K207CEV-Construction Economics & Value Management.

QK041V8-0

The College of Estate Management

K207CEV Construction Economics and Value Management

Assignment 1 QK041V8-0

Submitted by:

NAME Student Reg No

: RAMAKRISHNAN.S : 0701669/2

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K207CEV-Construction Economics & Value Management. QK041V8-0

Feasibility

Report

Mixed

Use

Development, Working,Surrey.
Table of Contents
__________________________________________________________________

1. Executive Summary.................................................................3 2. Introduction..............................................................................3 Scope & Size of proposed development.......................4 Special issues in mix use development.........................4 3. State of the Market...................................................................5 4. Financial Feasibility..................................................................6 Cost of Construction......................................................6 Risk Analysis.................................................................6 Increase In construction period.6 Decrease in rental income.7 Rental Income...............................................................7 5. Recommendation7

Appendices: Appendix 1: Residual Appraisal Calculation Sheet Appendix 2: Sensitivity Analysis sheet.

Executive Summary

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Purpose of this Paper is to provide a financial feasibility of the proposed new mixed use development of a five storey Building.

Key Findings: The office space has been pre-let to the Canadian Insurance Company (Cando) on the basis of a 15-year full repairing and insuring lease with rent reviews every five years. The major risks on this development are Increase in Construction period and Decrease in Rent are been analysed for the sensitivity.

The Project will be feasible & a profitable one for the developer ,Generally, both lenders and investors have attached a risk premium to mixed-use developments because of the complexity of meshing multiple uses, the increased construction costs, and the longer development horizon. All components of a master planned mixed-use project may be beyond most firms, but a skilled developer can organize a team of investors, designers, builders and operators who are interested in each component of the project, allowing the developer to transfer risk during the development and operational stages. Investment in a variety of land uses should provide diversification, and thereby reduce risk. A mixed-use development reduces reliance on a single market sector and the amount of space of a single type that must be absorbed by the market.The skill, experience and investment required to develop all components of a master planned mixed-use project may be beyond most firms, but a skilled developer can organize a team of investors, designers, builders and operators who are interested in each component of the project, allowing the developer to transfer risk during the development and operational stages. Investment in a variety of land uses should provide diversification, and thereby reduce risk. A mixed-use development reduces reliance on a single market sector and the amount of space of a single type that must be absorbed by the market.

Introduction Mixed-Use Developments are growing in Popularity as they reportedly can create additional value and outperform standard single-use real estate developments. The Synergy and appeal of a quality mixed-use development can increase office and retail prices, rents and occupancy rates as well as accelerate absorption rates. Retail tenants may be willing to pay higher rents because of the increased customer traffic generated by the compatible and complementary uses. Residents and hotel guests are attracted by the convenient location of dining, retail and

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entertainment venues on the site. However, some locations are not well suited for mixed-used developments, and careful consideration must be given to the financial feasibility of each specific project. Financial feasibility of mixed-use development occurs when the return on the investment meets or exceeds the required return of the developer and/or the investor. Evaluating financial return on a mixed-use project is more complex than with a single-use development. While some economies of scale may be achieved, the complexity of multiple uses may raise development and operating costs. On the other hand, the synergy of complementary uses may increase cash flows.

Scope & size of mixed use development The proposed development is a 6,000 m mixed used building which consists of Residential, Office and Retail. Ground Floor 1 &2
rd st nd th 2

1,200 m 2,400 m 2,400 m

2 2

2 2 2

Retail Office Residential Flat

Floor

3 & 4 Floor

The residential floors comprise the following units: One-bed flats: 39 m Two-bed flats: 64 m

The site is located in the south east of England with easy access to London. The site is surrounded by a mixture of residential, commercial and retail properties. The ground floor will be a shell only and will be fitted out by the tenants.

Special issues in mixed use development Some developers believe that a mixed-use project diversifies risk across the multiple uses. Other developers believe that the added financial and physical complexity of a mixed-use development, in addition to longer development timelines, heightens the uncertainty associated with the project and thereby increases the level of risk. Factors influencing the financial success of a mixed-use development can be grouped in the categories of economic and market, financial, physical and public issues. A general economic precondition for the financial success of a mixed-use project is a strong local economy. Employment, population and consumer disposable income should be growing. This growth benefits both tenants and customers for the uses on the site. A mixed use project developed in a stagnant or declining local economy can have problems attracting quality tenants, an adequate number of customers and rent levels high enough to ensure financial success. A stagnant or

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declining local economy can be perplexing for a community that wants a mixed-use development to serve as a catalyst for urban regeneration. However, it may be possible for a certain geographic market area to grow within a larger stagnant local economy. A possible scenario is a high-income geographic market area within a stagnant local economy. The population base of high-income consumers could be underserved (excess demand) for high quality retail goods and convenient personal services such as medical and dental services, accountants, insurance agents and attorneys. In addition, the empty-nester portion of the population base desires to remain in the area but also wants to downsize to luxury apartments or condo units. This situation could support a mixed-use development of retail, office and residential units. Another possibility is that a strong tourist component could offset some lack of local economic vitality, especially if hotels and entertainment Venues were incorporated into the development. Several features of mixed-use projects can lead to higher development costs. Initial planning costs are much larger for mixed-use developments because of the complexity and need to integrate varied uses.

State of the Market The site is situated in a prime location a short distance from Woking railway station (London is 28 minutes away) and Woking high street. The recent economic downturn has hit Woking and the surrounding area badly. However, the developer has been fortunate to pre-let part of the development; therefore, it is felt that the project may be feasible, particularly as it is mixed use. Currently, the residential rental market in the area is very strong with good yields being obtained. Even so, it is a mixed picture with little growth in property values or yields predicted over the next two years. Retail The ground floor of the development is to be retail (shell only, to be fitted out by tenants). Office The office space has been pre-let to the Canadian Insurance Company (Cando) on the basis of a 15-year full repairing and insuring lease with rent reviews every five years. Residential Owing to the recent downturn in the residential sector, the residential floors, divided into one- and two-bed flats, will be rented on the basis of assured short hold tenancies. Retail 360/m2 full repair and insuring lease; 10 or 15 years with a five-year review.

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Office 270/m2 full repair and insuring lease; 10 or 15 years with a five-year review. Residential One-bed flat (40 m2) 895 per calendar month Two-bed flat (65 m2) 1,100 per calendar month.

Construction Period The construction of the five storey building has been programmed for 24 months with 6 months of void period for the Retail and Residential as the Offices are been pre let for Canadian Insurance Company.

Cost of Construction The budget for the Woking, surrey mixed used development including the finance charges is 13,285,512 Total cost of the building is summarized below. Summary of Budget (Appendix # 1 Cost Details) Description of Items Prior to development (Planning & Demolition) Building Costs Finance @ 5% per annum Letting, Legal costs and Promotion Costs Contingencies Profit Total Risks Analysis The recent economic downturn has affected the Woking and the surrounding area badly, but as the office blocks has been pre let for Canadian Insurance Company, there is a potential demand in the area. The major risks on this development are Increase in Construction period and Decrease in Rent are been analysed for the sensitivity. Amount 150,000 10,101,110 658,110 323,154 439,255 1,613,883 13,285,512

Risk 1 - Increase in Construction Period. Construction period are generally an important component in a property development project. As such, it only takes a slight proportional change in its programme of construction to have a significant impact on the projects bottom line. Considering the busy road on the week days, the period of construction might be affected.

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The Sensitivity Analysis has been done by increasing the construction period by 15%, where the developer profits will be decreased by 1.75% compared to the original planned duration of 24 months and the Yield will be affected by 0.13%.(Refer to Appendix -2) Risk 2 Decrease in Rental Income As the construction period is for 24 months, considering the current economic market, there is a risk of decrease in rental income which will affect the developers profit considerably. The Sensitivity Analysis has been done by decreasing the rent by 2.5% for retail and residential as the offices has been pre let, where the developer profits will be decreased by 2.44% and the Yield will be affected by 0.18%(Refer to Appendix -2)

Rental Income The residential market in the area is very strong with good yields being obtained. The annual income through the rent is summarized below.

Description of Items Retail Office Area Residential - Double Bed Residential - Single Bed Total

Amount 392,848 619,776 844,800 418,860 2,276,284

Considering the years in perpetuity @ 7%, the Capital Value of the project will be 31,542,793 Refer Appendix -1 for Rental value Calculation.

Recommendations After the analysis of the Capital value and the Budget for the construction of the building, the Residual amount for the purchase of the land is 15,500,000, which is a good value to be purchased. The total profit of this project will be 3,221,668 by 11.38% to the total expenditure of the development. Further negotiation could be done with the Insurance Company, so that the flats could also be pre let for their employees. This will bring down the interest for the void period.

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There is a risk of blow out of construction cost. The best way to cover this risk is to use a Design and Build lump sum fixed price contract. The D&B procurement route is easily achievable considering the less complexity of the building.

One of the reasons for the above mentioned risk of Increase in Construction period is the busy road on the week days. A proper planning of logistics and the prior approval from the municipality will reduce this risk.

Foot Notes: Colm Dillion, How to Do A Real Estate Feasibility Study http://www.realestatedevelopmentcoach.com/feasibilitystudy.html

Gavin Taylor, Property development guide part 9 - Common risks related to development http://www.propertyupdate.com.au/articles/property-development-guide-part-9--common-risks-related-to-development.html

Gavin Taylor, Property development guide part 10 - Assessing your development's feasibility http://www.propertyupdate.com.au/articles/property-development-guide-part-10--assessing-your-developments-feasibility.html

Will Witt, Feasibility Studies Examples and Samples http://www.feasibilitystudyexpert.com/Feasibility%20Study%20Examples%20and% 20Samples.html

Managing Risk In Property Development http://www.piaa.asn.au/news/Managing_Risk_In_Property_Development

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