Financial viability appraisals are very much the day job for development project managers. If a development opportunity is being considered, unless it financially stacks up, it is unlikely to get built.
Viability appraisals have moved on a great deal from the days when project managers had to rely on spreadsheets. Specialist housing viability software can handle the complexities such as mixed tenure where you have capital receipts from shared ownership as well as the rental income to see if the opportunity is viable.
However, with respect to shared ownership, one appraisal that sometimes gets overlooked, particularly by new entrants into the shared ownership arena, is the Market Appraisal. The market appraisal is an essential companion to the viability appraisal and will give the organisation confidence that the properties will sell, sell in a timely manner and sell for the price assumed by the viability appraisal. This article looks in some detail at the reasons why we need to do a market appraisal, what is in our market appraisal and how we do our market appraisal.
Why do a Market Appraisal?
A healthy-looking viability appraisal will soon start to look unhealthy if there is weak demand for the shared ownership houses being sold. With businesses in the social sector becoming increasingly risk-focused, a well-constructed market appraisal can help to mitigate the risk. Organisations that want to raise money on the bond market will need credit ratings from the big credit agencies who themselves will be looking at the organisation’s treatment of risk. Consequently, housing association Boards and local authority Cabinets are increasingly risk-aware and looking to the business for confidence that risks can be mitigated. A well-constructed market appraisal can give the Board confidence that development is being undertaken in a responsible manner. In fact, at an organisation I previously worked for, the Board always required a full market appraisal to be undertaken and presented when shared ownership properties were being considered. They would not entertain signing off on a development project unless the market appraisal had been carried out, and the mantra of the organisation was “…development starts with marketing”.
Between the time of committing to the development opportunity and actually getting to sell the houses, there is ample opportunity for the market to turn. In today’s global interconnected economies, we always need to be aware that the economic climate we might be selling in could be very different from the one that existed when we were considering the opportunity. For example, one mitigation strategy might be to; either permanently or temporarily switch the properties to a rented product in the event of poor sales. If the development is being built as part of a Homes England registered programme, then Homes England will consider allowing the organisation to switch the tenure, but Section 2.81 of the Capital Funding Guide does make clear that:
It is expected that providers will conduct their own market research before bidding for grant and make development decisions based on expectations of sales.
A well-constructed market appraisal will provide evidence that the organisation has carried out the required market research.
What is in the market appraisal?
The market appraisal has three basic sections:
The Site and Environs
This will have information about the proposed site, the local area, proximity to shops, etc. Photographs are always useful and at this point, you might be wanting to look at the possibility of rearranging the development layout to get the optimum unit position for sales. Particular attention will be given to the environs of circumstances that might be a barrier to sale or demand.
Data Mining
In this section, you’ll be looking at all the demographics of the area. Examples of this include population data, the type of housing in the area, proximity to transport links, economic activity, car ownership, crime rates, broadband speeds, schools, etc. Also, you want to be doing a sense check on the price the development appraisal is suggesting for the properties and look at other tenures in the area, such as private rent, to see how the occupation costs are going to compare. Basically, you need to accumulate all the data that you might want to consider when deciding how attractive the proposition is.
Appraisal Summary
This is the informed view of the sales and marketing discipline on how good a proposition this is. It will make recommendations on whether or not the opportunity should be pursued or where appropriate, changes to aspects of the proposition such as the site layout which would improve the saleability and demand. This is the section that your Board is going to be looking at in detail when being asked to sign off on the proposition.
How do we do a market appraisal?
Market appraisals can be subcontracted and bought in from many established companies specialising in house sale opportunities. If you go down that route and you want their report to include the comparative occupation costs of your shared ownership proposition vs. private market rent, for example, you will have to work closely with them to ensure that you give them the information they need. SDS believes that the best person to do market appraisal is in fact, you. You know your patch better than anyone and you know specifically what you and your Boards are going to need. And certainly, it’s a more cost-effective route to get the capability in-house to do market appraisals.
SDS delivers a workshop to shared ownership providers to bring Market Appraisal capability in-house. Appraisal templates are provided and real-life data mining on a proposed (real or otherwise) opportunity will be demonstrated. If this is of interest, please email alison@s-d-s.co.uk who will be very happy to send you all the relevant information.
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