Understanding development appraisal. A guide for housing associations

Transcription

1 Understanding development appraisal A guide for housing associations i

2 UNDERSTANDING DEVELOPMENT APPRAISAL: A GUIDE FOR HOUSING ASSOCIATIONS All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers. While all reasonable care and attention has been taken in preparing this guide, the National Housing Federation regrets that it cannot assume responsibility for any errors or omissions. National Housing Federation ISBN First published in December 2015 by the National Housing Federation Lion Court, 25 Procter Street London WC1V 6NY Printed in Great Britain by Typecast Colour, Hop Pocket Lane, Paddock Wood, Kent TN12 6DQ ii

3 Contents Acknowledgements Foreword vii viii 1 Introduction Financial appraisal the basics Tenures to be appraised Social rent Shared ownership Affordable rent Outright sale/private sale Rent to buy/rent to Homebuy/try before you buy Market rent/private rent Calculating development costs Credit interest Variable interest rates Income grant, sales and direct subsidies Grant tranches and regulation Sales income and interest 18 3 Long-term forecasting general principles 23 4 Long-term forecasting of the net rent Rent Rent projection assumptions Future void projection assumptions Management Maintenance responsive and planned/routine/cyclical 37 iii

4 UNDERSTANDING DEVELOPMENT APPRAISAL: A GUIDE FOR HOUSING ASSOCIATIONS 4.5 Future void assumptions Calculating the Recycled Capital Grant Fund First year measures cost/value per cent, net yield, Cost/value per cent Net yield Interest cover Long-term loan repayment break-even, peak debt and payback rolling repayment Break-even year Peak debt Payback Break-even using detailed life cycle costs 60 6 The Net Present Value unlocking the mystery of discounting The Present Value of income in Year Present Value of the net rent Net Present Value 70 7 NPV assumptions, IRR and other considerations NPV sensitivity to discount rates Internal Rate of Return NPV per unit Discounting other considerations Variable discount rates Discount periods (NPV periods, appraisal periods) Different discount rates for different tenures 79 8 Phased projects NPV at completion or at start? Adding NPV surpluses together Calculating the NPV at project start Calculating PV of costs back to project start PV of net rents back to project start NPV at project start versus completion 89 iv

5 9.1 Subsidy of affordable/social housing Valuing land and s106 units Valuing land for private sale projects Valuing s106 units The politics of spreadsheets planning and site viability Other commercial and valuation considerations Residual land values using other measures Modelling joint ventures The role of professional valuers Housing associations as private developer 11 Financial appraisal of existing stock Out of the blue the impact of recent government policy on development appraisals Proposed rent drop The abolition of s106 obligations and grant on rented units The Right to Buy Conclusion 136 Appendices 1 Financial assumption benchmarks 138 A1.1 Rent assumptions 138 A1.2 Void assumptions 138 A1.3 Management assumptions 139 A1.4 Maintenance assumptions 141 A1.5 Major repairs assumptions 143 A1.6 Shared ownership initial sales and staircasing assumptions 145 A1.7 Discount rates and discount periods 147 v

6 UNDERSTANDING DEVELOPMENT APPRAISAL: A GUIDE FOR HOUSING ASSOCIATIONS 2 Microsoft Excel and the NPV calculation 149 A2.1 NPV Net Present Value 149 A2.2 xnpv xnet Present Value Glossary 153 vi

7 Acknowledgements Many thanks to Paul Flowers of M3 for authoring this publication. Special thanks to everyone who helped with the production of this guide: Liz Circuit M3 Dave Treanor M3 Matt Snuggs M3 Laurie Wright Stonewater Housing Group (Chair of Pamwin Plus user group) Karen Sheedy Metropolitan Housing Group Paul Circuit General reader Eamonn O Domhnaill General reader Hannah Flowers General reader. vii

8 UNDERSTANDING DEVELOPMENT APPRAISAL: A GUIDE FOR HOUSING ASSOCIATIONS Foreword are calculated and what they actually represent. This publication aims to plug that gap. It will guide development staff step-by-step through all including the mathematical principles behind them. with less fear of the numbers and a better chance of spotting errors, leaving more time to get houses built. David Orr National Housing Federation viii

9 CHAPTER 1 INTRODUCTION Chapter 1 Introduction You don t have to know the workings of the internal combustion engine to pass a driving test or own a car, but even the least mechanically-minded of drivers understand deep down that their amazing machine runs thanks to machinery, oil, water and petrol not magic. A With appraisal systems or spreadsheets the development department are usually the drivers, it actually meant. The principles of appraisal are common across all businesses, but how they are applied After reading this guide you should have some idea of what happens behind the front sheet of your appraisal system, even if you never need to look at its spreadsheet calculations in detail. have taken to appraisal, and how it delivers the overall strategic aims for your organisation. 1