that all 12 monthly payments in the year are received in one lump at the end of the year, i.e. 31 December 2020.

We are further assuming that you are borrowing money to build this house at 6% APR and so that is the rate at which we will discount your future annual incomes.

The table on the following page illustrates the figures in each year:

YearMonthly rentAnnual rentPresent Value
2020500.006,0005,660
2021515.006,1805,500
2022530.456,3655,344
..etc....etc....etc....etc..
20481,143.9613,7272,533
20491,178.2814,1392,461
Total 285,452115,478

The first year’s rental income in 2020 is £6,000 (12 x £500), which is worth £5,660 after discounting. In the second year, the annual income is now £6,180 (because of the 3% rent inflation) but discounted back at 6% APR it is only worth £5,500 today.

And so on over the next 30 years.

When we add up all these present values over 30 years, the NPV of the rental income is £115,478.

So what does this mean?

Well, assuming that you can borrow £115,478 at 6% APR over 30 years (and ignoring the impact of expenses), you will pay off your loan completely over that time and break even.  

But at the end of this period, the house is still yours and you continue to receive rental income if you decide not to sell it.

Discount rate

The Discount Rate is a percentage rate that is used to reduce future income. It is made up of two key factors: the interest rate (APR) and the level of risk. In the social housing sector, housing development is considered low risk (as associations receive grant and are regulated), so the discount rate is typically the same as the borrowing rate, hence why we have used APR in the example above. The difference between a traditional NPV Discount Rate and an APR is very small and very technical.

Generally the higher the perceived risk in a scheme, the higher the APR used in the NPV calculations. If this housing project was in an earthquake zone, you may want to considerably raise the rate of discount. If there is a mild risk of flooding or subsidence, you may wish to just add a percentage point or two to the discount rate. As you increase the discount rate, the NPV will be lowered.

Alternatively, you could take out insurance against these risks and deduct the cost of that insurance from the NPV.

What about voids and bad debts?

When tenants move out, they sometimes leave without paying the last month’s (or more!) rent. Additionally, the property may remain empty for a while before new tenants move in. Either way, this leaves you with a gap in the anticipated rental income stream.

Even though this is a risk factor, the general approach to this problem is not to increase the discount APR, but to reduce the rent amount instead.

For social housing, the norm is to reduce the rent by 2 to 3%, depending on tenure. This does not mean reducing the actual rent charged to the tenant by 3 to 4%, just assuming that over 30 years we will lose between 2 and 3% of rent due to periods of no occupancy, and/or unrecoverable rent arrears. A 3% allowance translates into a £3,464 drop in NPV using the earlier example of £500 per month rent inflating at 3% per year for 30 years and discounted at 6% APR.

Voids and bad debts are often modelled at a higher rate for private market rented schemes. It is common to exclude it for shared ownership schemes (as there won’t be a void period between purchasers); however, it is prudent to allow a percentage for bad debt/arrears.

Pulling this all together

NPV is a methodology to calculate the financial return on investment for a project.  NPV is the total future income of your project discounted to today’s values and then compared to the initial investment (i.e. the total cost of the scheme less any initial sales/grant).  A project is financially worthwhile if the NPV of the income is greater than the investment value. If the NPV is negative then the scheme will lose the amount of money represented by the shortfall.

When comparing the NPV of two assets, like a house, the asset with the higher NPV is more valuable in financial terms. Housing Associations can optimise their portfolio by divesting existing properties with negative NPVs and investing in building properties with positive NPVs. This will improve the sustainability of the portfolio over the longer term.

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Laura Matthews

Laura Matthews

Laura is SDS Marketing Manager specialising in digital, social and content marketing. Her passion for helping people in all aspects of marketing flows through in the expert industry coverage she provides. Her work involves overseeing all aspects of SDS marketing including online, offline and events. Promoting; development appraisal, land valuation, development viability amongst many other areas.

Connect with Laura on LinkedIn www.linkedin.com/in/laura-matthews-sds/ or follow on Twitter @LauraSDS.

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Data

Using data to future proof your homes

Using data to understand energy performance and future proof your homes

‘This Government is determined to leave our natural environment in a better condition than we found it. Clean growth is not an option, but a duty we owe to the next generation, and economic growth has to go hand-in-hand with greater protection for our forests and beaches, clean air and places of outstanding natural beauty.’

Theresa May, Prime Minister

Future Proof Your Home

This Strategy sets out a comprehensive set of policies and proposals that aim to accelerate the pace of “clean growth”. The Government’s approach is set regarding the context of the UK’s legal requirements under the Climate Change Act, the UK’s approach to reducing emissions has two guiding objectives:

  • To meet our domestic commitments at the lowest possible net cost to UK taxpayers, consumers and businesses
  • To maximise the social and economic benefits for the UK from this transition.

The Government’s key actions are set out in 8 policies and proposals with the aim to drive emissions down throughout the next decade, including improving our Homes, which represent 13% of UK emissions:

  • Improving the energy efficiency of our homes
  • Rolling out low carbon heating

The Government’s aim is to improve the energy efficiency of our homes, with £3.6 billion of investment to upgrade around a million homes through the Energy Company Obligation (ECO) to 2028, to achieve the following:

  • All fuel poor homes to be upgraded to Energy Performance Certificate (EPC) Band C by 2030, with the aspiration for as many homes as possible to be EPC Band C by 2035
  • Offer a smart meter to all homes to help them save energy by the end of 2020 

Not only will this strategy support the improvement of the energy efficiency and future sustainability of the UK’s housing stock, but it will also improve the lives of fuel poor households and the human cost of fuel poverty, including health and education.

The Department for Business, Energy & Industrial Strategy (BEIS) analysis of the English Housing Survey data forecasts that upgrading energy efficiency from an EPC Band E to C reduces energy costs by £650 per year on average. Given residents’ concerns about the cost of heating their homes, demand to replace electric storage heating along with ensuring their homes are well insulated, it is clear that keeping £650 a year in a resident’s pocket is a great result given the increasing cost of energy prices and impact of welfare reform.   

So, how can you use your data to understand energy performance and support the Government’s ‘Clean Growth Strategy’ now?

Using SDS StockProfiler and our active asset management methodology: to KNOW your stock, INVESTIGATE anomalies and ACT to deliver value to your organisation.

KNOW

  • Consolidate within StockProfiler existing internal Asset and Finance data about each unit to understand the existing worth of each unit.
  • Use current and potential Energy Performance Certificate (EPC) information to add an additional dimension to the dataset and enable in-depth scenario modelling of future potential investment projects.
  • Where internal EPC data is not complete,  we can fill data gaps using the Department for Communities and Local Government (DCLG) EPC data to populate our asset management model.

INVESTIGATE

  • Model actual or archetype investment options, then assess the impact on the worth of this investment on your assets to the business.
  • Examine and report the investigated options to enable the business to take a planned and considered approach to the investment, planning and implementation.

ACT

  • Support the project management and delivery of the investment, along with updating the datasets to ensure the business KNOWledge is up-to-date and accurate.

Linking the analysis of energy performance to wider economic performance such as net present values (NPV) and social intelligence such as resident satisfaction with the quality of their home enables you to make better decisions regarding future investment, obsolescence, disposal and growth across the wider portfolio of your assets. Overall driving the value of your assets whilst delivering sustainable green investment.

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Laura Matthews

Laura Matthews

Laura is SDS Marketing Manager specialising in digital, social and content marketing. Her passion for helping people in all aspects of marketing flows through in the expert industry coverage she provides. Her work involves overseeing all aspects of SDS marketing including online, offline and events. Promoting; development appraisal, land valuation, development viability amongst many other areas.

Connect with Laura on LinkedIn www.linkedin.com/in/laura-matthews-sds/ or follow on Twitter @LauraSDS.

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shared ownership

13 points you MUST cover in your Shared Ownership sales policy

Shared Ownership Sales Policy is very different from social or affordable rent. It’s not just about who gets a home. There’s a cascade of consequential policy decisions that influence procedures and development contracts. You also need to address regulatory requirements and have clear procedures that lead to excellent customer experience. 

Here are the SDS top tips on what should be covered in a robust sales policy:

1. Customer Group
Funding streams, the Capital Funding Guide and Regulator. Policy around the target customer group is as fundamental to shared ownership as it is to social or affordable rent. However, depending on your funding stream, this policy decision will be strongly influenced by the capital funding guide and regulator.

2. Registers & Application Forms
Your own register, other registers and purchaser application forms. Whether or not you keep your own register of potential shared owners, there are other registers available which in some cases regulation will insist you use. Policy on how and when you access registers needs to be established.

3. Eligibility & Affordability
Regulation and the Homes England sustainability calculator. If the shared ownership development forms part of a registered programme then the CFG  advises on how you look at affordability. However, there are other factors that need to be looked at when you develop your policy which will be discussed at the workshop. Furthermore, if you are a local authority and developing through your own resources such as the HRA, then you may wish to develop policy independent of that advised in the CFG.

4. Allocation
With shared ownership, it is not usual for purchasers to be ‘allocated’ homes and so policy around choice needs to be developed

5. Drop Out, Re-assign and Reservation Fees
What happens when a purchaser drops out? You need to have a clear policy so your staff understand how they are expected to deal with this. (Will you re-assign if a purchaser drops out and how will you handle reservation fees?)

6. Off-Plan and Show Homes
How do you intend to show people the beautiful homes you are developing? Will you build a view-home or sell off-plan with final pre-viewings? Whichever route you choose, communicate this clearly and make these easy to see.

7. Floor Coverings 
Purchasers will want to measure up if you’re not supplying floor coverings. This can cause time delays and is an extra step which is often overlooked. Your Policy around this may influence your development contract.

8. Timeline
During the sales process, there will be some time-sensitive activities, for example, how long will you give your purchaser to get a mortgage before withdrawing the offer of a home? Your policy needs to outline what these are and think about how they affect the financial appraisal. Is there anything you can do in advance or are there contingencies you could implement?

9. Warranty Handling
Be aware that there could be a mismatch between standard JCT contracts and NHBC warranty.  Policy needs to be developed to deal with this mismatch so the customers can access the warranty should the need arise.

10. Mitigation
How will you handle ‘difficult to sell’ homes? Having a plan in advance is key to avoiding delays and having long term voids. Not only is your policy on this crucial for your business but governance bodies and credit rating agencies are keen to see such policies.

11. Data Protection
Your policy must ensure that data protection requirements are secure and compliant with the GDPR regulations.

12. Related Policies
You will need to consider other internal policies that may have an influence eg. Appeals and Complaints, EDI policy.

13. Review
Some aspects of your sales policy may need to change as your capability develops.

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Greg Warner-Harris

Greg Warner-Harris

Greg Warner-Harris has worked in the low cost and assisted home ownership sector since 1997. Greg and his teams have been responsible for bringing over 2,000 New-Build Shared Ownership and other intermediate purchase products to market. Before creating Domus IMH, Greg was the Sales and Marketing Director for a major developing housing association and its commercial subsidiary which sold homes on the ‘open market’ to generate cross subsidy for the social parent. As Senior Partner for Domus IMH, Greg brings his experience & expertise to provide cost effective specialist services to the wider sector.

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