Gauging a project’s feasibility and potential profitability requires tracking the right KPIs. Not only do these KPIs ensure that informed decisions are made – they also provide a roadmap for the project’s success.
This article discusses several essential metrics that allow investors, developers, and other stakeholders to assess a development project’s viability and explains how to track them.
KPIs for Development Appraisals
Gross Development Value (GDV)
GDV represents the projected market value of a development project once it’s completed and all units are sold or rented. As such, it’s pivotal in assessing the feasibility of a project; it gives an estimated revenue figure and serves as a benchmark against which costs are measured.
Net Development Value (NDV)
NDV is the GDV minus costs associated with sales, such as marketing, agent fees, and legal costs. It offers a realistic projection of the revenue after sales, giving stakeholders a realistic picture of expected revenue.
Net Present Value (NPV)
NPV is the difference between the present value of cash inflows and the present value of cash outflows over the project’s life. In other words, it’s an estimate of how much value an investment is expected to generate; if positive, it indicates expected profit, and if negative, anticipated loss. This metric is a primary tool in capital budgeting, helping developers assess the profitability of a single project or choose between multiple projects.
Internal Rate of Return (IRR)
IRR is the discount rate at which the present value of all future cash flows (both positive and negative) from a property development project equals zero. In other words, it’s the annualised rate of return at which the NPV of a series of cash flows becomes zero.
The IRR gives an estimate of the potential profitability of a development project, allowing developers to compare itspotential return against other investment opportunities, or against a required rate of return to determine if the project is worth pursuing. It’s also used to determine how changes in the project’s parameters (like costs, sales prices, or timelines) might impact its profitability.
A higher IRR suggests a more lucrative project, assuming all other factors are constant. However, it should be used in conjunction with other financial metrics to get a comprehensive view of the project’s financial viability.
This is the time it takes for the returns on an investment to cover the initial expenditure; a straightforward tool forevaluating investment risk and assists developers in understanding liquidity risks and planning their cash flows.
Return on Capital Employed (ROCE)
This metric calculates the return generated from all the capital employed (both equity and debt) in a project. It’s used to measure efficiency, indicating how effectively the company is using its capital to generate profits. It’s also a tool to help in benchmarking performance against competitors and understanding if the firm is generating sufficient returns considering the capital tied up.
Profit on Cost (PoC)
PoC represents the profit as a percentage of the total project costs, giving a clear ratio of how much profit can be expected for every pound spent. A higher PoC suggests better efficiency in converting costs into profits, making it a crucial metric for developers and investors to assess viability. This percentage can be also used for benchmarking against other projects or industry standards, helping decision-makers to prioritise or reassess ventures based on their profit potential.
Loan to Development Value (LDV)
This is the ratio of the development loan amount to the GDV. As such, it’s a vital metric for lenders, as it indicates the level of risk associated with the loan in relation to the projected end value of the development. Lenders therefore use it to determine how much they’re willing to loan against the expected value of a finished project.
This metric represents the annual profit of a project represented as a percentage of its total costs. It’s especially crucial for rental developments, providing insight into the project’s long-term revenue-generating potential and helping developers and investors compare potential returns across different projects. Ultimately, it assists in capital allocation, helping stakeholders decide where to invest for optimal returns.
Planning gain is the increase in land value once planning permission has been granted. This can provide a strong indicator of a project’s profitability, especially in areas with stringent planning regulations.
This rate gauges the speed at which available homes in a specific market are sold during a given period. A slower absorption rate might indicate overpricing or market saturation, while a faster rate could signify strong demand or underpricing. As such, it’s helpful in forecasting sales, aligning production rates, and planning marketing efforts.
How Can You Track Property Development KPIs?
There’s no need to waste time on manual calculations or spreadsheets anymore. Financial appraisal software such as ProVal is designed to help social housing providers make viability decisions and track financial progress. It also automates and streamlines workflows and administrative tasks so you can focus on more important tasks – while staying compliant.
Calculating and Forecasting Property Development KPIs
ProVal calculates metrics such as NPV and IRR, giving you robust, auditable outputs at the click of a button. You can view long-term cash flow (up to 100 years), view cost summaries, allocate costs based on the tenure type, as well as adapt costs by floor area, unit, bedrooms, and number of residents.
In addition, you can generate reports on subsidy, viable outturn, and residual land value for each unit, which helps with mix optimisation.
One thing a spreadsheet won’t do is generate appraisals for diverse schemes of mixed tenure – but ProVal does, thanks to the Appraisal Creation tool. This tool helps you assess different tenure types within one appraisal, saving the time that would otherwise be spent creating separate ones. In addition, there’s no limit to how many mixed tenures you can include in one appraisal.
The user experience is seamless – simply drop dwellings directly from your library into the appraisal. The output? Viability results for each dwelling type.
This tool will help you determine the key income drivers that will make your scheme successful – no matter how complex the scheme.
With this tool, you can perform sensitivity analyses on all your appraisals, and there’s no need to reinvent the wheel – instead, reuse your own default scenarios for quick testing. The data from each test – and all your data, for that matter – is securely stored in the cloud so you can access it anywhere, any time.
Property development appraisals require careful consideration of multiple KPIs. Focusing on these vital metrics gives developers a clearer perspective on a project’s potential profitability, risks, and strategic positioning.
Of course, no single metric is enough to develop an accurate forecast – a unified picture is necessary, and that’s why appraisal software is so valuable; it simplifies the inherent complexity.
ProVal has been developed by experts in social housing experts with vast experience in appraisals and development finance. Eliminate spreadsheets, time-consuming admin, and other inefficiencies – book a demo today.