This month’s column is devoted entirely to the use of information technology for development appraisal purposes, and four systems are outlined below to give readers an impression of the type of facilities available. They were selected simply because they illustrate the full range of options — from calculator programs to minicomputer systems. No attempt is made to recommend any of the systems, because selection largely depends on what a user wants and is willing to pay.
In my experience users do not adopt a very disciplined approach to selecting software and it is rare to find someone who has a clear idea of what they require. However, this is the most important stage in system selection, even for something as apparently straightforward as development appraisal. Thus, Rule 1: prepare an outline specification. Next, it is useful to see who else is using the software, because the quality of a system is proven only through constant use. Remember, most programs can be made to look good during a demonstration.
Development appraisal is frequently viewed as a simple technique which does not justify the expenditure of large sums on computer programs. However, this is a misconception that underestimates the role of the development surveyor. Certainly, the residual method of appraisal has acquired a poor reputation, but this is largely because of the difficulty of estimating the inputs. And poor data should not be an excuse for using poor techniques. Also, various improvements in the residual method have been adopted in recent years (eg sensitivity testing and cost profiles) which dictate the use of well-designed computer software. These more sophisticated models allow the valuer to concentrate on their main function of exercising professional judgment.
Sam Mk II
In May I reviewed a calculator dedicated to development appraisal, called SAM (site appraisal model). Since then a second version, SAM 4K+, has been released (and you thought the first one was perfect!), which incorporates sensitivity testing and dual-and single-rate year’s purchase computations.
The user has the choice of two development appraisal models: one for residential development and one for commercial development. And each model enables the user to undertake either a residual valuation or a development feasibility.
The data is input via a series of simple one-line prompts. For example, the first prompt is “R, C or T?” for residential, commercial or tables. Selecting residential as an example, the following table shows the type of input data required:
The following output is then produced, line by line, on the calculator’s display:
SAM is based on a standard Casio PB 410 personal computer to which has been added a dedicated program stored on the 2K ramcard. SAM may still be used as a PC by removing the ramcard and inserting a replacement.
For further information contact: Bowden Bros Ltd, Compass House, 2 Walters Yard, Bromley, Kent BR1 1QA (01-650 4443).
Greenly’s Index
Greenly’s, who describe themselves as management and systems consultants, have prepared development appraisal software for IBM and IBM-compatible computers. In addition, they market a development appraisal system that runs on the Sharp PC5000 portable computer.
Greenly’s software provides a basic appraisal system plus sensitivity testing. The latter consists of calculating the effect on land value or profit of varying either the ERV, the yield or the building cost.
An additional feature of the software is a development property index (Greenly’s Index) giving the desirability of any proposed commercial property development on a 0-10 scale. The index is derived from a subsection of the program that is based on the Monte Carlo approach. The basic elements of the proposed development are input to give a conventional appraisal, and then the best, worst and most likely estimates of each key variable are input. The computer then calculates the following:
(1) Expected profit on cost %. An expected profit on cost of 0% or less scores 0 points, and a sliding scale of points up to 10 for 30% profit on cost is derived.
(2) Expected loss probability %. The probability of making a loss is calculated using the Monte Carlo method. An expected loss probability % of 40 or more scores 0 points. If there is no probability of making a loss, 10 points are scored. (If you pass GO collect £200!)
(3) Expected internal rate of return. The expected internal rate of return (IRR) is calculated from the estimated cash flow computed from the most likely key variables. An IRR less or equal to the interest rate on the project scores 0 points and a sliding scale up to a maximum of 10 points for an IRR 10% over the cost of capital is calculated.
Greenly’s Index is then calculated from the geometric mean of these three indicators. A score of 0 points indicates that the development should not proceed and 10 points indicates a highly desirable development.
Further information from Greenly’s, 35 Piccadilly, London W1V 9PB (01-439 8985).
Development Valuer program
The Development Valuer program, written by Michael Gilbert, is designed to run on an IBM PC or compatible microcomputer, with a minimum configuration of 256k internal memory and one disk drive. It runs under PC/DOS or MS/DOS, version 2.00 or later.
The program is menu driven for simplicity and ease of use and will prompt the user, through a series of questions and answers, to provide the information essential to a standard property development appraisal. To access and edit data the user may page backward and forward through the screens of information, and may readily change the assumptions for any aspect of the development, in order to explore any number of “what-if” situations.
Two alternative program modules allow either a preliminary analysis of the project using only minimal information or a detailed analysis for those projects that move to a more advanced stage. The program calculates the residual value of the development or, where the site cost is known, the profit margin, and then provides the user with the following choices:
(1) View a summary of the calculations.
(2) Revise any of the criteria.
(3) Print the valuation in detail.
(4) Produce a sensitivity analysis.
(5) Store your data permanently on disk.
(6) Retrieve an earlier appraisal from disk.
Some of the features and facilities of the Development Valuer program are listed below:
(1) Yield. Different elements of a mixed-use development may be capitalised at separate yields.
(2) Method. Allows the selection of residual method which calculates the site value or fixed-price method which calculates the profit margin starting from a known site cost.
(3) Areas may be entered in sq ft or m2 or a combination of both and the program will automatically convert from one to the other — useful for lecturers!
(4) Professional fees may be set at either a percentage or a fixed fee.
(5) Contractors’ payments are made monthly.
(6) VAT. The input of differential VAT rates is permitted and the user may specify in each instance the percentage of VAT that will be recovered, thus providing a useful VAT analysis.
Stephen Sykes Associates
Stephen Sykes Associates have designed a development appraisal system that is capable of running under a wide range of operating systems, including PC/DOS, MS/DOS, UNIX and AOS (Data General). The design strategy behind the system is that users may create their own appraisal models within a generalised framework of financial relationships. The flexibility of the model permits either simple or complex appraisals. The software is menu driven and in addition to being easy to use contains extensive error-trapping devices.
The user enters cost and value data via up to 86 individual area or cost zones. Thus, each separate part of a complex development may be entered individually with the user providing building costs, ERVs, net and gross areas and capitalisation rates. A “window” displays 14 of the cost zones at any one time and users may scroll rapidly to other data. Ten other cost zones may be entered on a “lump sum” capital value or cost basis, with or without VAT, and a maximum of five receipts may be entered.
Interest may be separately computed at different rates on site, funding, construction, void and receipts with monthly, quarterly, half-yearly or yearly compounding. Over the void period interest may be rolled up at a single rate or separate rates for site, construction and funding costs. A void may also be computed on the basis of a loss of rental income.
An interesting feature of the software is the inclusion of a “Cumulative building cost profile” which overcomes the criticism that the residual method uses an over-simplified rule-of-thum for determining finance. Thus, users supply the effective percentage of costs, the interest rate and the period, and the program does the rest.
Either site value or developer’s profit may be computed and an automatic sensitivity analysis is undertaken. The results may be shown as a summary screen display or a detailed print-out, which automatically adjust to the model which has been created.
Finally, the model enables a matrix of nine appraisals to be computed simultaneously on the basis of minimum, central and maximum capitalisation rates and ERVs. This produces nine results, shown in tabular form, of either site value or developer’s profit.
Both single and multi-user versions of the software are available. Further information from Stephen Sykes Associates, Tanglewood, Vauxhall Lane, Tunbridge Wells, Kent TN4 OXD (0892 34859).
