Property Development- Appraisal & Finance

Contents

Preface to the First Edition xi

Preface to the Second Edition xiii

Acknowledgements xiv

List of abbreviations xv

List of statutes, regulations and cases xvii

1 The property development process 11.1 Introduction 11.2 An overview of the development process 41.3 Development value 61.4 Stakeholders in the development process 111.5 The economic context for property development 151.6 Sustainable development 191.7 Summary 28

2 Development appraisal 302.1 Introduction 312.2 Committing to a site 312.3 Legal and policy constraints 352.4 Site appraisal 422.5 Economic and market analysis 482.6 Summary 51

3 The residual valuation 543.1 Introduction 553.2 Elements in the residual valuation 573.3 Detailed residual valuation 663.4 Sensitivity and risk 683.5 Calculation of the development profit 773.6 Alternative approaches 783.7 Calculating value using the investment method 793.8 A summary of the valuation tables 813.9 Summary 83

4 Ground rents and partnership schemes 854.1 Introduction 854.2 The calculation of ground rents 864.3 Equity sharing and partnerships 894.4 Advantages of partnerships 964.5 Summary 100

vii

5 Cash flow methods 1025.1 Introduction 1025.2 Cash flows in development appraisal 1045.3 Spreadsheets 1145.4 Sensitivity analysis 1195.5 Risk 1225.6 Summary 130

6 Financing property development 1336.1 Introduction 1346.2 The structure of the property investment market 1346.3 A brief history of commercial property funding 1366.4 Methods of property funding 1386.5 Sources of finance 1426.6 Lending criteria 1456.7 Loan terms and funding of small developers and builders 1476.8 Case study: finance for the smaller developer/building

contractor 1496.9 A market overview and a select glossary of financial terms 1536.10 Summary 155

7 The classification of development finance 1567.1 Introduction 1577.2 Debt and equity 1577.3 Categories of finance 1597.4 Project-based funding 1637.5 Corporate finance 1687.6 Summary 173

8 The structure of property finance 1758.1 Introduction 1768.2 Trends in institutional investment 1768.3 Direct versus indirect property investment 1788.4 Property companies 1788.5 Securitisation and unitisation 1838.6 Real Estate Investment Trusts (REITs) 1868.7 Joint ventures 1888.8 Summary 191

9 Design and construction 1939.1 Introduction 1949.2 Design and development 1949.3 Design and sustainability 2009.4 Design and cost 2059.5 Construction and procurement 2109.6 Selecting a procurement route 2219.7 Types of contract 2239.8 Partnering 2289.9 Modern methods of construction (MMC) 2309.10 Summary 232

viii Contents

10 Market research, marketing and disposal 23510.1 Introduction 23610.2 Market research 23610.3 Property marketing 24010.4 Disposal and warranties 24710.5 Summary 249

Bibliography 250Index 257

Contents ix

1The property developmentprocess

1.1 Introduction 1.5 The economic context for 1.2 An overview of the development property development

process 1.6 Sustainable development1.3 Development value 1.7 Summary1.4 Stakeholders in the development

process

AimsThis chapter introduces the basic definitions of terms used in property developmentand it puts the development process in an economic and sustainable developmentcontext. The chapter provides an overview of the development process and considersthe roles played by stakeholders in that process.

Key terms>> Property development – the process of erecting buildings for occupation,

sale or investment.>> Sustainable development – development which supports a better quality

of life now and in the future. The concept embraces economic, social andenvironmental criteria.

>> Development value – where land or buildings can increase in value by theapplication of capital.

>> Residual valuation – the valuation of a site which has development poten-tial. This is calculated by deducting the costs of building plus a profit fromthe development value leaving a residual sum which represents the landvalue.

1.1 IntroductionProperty development is the process by which buildings are erected for occupa-tion or for sale. Properties may be developed for owner occupation, for example

1

a major retailer may erect a supermarket for corporate use. Alternatively, a prop-erty developer might construct a similar building for lease or sale. The processmay be the same although some aspects of the financial appraisal may be differ-ent. A building produced for sale or investment is driven by a profit motive,while a building developed for owner occupation may be related to the prof-itability of the enterprise which will use the building and thus the profit moti-vation is indirect.

Property development may also be initiated by not-for-profit organisationssuch as when a public body procures a building which goes some way towardsmeeting social or cultural policy objectives rather than profit aspirations. Thesocial enterprise or third sector in the UK also comes within the not-for-profitcategory. Organisations here include charities and voluntary organisations suchas housing associations (also referred to as registered providers) where the objec-tive is to meet specific needs while not to making a loss. Thus the motive fordevelopment is not to make a profit but to meet social objectives withoutcompromising the financial viability of the whole organisation.

Property development also takes place in the context of partnershipsbetween organisations from the public, private and voluntary sectors. In recentyears these partnerships have taken a variety of forms in the UK and theyinclude those brokered under the private finance initiative (PFI). The lattertakes a number of forms but for example might see a primary healthcare trustprocure a new hospital under a PFI contract which secures private sector devel-opment expertise and funding. The healthcare trust then operates the newhospital and gradually pays off the PFI contractor over a fixed number of yearsat a specified rate of interest to reflect the risks involved. There are conflictingviews on whether PFI contracts represent good value for money for publicsector organisations and whether the risk involved to the private partners reallyjustifies the rates of return that they receive. However, the model is increasinglyused to procure large bespoke properties for public sector organisations.

In the UK a number of joint ventures (JVs) sometimes referred to as specialpurpose vehicles, have been formed in recent years between landowning localauthorities, private developers and housing associations under which largepublic sector housing estates are redeveloped to meet modern standards. Onemodel for these JVs which has emerged is the Local Housing Companypromoted by the Homes and Communities Agency (2009) in England.

Figure 1.1 below attempts to capture some of the main types of organisa-tions who commonly initiate development, although the chart could easily beextended to include financial institutions such as pension funds, universities,government departments and even community land trusts. Property develop-ment is therefore undertaken directly or procured by a wide variety of organi-sations to meet a wide variety of objectives.

It is not possible or necessary in this book to categorise all types of devel-oper, nor map out all of the contexts in which development may take place.Readers who are particularly interested in learning more about the variouspermutations could examine Havard (2008: 1–28) or Millington (2000:25–38). In this book the emphasis will be upon commercial development in theprivate sector. However there will also be occasional references to developmentactivity in the public and voluntary sectors and to development undertaken inpartnership between organisations from each sector.

2 Property Development

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1.2 An overview of the development processProperty development is much like any other economic activity in that it seeksto satisfy demands arising in a market through the application of scarceresources. The word ‘demand’ is used here in a broad sense to encompass‘needs’ as the latter is not strictly something which can be expressed in a marketsense. In the case of property development, the demand is for space to work in,to operate businesses from, to live in and to provide space for leisure and recre-ational activities.

The process by which buildings are erected employs the factors of produc-tion: land for the site, capital for purchase of the land and materials, labour toerect a building and manage the process. The entrepreneurial talent of theproperty developer is needed to initiate the process and combine these factorssuccessfully in a project.

A simplified approach to property development envisages a timeline frominception to completion involving a number of stages and this is sometimesreferred to as an ‘event sequence model’ as follows:

• choosing a location;• identifying a site and carrying out a detailed site survey;• providing an outline scheme and appraisal;• negotiating for site acquisition;• design;• planning consent;• finance;• site acquisition;• detailed plans;• tender documents for construction;• construction;• marketing for sale or letting with potential ongoing asset management.

The process is not as strictly linear as suggested above and activities may takeplace in parallel or be reordered to suit project realities. For example marketingmay begin very early in the process and it may continue throughout if the devel-oper has an aspiration to achieve advanced sales off plan or to achieve pre-lets.

For the process to be initiated there would have to be demand and thiswould stem directly from a client seeking a building for owner-occupation orthe demand will be detected by the developer through interpretation of marketconditions. As in any commodity market where demand outstrips supply theprice rises and in commercial property the main indicator is that the rental valueof floor space will tend to move upwards.

Regardless of whether a developer has a client or is responding to marketsignals a prudent developer would establish whether the completed sales valueof a scheme exceeds the costs of producing the development. The profit marginarising from the development would need to reflect the efforts and risks to thedeveloper. If market research carried out for a proposed development revealssufficient demand, then the developer can produce sketch plans to ascertain thedevelopment capacity of a site. The sketches will also be used as a basis for earlydiscussions with the planning authority.


In the UK, as in most countries, development of land is subject to planningcontrols and this is one of the first hurdles in the development process. A plan-ning consultant will be invaluable at this stage for advising on the type and scaleof development which may be acceptable to the local authority. The consultantwill also be able to negotiate any planning agreements which in the UK willtypically arise on a development of any magnitude. Depending on the scheme,planning obligations may range from the provision of onsite affordable housingto payments for the provision of infrastructure or both. These obligations mayhave a significant effect on the developer’s budget and this might threaten thefinancial viability of a scheme, particularly during a credit crunch whencompleted development values will tend to fall but costs may remain fairlyconstant.

In parallel to working up a development concept which would win thesupport of the local authority, initial development appraisals are also under-taken. On the basis of the scale and type of development envisaged, a value canbe assessed and rough costs calculated and this will indicate whether there is anyprofit in a scheme and whether it is worth continuing further. From a devel-oper’s perspective therefore a scheme can only be viable if two preconditions aremet: (a) that a planning consent either exists or there is a realistic prospect ofachieving consent; and (b) there is market demand for the development whichwould produce a development value in excess of all the costs involved. Initialschemes will evolve considerably at the drawing board stage so that thesepreconditions can be met more fully.

The costs of construction are usually assessed by comparison at this stage andthere are online databases and source books which distil costs arising fromrecent building contracts for different types of building. In the UK the BuildingCost Information Service (BCIS) is one such source which is available tosubscribers at: www.bcis.co.uk. There are other similar sources such as theSpons building price guides produced by cost consultants Davis Langdon. Aconstruction cost per square metre can thus be identified and applied to thegross internal floor area (measured between the internal faces of external walls)of the building envisaged.

Discussions with the planning authority will lead to a planning applicationwhich may be in outline form seeking consent on the general principles of ascheme and subsequently for detailed permission. When the characteristics ofthe scheme are confirmed, then a detailed financial appraisal can be undertaken.The architect would also be instructed to produce detailed construction draw-ings and in a traditional approach to development the drawings would be usedby a quantity surveyor to produce a bill of quantities. Funds will be sourced topurchase the site if it is not already owned and a loan facility will be arrangedto cover the costs of the construction contract plus ancillary costs.

Where a building is being developed on a speculative basis and there is noclient or particular end user in mind, a valuer or agent would normally provideadvice on a marketing strategy as well as actively seeking possible purchasers oroccupiers. The ambition is that once the building is completed there will be aminimal period when the property is empty and not providing a return. Thereturn will be a rental income if the property is let and retained as an investmentor a capital sum if the building is to be sold. If the building is procured by acorporate owner-occupier, then a notional rent can be assumed to be passing.

The Property Development Process 5

1.3 Development valueDevelopment value exists where land or buildings can increase in value throughthe application of capital. This can arise from a change of use of the land orexisting buildings, but the property development process usually involves thecreation of new buildings. The developer normally evaluates development valuein a residual appraisal and while this topic is covered in more detail in chapter2 some preliminary points can be made here on this process.

The residual valuation is one of the established methods of property appraisalwhich assesses the profitability of development proposals. The method calcu-lates the increased capital value of the land due to the proposed developmentand then deducts the costs of works and the original value of the land and build-ings. Costs in the equation should include a profit which reflects the risk andcommitment of the developer. However, given the timeline over which devel-opment takes place, there are a range of possible outcomes regarding the devel-oper’s profit if a site has been purchased at the commencement of adevelopment. If development values increase significantly over the developmenttimeline, then the developer may make an abnormal profit.

When development values realised at the end of the development correspondto the appraisal undertaken at the time when the land was purchased severalyears earlier, then a developer will make the profit anticipated at the outset.

During a recession or when credit becomes difficult to obtain as between2008 and 2009 then development values will tend to fall, sometimes quitedramatically. In that scenario a developer who has not commenced develop-ment will tend to ‘sit on the land’ and will wait until the market becomes morefavourable. In the UK, planning consent lasts for three years and so a developercould begin construction at any point over that term with a view to completinga development in a rising market. Of course this is where market intelligenceand forecasting come into play, although even armed with the most sophisti-cated analysis the future is still uncertain and the risks for a developer neverentirely dissipate.

Where a significant start has already been made on construction a developermay well be facing significantly reduced profits or the scheme may go intoreceivership as costs escalate against falling values. These are the risks attachedparticularly to speculative property development. While developers can takesome mitigating action to control development costs they have very littlecontrol over falling market values unless they have already achieved pre-sales orpre-lets.

The residual valuation essentially begins by looking at the completed grossdevelopment value (GDV) of a scheme which in the simple example in Figure1.2 below is £20 million. The costs, which include the developer’s profit, arethen deducted to identify the land value. In the example below the total costsare £15 million and this is deducted from the GDV to identify a residual sumof £5 million for the land. The development appears viable as both sides of theequation balance and the developer looks to have made a prudent decision bypurchasing the site for £5 million. It will be assumed in this example that thedevelopment will take two years to complete and sell.

Let us now imagine that over the two-year development period there is infla-tion in development values due to buoyant demand in the property market for


the type of development being produced. When the development is thereforesold it achieves £22 million rather than the £20 million envisaged two yearsearlier. The result would be that the developer earns a windfall additional profitas shown in Figure 1.3 below where a 10 per cent increase in the GDV hasgenerated a 66 per cent increase in the developer’s profit.

However, given an alternative scenario where a speculative development wasembarked upon and reached the market two years later when developmentvalues had fallen 15 per cent, the developer’s profit would have been entirelywiped out and in all probability the scheme would be in receivership. This isexactly what has happened to some developers during the global credit crunchin 2008 and 2009.


Developer’s profit @ 15 per cent of GDV = £3 million.

Gross development value All development costs including(GDV) estimated to be professional fees, construction £20 million at the beginning costs, ancillaries, contingencies,of a two-year development finance charges, marketing, letting timeline. and disposal fees = £12 million.

Land value inclusive of purchase costs, interest payments and land tax = £5 million.

Figure 1.2 Development value where GDV is £20m.

Figure 1.3 Development value where GDV is £22m.

Developer’s additional windfallprofit = £2 million

Developer’s profit @ 15 per centGross development value of original GDV = £3 million.(GDV) actually realised at the end of a two-year development All development costs includingprocess = £22 million, professional fees, constructioni.e. 10 per cent more than costs, ancillaries, contingencies,expected. finance charges, marketing, letting

and disposal fees = £12 million.

Land value inclusive of purchase costs, interest payments and land tax = £5 million.

It should also be noted that the site value in Figure 1.4 above of £5 millionwould need to be higher than the land value in its current use, otherwise therewill be no incentive for the land to come onto the market as a developmentopportunity. Thus valuers will also look at the existing use value (EUV) of a siterelative to its value in a development scheme. Thus a simple example might bethat a 1 hectare field used for agriculture might have an existing use value of£100,000. Given the realistic prospect of planning consent for housing on theland, its development value might be £1.5 million and thus the gap between theexisting use value and the development value is so significant that the site willalmost certainly come forward for development.

Differences in value will not always be so clear-cut in an urban context wherethe value of a site in existing use might not always be significantly increased bya planning consent for a new development combined with market demand forthat development.

The basic formula for the residual valuation therefore reflects the fact thatthe land is normally the unknown residual element as follows:

GDV – (building costs + profit margin) = land value

If, however, the land value is already known because it has been agreed as apurchase price then the residual equation can be transposed to identify theprofit margin as follows:

GDV – (building costs + land value) = profit margin

The need to use a residual valuation approach arises because of the uniquenessof land and property as an asset class and this is reinforced by the uniqueness ofdevelopment proposals for each site. If equal-sized plots of land were being soldin the same location and those plots were earmarked for the same density andtype of development, then a form of comparative analysis could be applied, suchas a price per hectare. In these cases adjustments would still need to be made toreflect the minor differences between each site. Thus the value of a 0.5 hectaresite benefiting from sea views in a coastal town, unencumbered by legalconstraints and with planning consent for twenty houses might be £1 million.


All development costs includingGross development value professional fees, construction(GDV) of £17 million actually costs, ancillaries, contingencies, realised at the end of the finance charges, marketing, lettingtwo-year development timeline and disposal fees = £12 million.during which the economy hasgone into a recession. Land value inclusive of purchase

costs, interest payments and landtax = £5 million.

Figure 1.4 Development value where GDV is £17m. (post-recession)

However the value of a 0.5 hectare site also with planning consent for twentyhouses at the back of the same town but close to an industrial estate and crossedby an overhead power line will be significantly less than £1 million. The judge-ments required to distinguish the value of the second site in monetary termsusing the comparative method could easily stretch the credibility of the valua-tion. What could safely be said is that the value of the first site does provide anupper benchmark for the value of the second site.

While the comparative method might be a little simplistic for complex situ-ations, the residual method has also been criticised by the Lands Tribunal whichis the highest court for dealing with property valuation and compensation issuesin the UK. The Tribunal felt that the method could generate unreliable valuesbecause of the number of variables in the calculation and the degree to whichthe calibration of those variables depends on a series of assumptions. TheTribunal prefers a comparative approach to be taken where that is possible.However, despite the misgivings of the Tribunal, practitioners continue to usethe residual method in circumstances where there is development potentialbecause of the limitations in the comparative method noted above. Thestrengths of the residual method are that it is explicit about the components ofdevelopment value and costs and it reflects the fact that the type and scale ofdevelopment will be unique from site to site.

The residual valuation is therefore used in development situations but it inturn relies on other valuation methods. In fact there is agreement that there arefive main methods of property valuation which are:

• the investment method;• the comparative method;• the contractor’s test (a cost-based method);• the profits method; and• the residual method.

The residual method may rely upon the investment method to determine thegross development value of a proposed commercial development. It may usethe comparative method to compare capital or rental values from the market.The costs calculated for building works are a form of the contractor’s test.Depending on the type of property, the profits method may also be used todetermine the gross development value. However, the residual method hasbecome an accepted and important development appraisal tool and the logicthat it employs regarding the interplay of variables is also used in more sophis-ticated cash flow approaches which will be explored later in this book. For nowit is worth noting that the main variables in the residual calculation are as setout in the following sections.

Value of the proposed developmentThis depends upon the market demand for the envisaged use in the particularlocation, the quantity of units or floorspace permitted under a planning consent,the quality of the building design and layout and the proximity of services andinfrastructure. The value can be affected significantly by the presence of negativeor positive externalities. Negative influences on value could be proximity to


noisy and pollution-generating roads, landfill sites and whether a locality has ahigh crime rate. Positive factors might be scenic views, proximity to goodschools and services and accessibility to efficient public transport.

Cost of constructionAs for value above, the costs of construction result from the interplay of anumber of factors including the size, design, type of building, quality of mate-rials and the extent of landscaping envisaged. Costs may also arise where thedeveloper has to part fund infrastructure or where site access needs to beimproved. Where there is ground contamination or a threat of flooding theremay be significant additional costs referred to as ‘abnormals’ in order to over-come these constraints.

Increasingly the regulatory regime in which developers work is becomingmore stringent in the interests of fostering sustainable development and this islikely to add some costs to projects. For example costs may arise from increas-ing the standard of insulation and build quality and/or in terms of incorporat-ing renewable energy technology or low-energy services in buildings. Thisequipment will normally attract a higher capital cost at the point of develop-ment although users of the building during its lifetime should experience loweroperating costs.

Value of the siteAs explored in the simple examples above, the site value will normally be a resid-ual amount reflecting the difference between the GDV and the costs to producea scheme. However, site values may also be affected by legal encumbrances,topography and adverse ground conditions.

The extent of the variation in these factors and how they combine for eachscheme means that each residual appraisal will be unique. Syms (2002: 147–60)for example shows how the residual appraisal can reflect significant abnormalcosts associated with ground remediation where a site has been contaminated.In some circumstances where costs like this arise, sites may have negative valuesand development in those circumstances will only take place where there is gapfunding such as a public sector grant.

Perhaps a final point to make on the uniqueness of the calibration of vari-ables in each residual valuation is that the value of land is determined by its useand intensity of use. Land may have development potential but it will requireplanning permission for any form of development (except for some minorworks and some changes of use). In England the Town and Country PlanningAct 1990 determines that planning consent is required for anything defined as‘development’ which the Act defines as:

the carrying out of building, engineering, mining or other operations in, on,over or under land or the making of any material change in the use of anybuilding or other land.

A planning consent therefore confirms development potential and on this pointsome trader developers specialise in purchasing sites with hope value but no


planning consent. They then invest time and effort in achieving a planningconsent which confirms a site’s maximum development value. At that point thesite is sold onto another developer who actually builds the scheme. The traderdeveloper is therefore making a profit from purchasing a risky site at a nominalvalue and selling it perhaps one or two years later at a considerably higher valuereflecting the certainty provided by the planning consent. Developers some-times refer to land purchased with consent as ‘oven ready’ in that very littleneeds to be done before starting construction.

Property appraisalThere is sometimes an understandable degree of confusion surrounding the useof the similar terms ‘property valuation’ and ‘property appraisal’. The distinc-tion between the two terms in the UK first arose in the 1980s when there werecriticisms of traditional approaches to property valuation. This led to demandsthat a more extensive property analysis be provided for clients. What emergedfrom that period was a more precise terminology around property valuationwork. Thus as Baum and Crosby (2008: 3–5) confirm, property appraisalshould contain two distinct aspects: property valuation for purchase (that is thevaluation for market price or exchange value); and the subsequent analysis ofperformance. The first aspect is valuation and the second aspect is analysis andthe combination of the two is property appraisal.

1.4 Stakeholders in the development processNo development is exactly the same as another and the combination of stake-holders and the roles that they play will be different each time. For example inone scheme a developer will be both landowner (having already purchased asite) and developer whereas in another scheme the landowner retains a separateidentity as a site freehold owner in partnership with a developer. Even the linesof communication, which are simplified diagrammatically below to representthe developer at the fulcrum of the process, are not always that straightforward.For example the developer will often work through the professional team whichscreens and filter contacts with some of the other stakeholders. In particular thedeveloper’s project manager might be given considerable delegated power todeal with the main contractor and other third parties. Thus it is not wise toovergeneralise on the organisational combinations and interactions which canarise in development. However, there are some general patterns of stakeholderinvolvement which are worth considering as follows.

The developerAs discussed at the beginning of this chapter there are numerous types of devel-oper straddling public, private and voluntary sectors and so for simplicity hereit assumed that the developer is a private sector commercial property developer.This broad category would include trader developers who tend to develop spec-ulatively in order to sell completed schemes before moving onto the next devel-opment opportunity and investor developers who tend to retain completedschemes for rental income and capital growth.


Marriott (1962) provides an interesting historical perspective on how anumber of the leading development companies in the UK began as very modestorganisations which exploited opportunities in the property ‘boom’ of the late1940s and early 1950s. The early growth of these companies was financedalmost entirely by borrowing in a context where there was rental growth, lowbuilding costs and low-interest rates. From those humble beginnings there isnow in the UK a premier league of property companies who since 2007 haveconverted to Real Estate Investment Trust (REIT) status in order to benefitfrom the tax advantages that this vehicle offers.

Typically these companies will be active developing major office schemes inprime locations, large city centre retail malls and edge of city business andretail parks. The largest UK REITs include British Land, Land Securities,Derwent London, Hammerson and the Slough Estates Group (SEGRO) andtogether they have a market capitalisation in excess of £20 billion. Readerswho are interested in finding out more about the value and activities of thesecompanies could examine the information portal: www.reita.org whichprovides links to company accounts and annual reports. It is this type of devel-oper that will interpret wider economic conditions before engaging in majorproperty developments.


The maincontractor

Thelandowner

Thecommunity

Thedeveloper’sprofessional

team

The localplanningauthority

The client

Developmentpartners

Thefunding

institution

Thedeveloper

Figure 1.5 Stakeholders in the development process

The developer’s professional teamDepending on the type of development, the professional team can be quiteextensive, although the following would normally feature as the core profes-sional team in a large commercial or residential development: a projectmanager, an architect, quantity surveyor, valuer, planning consultant, construc-tion manager, structural engineer, services engineer, landscape architect andpossibly a highways consultant.

The local planning authorityThe local planning authority (LPA) would normally have policies set out in alocal development plan and it will use these policies to negotiate with develop-ers so that the resulting scheme is policy compliant. This is termed the plan-ledsystem, in that a local authority will refuse development proposals which do notgo far enough in meeting the policy ambitions in the development plan. As wellas enforcing policies, in the UK it is increasingly common for LPAs to negoti-ate planning agreements with developers in order to create ‘planning obliga-tions’. The latter require the developer to contribute to the provision ofinfrastructure, impact mitigation or affordable housing.

The LPA also occupies an important pivotal position for the developer as oneof its roles is to evaluate public representations regarding the developer’sscheme. The LPA is not duty bound to reject a development just because thereis local opposition. However the LPA does have a legal duty to evaluate objec-tions and to explain the weight given to objections in the decision-makingprocess.

Where there are significant highways issues the LPA will work with the high-ways authority to ensure that these issues are factored into the final planningconsent.

The clientIf the development is speculative, the developer will be working to fulfil generalmarket demand by selling or letting a building. Thus the concept of a client orspecific end user becomes notional, and in that context the developer will prob-ably produce a building which has the widest possible market appeal. That isone which is visually appealing, adaptable and in a popular location. Wherethere is a client, who may be a landowner, a public body, a business seeking newpremises or a funding institution building up its property investment portfoliothe developer will be working to a more specific brief.

Development partnersSometimes the scale of a development requires a joint approach in order thata developer is not singularly overexposed to the risks involved. In othercircumstances where the development is particularly challenging there may bea need for specialist partners to become involved. This is common where largebrownfield sites (previously developed land) are being redeveloped and wherethe inputs from regeneration agencies such as urban development corporations


may be needed to bring sites up to a developable condition. In other circum-stances the landowner may wish to play a role as a development partner and bysharing the risks will be looking to participate in the rewards from thecompleted development.

Specialist organisations such as housing associations might also be involvedwhere there is a substantial housing element in a scheme. Development in part-nerships has the potential to bring synergies to a development, spread the risksbetween parties and enables participants to exert some control over theoutcome. Those readers who are particularly interested in this specialised areaof development are directed to Dubben and Williams (2009).

Funding institutionsAs Wilkinson and Reed (2008: 125) point out there is traditionally a distinctiondrawn between institutions which fund property development in the short termcovering the construction period (typically banks) and those with longer-terminterests in the investment performance of property (typically financial institu-tions). The latter includes pension funds and insurance companies who vary intheir degree of enthusiasm for acquiring property as part of their overall invest-ment portfolios.

During periods when these institutions are actively investing in commercialproperty they may forward fund developments which are pre-let to businesstenants or they may agree to forward-purchase a development conditional upona tenant being found within a specified timescale. Alternatively a fund mightemploy a developer as a project manager in order to carry out a developmenton a site which it has acquired. In these circumstances a financial institution willexert considerable control over a developer who may have to accept a lowerprofit margin for the certainty provided by the involvement of an institution.

The role of a bank is normally to provide development funding usuallygeared to a proportion of the value or costs of the development. A bank willevaluate a developer’s loan application and will take a view on the degree of riskfaced when setting the interest rate which the developer will pay. Thus a bankwould normally evaluate a developer’s credit rating and track record for deliv-ering developments on time. A bank would also consider its own exit strategyin a worst-case scenario where it had to take possession of a site because a devel-oper had defaulted on a loan. The credit crunch during 2008 to 2009 exposedsome toxic loans in the property sector and Phillips (2009) reported that onlytwo UK banks were subsequently interested in making new property loansexceeding £25 million. In 2009 two leading UK banks, Lloyds TSB andHBOS, had between them over £97 billion of loans extended against buildingand property and both banks were seeking to reduce this exposure. To put thisinto some perspective, Lloyds TSB’s exposure to building and propertyamounted to £23.2 billion in 2009 which represents approximately 15 per centof its overall lending portfolio.

The main contractorThe contractor is employed on the construction of the building and may in turnemploy specialist subcontractors. For large projects there may be twenty to


thirty subcontractors whose specialist contributions to the project are coordi-nated by the main contractor or project manager. The procurement route usedand the type of building contract will determine the relationship of the maincontractor with the developer, and some of the main options are discussed inchapter 9 of this book. However at this juncture one of the options which adeveloper might explore is to try to pass on a lot of the risk involved in theconstruction stage of the project by negotiating a fixed-price contract with thecontractor which may also include penalty clauses for project overruns.

The landownerAs mentioned above the developer may have acquired the freehold of a site andwill thus be the landowner. However, particularly on town centre retailschemes, the landowner may be the local authority and there may be a lease andleaseback arrangement whereby the developer has the opportunity to undertakethe development and may then share in the rental income from the completedscheme along with the local authority. The division of the returns will act as anincentive for the developer to become involved so that there is a relationshipbetween risk and reward.

Landowners may also have agreed to enter into option agreements andconditional sales agreements with developers under which a developer agrees toundertake the work involved in obtaining planning consent. If consent is subse-quently agreed, the developer may exercise the option or fulfil the terms of theconditional contract by purchasing the site at an agreed market valuation. Thisis a useful arrangement for a developer in that while they might have to pay avalue for a site reflecting its full development potential (less their costs of obtain-ing consent) they will not have to acquire a site upon which it was not possibleto obtain planning consent after having made all reasonable endeavours.

The communityLocal residents, businesses and organisations will tend to form opinions ondevelopment proposals of any significance and they will make known their viewsto the local authority during the planning consultation period. In the UK apejorative term, NIMBY (not in my back yard), is often used to describe anygroup or individual who opposes development. Local objections to eco-townproposals, wind farms and airport extensions show that local protest is verymuch alive. While local objections will not always result in a scheme beingrefused by the local authority, local pressure can result in developers having torethink or concede on aspects of a scheme. Some would say that local objectorshave too much power to veto development while others would say that this isthe sign of a healthy democracy.

1.5 The economic context for property developmentThe development process has so far been discussed in terms of the stages andorganisations involved and how development viability may be assessed using theresidual method. The development process also has a wider economic contextin which the contribution of the developer may be seen as revitalising local


economies and utilising assets in a production process which generateseconomic growth.

Keynesian economists would advocate that during recessionary periodsgovernments should invest in major infrastructure and construction projects inorder to create an economic multiplier. Assuming this perspective, governmentswould be expected to invest in or incentivise major construction projects suchas high-capacity fast rail links or airport expansions. Governments which bid tohost the Olympic games are also demonstrating their awareness of the potentialthat these events have in terms of job creation and upskilling the workforce asvenues are prepared and infrastructure is upgraded. The upfront costs may besignificant but the potential multiplier effects felt throughout the economy maymore than justify the investment.

Property development is an important element on the supply side of a country’s economy as businesses require land and premises in the same way thatthey require labour, machinery and financial capital. The demand for propertyis therefore ultimately derived demand in that it stems from the activity of busi-nesses and firms. When the economy is contracting and firms are downsizing,then the knock-on effect will be reduced demand for business space. Converselywhen an economy is expanding and there are new business start-ups and busi-ness expansions the demand for premises increases and this is usually reflectedin rental growth. The challenge for property developers is to deliver the build-ings that businesses need at the required criteria of cost, quality and time. Thegrowth of an economy could be badly affected by shortcomings in the quantityand quality of property supplied.

Economic theory and property developmentHowever, developers tend to approach property from a different perspective tothat of economists. D’Arcy and Keogh (2002: 19) confirm that developers aremore likely to focus on a narrow band of the property market and they will bemore concerned with the marketability and profitability of potential develop-ments. The concentration is more on new space and speculative schemes, ratherthan on the larger stock of older occupied properties.

Economists are more interested in the influence of property on economicgrowth and efficiency and the effect of location on firms and jobs. Economictheory tends to ignore the supply of land and property and sometimes assumesthat there is an automatic adjustment of supply to meet demand. Economicsmay have failed to incorporate land and property into its analysis in a satisfac-tory manner. Neo-classical economics suggests that the price adjustments ofrent and land values will regulate the demand for and the supply of physicalspace. But in a mixed economy the workings of the price mechanism are condi-tioned and controlled by public policy to the extent that the forces of the freemarket and intervention become interdependent. Thus the pattern of landvalues is a reflection of both market forces and land use planning policy.

Another major shortcoming of economic theory is that it cannot accommo-date the physical nature of property. Once a factory has been built, it cannot bemoved, even if its original user deserts it. Ideally the supply of property wouldadjust quickly and smoothly to meet the needs of firms, but in reality there aretime lags in the supply of property and this may exert a negative influence on


the performance of firms and the national economy. Buildings vary in age,layout, size and design so it is difficult to find close substitutes. The propertymarket is also dominated by the price of second-hand stock, because the volumeof new property coming onto the market is small compared to the existing stockof buildings.

Determining the scale of developmentDevelopment is essentially a conversion process by change of use and theconstruction of buildings. If it is assumed that developers and property ownersseek to maximise profits, then the property developer is faced with a range ofdecisions on each project to enable a profit maximisation position to beachieved. The principle of discounted returns which underlies such decisionshas been considered by Balchin et al. (2000: 320–2). In theory a developer willneither strive to minimise total cost nor maximise the value of the completedproperty but to maximise the (discounted) difference between them. This prin-ciple will also dictate whether a developer should refurbish or redevelop. Inconceptual form the optimal size of a building to erect on a cleared urban siteis illustrated below in Figure 1.6.

The optimal size of the building is shown by X units of accommodation,because Y is the profit maximisation point where marginal cost (MC) =marginal revenue (MR), at this point the site value is V. Marginal revenue is theextra revenue to be earned from the addition of each successive unit (or floor)of accommodation to a site. However there comes a point where the additionof extra floors or units of accommodation is not worthwhile as demand decays.This phenomenon can be seen in multilevel retail malls where it is often diffi-cult or impossible to let retail units profitably on the higher floors. Increasinginaccessibility means that the unit value begins to fall and the economic expres-sion for this is diminishing marginal returns.

In many countries the developer does not have to confront this phenome-non as planning controls or zoning ordinances will limit building heights anddensities on sites. In those contexts a developer will probably build up to thelimits if market research suggests that there will be demand for the units orfloorspace provided. However in countries such as the Gulf States where policy


Figure 1.6 Optimal size of a building

units of accommodation

sitevalue

is deliberately relaxed with the intention of creating a development boom, thedeveloper is faced with the dilemma of how high to build. The lack of policycontrols may create overspeculation and oversupply, exposing developers andtheir funders to considerable risk if the market were to turn.

Marginal cost (in the diagram above) represents the additional costs ofadding each additional unit of accommodation to a building. Initially marginalcost falls, for example when a second storey is built, but then it increases asadditional storeys will necessitate more powerful lifts, deeper and more expen-sive foundations and the project period is extended. The latter increases financecosts.

In the conceptual depiction of the interplay of marginal cost and marginalrevenue above the area represented by PQY should equal the profit the devel-oper would make, which is the difference between the total revenue and cost.Of course this is a simplified conceptual representation and in reality the devel-oper’s professional advisers would model different development scenariosarmed with up-to-date market intelligence while factoring in constraints affect-ing a site.

Some of the constraints typically encountered by developers in this typeof exercise are heritage related involving conservation areas, listed buildingsand even protected views which limit the height to which buildings can bedeveloped.

In the commercial property sector there are policy constraints on developingout-of-town retail centres and business parks. However there are also opportu-nities identified at strategic employment locations in cities where transportinfrastructure is being upgraded and where high buildings proposals areencouraged. The Canary Wharf cluster in London’s former docklands is onesuch centre which benefits from the intersection of underground, light railwayextensions and the city airport and where additional investment is being made in the Crossrail scheme. Successful developers will therefore be those whostay attuned to policy so that they are able to take options on sites in locationswhere development is encouraged while avoiding locations where policyconstrains development.

Cyclical development activityChanges in the level of private sector development activity are caused bychanges in the availability of viable development opportunities and the expectedprofitability and risk of development. Thus the opportunity and the profitmotive for development both need to exist for development to happen.

Rental values for commercial property vary according to changes ineconomic activity. In a reflationary phase of the economic cycle, rental and capi-tal values will tend to rise with occupational demand, while new supply will belimited and construction and finance costs relatively stable. As values rise sothere are more opportunities for development and more developers willbecome fully active. Ultimately the pipeline of development will exceed thedemand for the new space and as schemes materialise several years later itbecomes increasingly difficult to find business occupiers and thus rents andcapital values begin to fall. A deflationary phase ensues which causes developersto scale down their operations in the face of reduced demand.


Although the term ‘property cycle’ is sometimes used to reflect these peri-odic variations in development activity, research by the Investment PropertyDatabank and the University of Aberdeen (1994) found that over a 30-yearperiod the depth and duration of these fluctuations was not regular, predictablenor subject to any formula.

Thus while it is important to consider the broader economic context inwhich property developers operate and to accept that there will be fluctuationsin development activity, it is also important to recognise that economic theoryhas yet to provide an adequate explanation of the activities and contributionsmade by developers.

1.6 Sustainable developmentThe discussion above reveals that a number of practices have evolved concern-ing property development and that the focus has perhaps understandably beenon economic viability. However in recent years the threats posed by climatechange have become apparent in extreme weather events and this has raised thelevel of concern regarding the environment. The consequences for propertydevelopment are that the concept of sustainable development is being takenmore seriously than it once was.

Of course environmental regulation has impacted upon the built environ-ment for many years and for example in most countries major developmentsmust undergo environmental impact assessment. In Europe this requirementdates back to a 1985 directive. However, the sustainable development agendaentails more than just the environmental screening of projects, laudable thoughthat might be. As Ratcliffe et al. (2009) point out, discussions on sustainabledevelopment tend to begin with the report of the World Commission onEnvironment and Development (1987) Our Common Future (more commonlyknown as the Brundtland report) which contained the following user-friendlydefinition of sustainability:

Development that meets the needs of the present without compromising theability of future generations to meet their own needs. (Brundtland cited inRatcliffe et al. 2009: 4)

The Brundtland definition has subsequently influenced thinking and policyaffecting all sectors of industry in most countries and the UK is no exception.The environmental theme is evident in that interpretation, but as established inAgenda 21 at the Rio Earth Summit in 1992, there are three interlinked aspectsof sustainability as shown below in Figure 1.7.

Most readers would correctly make the connection between sustainabledevelopment and environmental concerns such as climate change. The environ-mental strands of sustainable development are of course important, but theeconomic and social facets, which receive less attention, are also importantconsiderations.

While some progress has been made on establishing the link between sustain-ability and property development by authors such as Keeping and Shiers (2002)the agenda is developing fast and is still largely unexplored. For the purposes ofthis discussion therefore a sustainable building which attempted to address all


three sustainability facets might achieve some of the criteria as set out in Figure1.8.

Of course not all of those issues can be addressed in all commercial develop-ments. It must also be accepted that some of the measurable ‘quick wins’ on thesustainability agenda are more easily achieved on the environmental dimensionwhile some of the more subtle social and economic ambitions are not as readilyachievable. Perhaps it is for these reasons that the environmental aspect of sustain-ability has achieved greater prominence in relation to property development.

Sustainable development: policy and regulationGiven that a tipping point has been reached in the collective consciousness onclimate change most individuals and national governments now recognise theneed to take measures to tackle the problem. The political manifestation is thatnations have signed up to meeting carbon reduction targets, a process whichfirst came to global prominence under the Kyoto protocol in 1997.

There was understandably some scepticism by developing countries thatpressure to sign up to carbon reduction targets was a covert way of preventingthem from reaching levels of development already enjoyed by developed coun-tries. However as Lord Stern (2006: viii) has pointed out:

The world does not need to choose between averting climate change andpromoting growth and development. Changes in energy technologies and inthe structure of economies have created opportunities to decouple growthfrom greenhouse gas emissions. Indeed, ignoring climate change will even-tually damage economic growth.


Social(combatinginequality)

Environmental(protectingecosystems)

Economic(tackling poverty and

unemployment)

Figure 1.7 Three interlinked aspects of sustainability

Like any other industry, property development has to accept its share of respon-sibility on this agenda, particularly as it is estimated that 18 per cent of the UK’scarbon emissions are produced by non-domestic buildings and the additionalemissions from housing more than doubles this figure. Reducing carbon emis-sions from development can of course be achieved on a voluntary basis or


Use of sustainable building materials such assoftwood.

Use of renewable energy sources such as onsite micro-generation.

Energy efficient building services and reduced reliance on air conditioning plant.

Environmental Use of brownfield sites and avoidance of building ondimension floodplains.

Higher-density development located close to public transport nodes in order to reduce reliance on the car. Adoption of green travel plans.

Ensure building components are lifecycle costed, sothat they require less maintenance and repair.

Ensure that heating and other equipment can easily convert to cheaper energy sources.

Economic Adoption of high insulation standards to reduce heat dimension loss.

Ensuring internal space is adaptable to meet a variety of user needs.

In housing development providing a dwelling mix tomeet the needs and demand arising from different-sized households.

Social Ensure development is close to social infrastructure, dimension so that building users/residents have convenient

access to schools, healthcare facilities, shops, leisure and recreational opportunities.

Improved security by incorporating crime reduction advice from the police force at the design stage.

Figure 1.8 Some sustainable development criteria applied to property development

through regulation or by introducing incentives such as grants or tax breaks ora combination of all of these approaches.

From a regulatory perspective, governmental ambitions to foster sustainabledevelopment will result in gradually more exacting standards which will presentsome new challenges to property developers. For example at a macro level, theUK government has put in place a Code for Sustainable Homes which will ulti-mately require that all new housing produced after 2016 to be zero carbon.

At a micro level Energy Performance Certificates (EPCs) were mademandatory in the UK in 2009 for all domestic and non-domestic buildings.While EPCs do not specify minimum levels of energy performance they doincrease the degree of transparency and information regarding a building’senergy efficiency.

There is also considerable interest in how renewable energy technologiesmight contribute to reducing carbon emissions. In this context the LondonBorough of Merton in the UK came to prominence because it embedded apolicy in its Unitary Development Plan which stated that:

All new industrial, warehousing, office and live/work units outside conser-vation areas and above a threshold of 1,000 square metres will be expectedto incorporate renewable energy production equipment to provide at least10 per cent of predicted energy requirements. (London Borough of Merton2003: 86)

The 10 per cent renewable energy contribution was to be provided on-site andthe policy became known as the ‘Merton Rule’. Other local authorities subse-quently adopted similar policies which required new developments to incorpo-rate some renewable energy technology.

Although the Merton Rule began by targeting large commercial develop-ments, the policy had obvious implications for housebuilding, given that thegovernment has set a target that all new housing should be zero carbon by2016. The volume housebuilding industry is not known for its innovativeapproaches to producing low-energy housing and authorities such as Mertonhave argued that they need controls to force developers to produce moresustainable housing.

Hewitt (2007) a supporter of the Merton Rule, argues that the additionalcost of adding renewable energy equipment, such as micro-generation equip-ment, to an average new home is around £2,000. Even if this is passed onto theend user, Hewitt argues that the reduction in energy bills will soon make inroadsinto the initial capital investment. The resale value of the dwelling could also beexpected to reflect an energy efficiency advantage over standard housing.

A number of volume housebuilders in the UK and the industry’s represen-tative body, the Home Builders Federation (HBF) has argued against an appli-cation of the Merton Rule to housing. The HBF and other objectors claim thatwhile the costs are easy to calculate, renewable energy technologies are rela-tively untried and some of the methods are not particularly attractive in termsof payback rates on initial capital investment.

Scott (2008) for example reports on trials conducted by housebuilderBarratt at their eco-village at Chorley in Lancashire. Barratt support the moveto zero carbon housing and are testing various renewable energy technologies


on standard house types. Photovoltaics and heat pumps have performed well interms of energy generation, but their payback times, when measured as a ratioof cost savings against capital outlay were reported to be ‘prohibitive’. Givencurrent technology, photovoltaics would take more than 37 years to pay backand heat pumps 15 years. Micro wind turbines were found by Barratt toperform disappointingly in terms of energy generation and therefore pay-backtimes, while combined heat and power units performed well. Trials are contin-uing on a range of renewable and low-carbon energy technology, but it is clearthat the housebuilding industry is still very much on a learning curve regard-ing the identification of the technologies which will be cost-effective energygenerators.

Objectors to the Merton Rule have also suggested that a blanket percentagetarget for renewable energy for all developments would be arbitrary and unjus-tified because while the target might be achievable on some sites, it might bedifficult on others due to aspect, topography or cost.

The HBF are also concerned that there is an overemphasis on new-buildwhen it only represents a small fraction of existing housing stock. The HBF feelthat there should be more focus on ways to bring existing dwellings in private,public and social ownership up to near zero carbon standards. As Whitaker, aspokesperson for the HBF, states:

Modern day homes may account for 25% of UK emissions, but this needs tobe seen in context. New homes also account for barely 1% of housing stockeach year, so while the need for greener homes is obvious, without anemphasis on existing homes any drive for lower emissions is doomed to futil-ity. (Whitaker 2007: 335)

Having considered these arguments, the government in England(Communities and Local Government 2007) issued a Planning PolicyStatement (PPS) on climate change which endorses local action consistent withthe Merton Rule. The policy emphasises how important tackling climatechange has become in the political arena:

The Government believes that climate change is the greatest long-term chal-lenge facing the world today. Addressing climate change is therefore theGovernment’s principle concern for sustainable development. (Communitiesand Local Government 2007: 8)

Among other things the policy requires local authorities to encourage renew-able and low-carbon energy generation but with some important qualifyingcriteria. Local authorities should have an evidence-based understanding of thefeasibility and potential for renewable and low-carbon technologies, includingmicro-generation, to supply new development in their area. The policyendorses the principle of setting a target percentage for the energy expectedfrom renewable sources but that this should not prescribe particular technolo-gies and should be flexible in how carbon savings from local energy suppliesare to be secured. The policy requires local authorities to set out the type andsize of development to which the target will be applied in consultation withdevelopers.


The policy ambition to include renewable energy in new development istherefore one of the positive ways that carbon emissions from buildings can bereduced. However it is also important to consider the property market responseto the sustainability agenda.

Sustainable development and the property marketMarket forces can work in harmony with many sustainable development objec-tives. For example at the micro level house purchasers might well be interestedin energy efficient appliances in their homes and while such appliances mighthave a marginally higher initial capital cost, they will pay for themselves over alifetime of use. However, market forces may not always be conducive to foster-ing sustainable development. For example, social and economic problems in anarea may have arisen precisely because the market has failed to invest there andin such areas intervention may be required to stimulate development in theinterests of regeneration.

To foster sustainable development an ideal framework would contain acombination of regulation and incentives for developers. Thus far the focus hasbeen on regulation and so the discussion now considers whether there are anyfinancial incentives in the market for a developer to provide more sustainablebuildings. This is not a discussion about whether there are or should be grantsto subsidise the provision of sustainable buildings but whether there is evidenceof any market demand for such buildings. If the concept of sustainable propertydevelopment is to become established, it must be self-sustaining in a marketsense.

The Oxford Institute for Sustainable Development (OISD) research on land-lord and tenant attitudes towards sustainable offices, identified a ‘circle ofblame’ (OISD 2009: 12) in which developers claim that they are not requestedto produce sustainable buildings by end users or investors, so there is no incen-tive for them to produce buildings which exceed the statutory minima in thebuilding regulations. The end users (business tenants) claim that they are notoffered sustainable buildings and so sustainability is removed from their searchcriteria. Property investors claim that they would invest in sustainable buildingsif more were produced by developers to create an investment market for suchproperties.

The OISD research therefore investigated whether there was any truth in theassertion that the end users of commercial property (businesses from all sectorsof industry) were simply not requesting sustainable buildings. The OISDresearch focused upon commercial tenants search priorities when they werelooking to lease office space. The study concluded that (2009: 12):

This research has shown that although there is evidence of an emerging andincreasing demand for sustainable offices, other factors such as location,availability of stock and building quality remain more important in determin-ing occupiers’ final choice of office.

However, the OISD team detected that companies which had a corporate socialresponsibility policy were leading the way in specifying sustainability in theirsearch criteria for office space. One of the survey respondents summed up this


position in that companies needed to be seen by their clients to ‘walk the talk’on sustainability and it was this type of company that took space in BREEAM-rated office buildings.

Research funded partly by the RICS on the office market in the UnitedStates and carried out by Eichholtz et al. (2009) explored whether officetenants were willing to pay a rental premium to lease energy efficient build-ings. In the USA the terminology used is ‘green building’ which are certifiedunder one of two recognised green rating systems which are the LEEDsystem (Leadership in Energy and Environmental Design) and the EnergyStar label.

In a similar vein to the OISD research in the UK Eichholtz at al. (2009)noted that the occupier market in the USA contains an increasing proportionof companies which have a corporate social responsibility policy which extendsto taking practical measures to tackle climate change. This, the team felt, wasconducive to the cultivation of a more discerning market for commercial build-ings and it is likely that sustainability will begin to feature more highly in occu-piers’ expectations when searching for premises.

Having considered a wide sample of office buildings in American cities,Eichholtz et al. (2009) detected a 6 per cent rental premium for buildings certi-fied under the Energy Star system. While the team did not find a premium forLEED-rated buildings they concluded that in aggregate there was a 3 per centrental premium achievable for green buildings. The research also examined thecapital values achieved on the sales of office buildings. After controlling forlocation and quality the team found that those buildings which were accreditedwith green status attracted a 16 per cent higher capital value than standardbuildings.

While the research suggests incentives for developers, the cost side of theequation also has to be considered as the incentive of a 3 per cent rentalpremium could be eradicated if the costs to put a building in that category arean additional 6 per cent.

There is a widely held perception that the additional costs incurred inproducing a sustainable building will either be exorbitant or that those costs willnot be recovered by the developer through added value at the point of sale.This assertion was investigated in research by construction and property consul-tancy Cyril Sweett (2005) which examined the cost implications of achievingenhanced environmental performance for four typical building types whichwere: a four bedroom house, a naturally ventilated office building, an air-condi-tioned office building and a healthcare centre.

The Cyril Sweett research team adopted compliance with the UK buildingregulations as the baseline for each development from which to assess the costof improvements necessary to raise each project progressively to ‘good’, ‘verygood’ and ‘excellent’ under the BREEAM (Building Research EstablishmentEnvironmental Assessment Method) ratings.

BREEAM is the recognised industry standard in the UK for measuring thesustainability of a building and it awards credit points for enhanced environ-mental performance through management, design and specification. It is thesum of the credit points which attracts the rating categories mentioned above.For example a building which attracted a score of between 40 to 55 creditpoints would attract a ‘good’ rating under BREEAM.


It is not necessary here to unpack the intricacies of BREEAM and theresearch methodology adopted by the Cyril Sweett team, but the findingssummarised above in Table 1.1 provide some evidence that cost may not be aninsurmountable issue when trying to develop sustainable buildings.

The range achievable in each category above in Table 1.1represents choicesabout the site location. Thus the reuse of a brownfield site which is close to publictransport will bring the development to the lower end of the cost range in eachcase. Conversely the use of a greenfield site which is inaccessible by public trans-port will mean that more must be spent on achieving the necessary credits to raisethe scheme to a higher BREEAM category. Site location is thus a key issue indetermining the degree of environmental sustainability achieved by new buildings.

BedZED: a sustainable property developmentIn the UK the most well-known pioneering sustainable development wasdesigned by a team led by architect Bill Dunster and completed in 2002. Thescheme occupies a 1.4 hectare site at Beddington in the outskirts of Londonand is known as BedZED.

The ‘ZED’ in the scheme’s name stands for zero (fossil) energy development asthe heat and power for the scheme sought to rely entirely on renewable energy.Approximately 10 per cent of the renewable energy is provided by roof and façade-mounted photovoltaic panels which also provide energy for electric car charging


Table 1.1 Developing sustainable buildings (BREEAM ratings)

Building type Additional capital Additional capital Additional capital cost required to cost required to cost required to raiseraise the project to raise the project to the project to BREEAM ‘good’ BREEAM ‘very BREEAM

good’ ‘excellent’

Four-bedroom 0.3 per cent to 1.3 per cent to 4.2 per cent tohouse (115m2 0.9 per cent 3.1 per cent 6.9 per centgross floor area)

Naturally –0.3 per cent –0.4 per cent to 2.5 per cent toventilated office to –0.4 per cent 2 per cent 3.4 per centbuilding (493m2 (i.e. cost savings)gross floor area)

Air-conditioned 0 to 0.2 per cent 0.1 per cent to 3.3 per cent tooffice building 5.7 per cent 5.7 per cent(10,098m2 gross floor area)

Healthcare centre Baseline 0 per cent 0.6 per cent to(6,400m2 gross 1.9 per centfloor area)

points. The remaining 90 per cent of the scheme’s energy requirement is providedby a combined heat and power (CHP) unit fuelled by wood pellets produced fromforestry waste. The latter is one of a number of biomass sources of energy.

The client for the development was the Peabody Trust, a large and well-established housing association which had acquired the brownfield site at belowmarket value from the local authority: the London Borough of Sutton.

The award-winning scheme is a high-density mixed-use developmentcontaining 82 flats and maisonettes, 1,600m2 of business space available forletting in 23 separate units and social and recreational facilities. The mixedtenure housing element comprises 34 open market units, 23 shared ownershipunits, 10 key worker rented units and 15 social rented units. There is a sportspitch, café, shop, a healthy living centre and nursery.

As Towers (2005: 251–6) points out, the development uses the site very effi-ciently and for example the net density of the residential element is 128 unitsper hectare. This is a very sustainable use of land and significantly exceeds densi-ties achieved on contemporary flatted developments in outer London.

Key BedZED features are its green travel plan and a car pooling system forthe residents. Some of the larger residential units are live-work units whichenable flexible lifestyles and reduce the need for residents to commute. Thereis water recycling and rain-water harvesting and the scheme’s roof gardens canbe used for food production.

The development maximised the use of recycled building materials such assteel and brick and in the sourcing of all building materials suppliers within a35-mile radius of the scheme were prioritised. All building materials are non-toxic and from sustainable sources.

The detailed construction specification at BedZED achieves very high stan-dards of insulation, so that energy is not wasted. The buildings’ thermal masshas been designed to smooth the profile between periods of heat gain and dissi-pation. The potential of solar gain is maximised by the form of the buildingsand their orientation along an east–west axis upon which the residential unitsface south and the employment units face north.

Heat exchangers operate in roof spaces in conjunction with the roof-mountedwind cowls which are a distinctive feature of this development. This arrangementis known as passive heat recovery ventilation, as wind passing across the cowlscreates a natural vacuum which draws stale air out of the building which in turncreates a vacuum which draws in fresh air. The result is dramatically reduced fuelconsumption during the winter months when there is no need for conventionalcentral heating and in the summer months there is no need for air conditioning.

In terms of the market response to BedZED all of the open market andshared ownership residential units sold on completion of the development andtheir resale values are estimated at 20 per cent above the sales values for compa-rable units in the area. All of the business space was let and there have been nodifficulties in reletting the space at competitive market rents.

However, as with any pioneering scheme, there will inevitably be somesetbacks, which is part of the learning curve on developing sustainable buildings.There have been periods when the CHP plant has not worked properly and thisnecessitated the installation of conventional boilers (powered from the nationalnetwork) in the apartments to provide hot water. The waste treatment system hasalso been out of service because of the difficulties in sourcing a reliable operator.


Because BedZED is an innovative scheme involving a lot of non-standardtechniques combined with a range of ambitious project goals the constructioncosts went 30 per cent over budget. This of course does not suggest that everysustainable building would experience a 30 per cent cost overrun, as economiesof scale and standardisation of construction techniques tend to iron out initialcost discrepancies. Because the land was obtained at less than market value andthat the client was a not-for-profit organisation there was no pressing need forthe scheme to show a clear profit so long as it did not at the same time make aloss. Given that the business units in the scheme let and the properties soldquickly the scheme was not in the end a loss maker for the client.

BedZED is one of a number of exemplar sustainable developments in theUK which have informed a ZED toolkit produced by Dunster et al. (2008)which illustrates practical ways that the ZED principles can be applied to differ-ent building types and scales.

1.7 SummaryThis chapter began by considering the property development process from aconventional perspective and it was found that there are a number of economicprinciples and appraisal techniques which have evolved and continue to serve apurpose. The profit motivation in this risk-prone process continues to drive themajor private sector developers and that scenario is unlikely to change signifi-cantly. However property development has become a very diversified businessand now includes a sizeable not-for-profit sector which includes governmentagencies and the voluntary sector.

Property development takes place within a dynamic context in which thedirection of travel of government policy is increasingly towards the productionof sustainable buildings. These changes may add additional costs to projects butthere is some research evidence to suggest that these costs need not pose aninsurmountable problem for developers. The likelihood is that the additionalproject costs will be: (a) marginal; (b) will gradually reduce due to standardisa-tion and technological innovation; and (c) may in any event be recoverable inadded project value as building users and owners begin to recognise and adoptsustainability as one of their selection criteria.

There are also sustainability toolkits and exemplary sustainable propertydevelopments, although for developers to fully buy into the concept of sustain-ability there will need to be a combination of regulation and market incentives.There are still a number of unexplored research agendas regarding sustainabledevelopment, although there are tentative signs that indulging in sustainableproperty development may not be inconsistent with a developer’s profit motive.

ReferencesBalchin, P., Isaac, D. and Chen, J. (2000) Urban Economics: A Global Perspective

(London: Palgrave).Baum, A. and Crosby, N. (2008) Property Investment Appraisal, 3rd edition (London:

Blackwell).Communities and Local Government (2007) Planning Policy Statement: Planning and

Climate Change: Supplement to Planning Policy Statement 1 (London: The Stationery


Office). Available in e-format at: www.communities.gov.uk/documents/ planningandbuilding/pdf/ppsclimatechange.pdf

Cyril Sweett (2005) Putting a Price on Sustainability, Building Research EstablishmentTrust. Readers may also be interested in Cyril Sweett (2009) Costing EnergyEfficiency Improvements in Existing Commercial Buildings, Investment PropertyForum. Available in e-format at: www.cyrilsweett.com/pdfs/IPF_low_energy_improvements_summary_report.pdf

D’Arcy, E. and Keogh, G. ‘The market context of property development activity’, inGuy, S. and Henneberry, J. (eds) (2002) Development and Developers: Perspectives onProperty (Oxford: Blackwell).

Dubben, N. and Williams, B. (2009) Partnerships in Property Development (London:Wiley-Blackwell).

Dunster, B., Gilbert, G. and Simmons, C. (2008) The Zed Book (Abingdon: Taylor &Francis).

Eichholtz, P., Kok, N. and Quigley, J. (2009) Doing Well by Doing Good? An Analysis ofthe Financial Performance of Green Buildings in the USA (London: RICS ResearchReport). Available in e-format at: www.rics.org/NR/rdonlyres/44F67595-7989-45C7-B489-7E2B84F9DA76/0/DoingWellbyDoingGood.pdf

Havard, T. (2008) Contemporary Property Development, 2nd edition (London: RIBAPublishing).

Hewitt, A. (2007) ‘Realities of the Merton rule’, 76 (10) Town and Country Planning,332–4.

Homes and Communities Agency (2009) notes on Local Housing Companies can befound at: www.homesandcommunities.co.uk/local_housing_companies

Investment Property Databank and the University of Aberdeen (1994) Understandingthe Property Cycle (London: RICS).

Keeping, M. and Shiers, D. (2002) Sustainable Property Development (Oxford: BlackwellScience).

London Borough of Merton (2003) Unitary Development Plan, London Borough ofMerton. Available in e-format at: www.merton.gov.uk/living/planning/planning-policy/udp.htm

Marriott, O. (1962) The Property Boom (London: Hamish Hamilton).Millington, A. (2000) Property Development (London: Estates Gazette).Oxford Institute for Sustainable Development (2009) Demand for Sustainable Offices in

the UK, Investment Property Forum. Available in e-format at: http://members.ipf.org.uk/membersarealive/downloads/listings1.asp?pid=292

Phillips, M. (2009) ‘The rush for the exit’, Estates Gazette, 14 March, 47–9.Ratcliffe, J., Stubbs, M. and Keeping, M. (2009) Urban Planning and Real Estate

Development, 3rd edition (Abingdon: Routledge).Scott, M. (2008) ‘The heat is on’, RICS Business, April, 14–17.Stern Review, the (2006) The Economics of Climate Change (London: HM Treasury).

Available in e-format at: www.hm-treasury.gov.uk/sternreview_index.htm Syms, P. (2002) Land, Development and Design (Oxford: Blackwell). Towers, G. (2005) At Home in the City: An Introduction to Urban Housing Design

(London: Architectural Press). Whitaker, A. (2007) ‘Wanted – a national framework’, 76 (10) Town and County

Planning.Wilkinson, S. and Reed, R. (2008) Property Development, 5th edition (Abingdon:

Routledge).World Commission on Environment and Development (Brundtland Report) (1987)

Our Common Future (Oxford: Oxford University Press).


abnormal profit 6acceptability 183access 10, 36–7, 42–4, 49, 188, 197,

205–8, 232accounts 55, 146–7, 148, 151, 152–3,

172advertising 57, 62–3, 236, 240, 241–2,

244–6, 247affordable housing 3, 5, 13, 34, 38–40,

52, 204, 230agents’ fees 68alternative approaches (of valuation) 78–9amount of £1 75, 77, 81–2, 83amount of £1 pa 82annual sinking fund 82annuity 82–3archaeological remains 43auctions 33, 35, 51authorised property unit trust 178, 183

B1 (use class) 116, 207bad debts 104, 142, 144balance sheet 134, 136, 138, 156, 158,

161, 166, 169, 170balance sheet model of the firm 169–70Bank of England (BoE) 49, 60, 71, 143,

150, 153, 154, 172, 189base rate 60, 150, 151, 155, 166basis point 60, 71, 139, 162BCIS (see Building Cost Information Service)BedZED 27–8bespoke property 218beta analysis 125–6, 130betas 130bill of quantities 5, 213, 224–5, 227, 247bonds 77, 102, 140, 153, 155–6, 171–3,

175, 178, 186–7boundaries 31, 36, 43, 157, 249BREEAM 25–6, 50, 200–1, 207, 209,

218, 238, 241bridging finance 150, 163–4, 167British Council for Offices 208–9British Property Federation 174Brochures 236, 140, 246, 269building:

contract 5, 9, 15, 60–2, 63–4, 65, 76, 137, 153, 211–12, 221–4, 225–6,227, 247–9

costs 8, 12, 5–9, 62, 65–6, 68–9, 70–1, 73, 75, 89, 98–9, 103–6, 107, 110,114, 116, 120, 128, 137, 166, 219,223, 226

procurement 213–14, 218–19, 221–5, 232

rent 88, 90, 93societies 82, 142, 143–4, 147, 151repayment 82, 133, 140, 142, 146–7,

150–2, 161, 168–9Building Cost Information Service 5, 58,

70, 207, 220business portfolio matrix 222–3

CABE (see Commission for Architectureand the Built Environment)

CAP (see capital market instrument)capital:

growth 11, 130, 136, 188holiday 150market instrument 139, 150–1profit 189structure 180, 182–3, 158sum 180, 182–3, 158value 6, 18, 25, 32, 54, 56–7, 68–9,

70, 74, 77–8, 79–81, 86, 103–4,106–9, 117, 146, 154, 182, 189,205, 209

carbon emissions 21, 22car parking 49, 206–7, 220–1cash 9, 56, 65, 73, 75–7, 78, 105, 122,

130, 140, 146–7, 149–50, 151, 155,160–1, 169–70

cash flow methods 9, 55, 102–30cash flows 78, 102–30Central Statistical Office (CSO) 177centralised marketplace 135certainty 96, 119, 121–3, 125–33, 213,

216, 222–3, 226, 230certainty equivalent method 125clearing banks 133, 138, 142, 143–4,

149–50, 167, 173client’s:

brief 13, 221objectives 221requirements 193

climate change 19, 20, 23, 25, 45coefficient of IRR/NPV variation 130Code for Sustainable Homes 22, 201–2,

230collar 71, 151, 155commercial mortgage 105, 150, 168Commission for Architecture and the Built

Environment 195, 197–8, 200communicating 244community 12, 15, 30, 40, 199

257

Index

Community Infrastructure Levy (CIL) 40comparative approach (see comparative

method)comparative method 9, 55compensation 9, 36, 45, 57, 73competitions 33, 34–5competitive tender 216, 222, 230compound interest 71, 81–2compounding 81–3, 104conservation 18, 38, 66construction:

industry 201, 225, 228–9, 232management 216, 218, 222, 224period 14, 106, 110, 139, 213, 221sector xi, 54techniques 28

contamination 10, 43, 47–8, 51contingencies 7–8, 57, 111, 164contract:

arrangements 223–4period 54, 104, 227

contractor 9, 11, 14–15, 69, 76, 103,112–13, 149, 153, 163, 193–4,200–1, 211–32, 247–9

contractor’s test 9control 6, 14, 18, 22, 25, 38controlling 25convertible mortgages (see mortgages)convertibles 149corporate capital structure 182corporate finance 156–7, 159–61, 168–71corporate social responsibility 24–5, 200,

209, 218, 238corporation tax 187cost reimbursement contracts 224cost of construction 10, 205, 220, 226covenant 146, 148credit crunch 5, 7, 14, 35, 40, 48–9, 60,

69, 71, 73, 95, 131, 138, 142, 147,169, 147–8, 191, 209

cumulative preference shares 171current:

assets 170liabilities 170

cyclical trends 18

data analysis 239daylight 197, 203DCF (see discounted cash flow)debt finance 86, 137, 138–9, 157, 168–9,

170debt:

capacity 169finance 86, 137–9, 157, 168–70

deep discounted bonds 140deferred shares 160demand 4–5, 6, 8, 9, 13, 16–17, 18, 24,

31–2, 35, 48–50, 69, 143, 236–41demolition 36, 60, 67–8, 72, 99, 220

density 8, 21, 27, 41, 196, 198, 207Department for Communities and Local

Government 37, 51, 231design 4, 9, 10, 17, 21, 25–7, 31, 38, 42,

62, 145, 165, 193–232, 240, 241,243, 244–8

design and build 193, 212, 215–17,221–4

design code 196design guide 196developers’ profit 6–7, 28, 38, 63, 66, 69,

70–1, 77, 85, 90–2, 120, 166, 231development:

brief 33, 38capital 148–9market 134, 239period 6, 49, 64–5, 68–70, 75, 89, 96,

104, 114, 121, 137, 141, 144–5,154, 155, 162, 163

plans 13, 22, 32, 37–9, 238development appraisal toolkits 30, 40,

114direct investment 136, 159, 171, 172,

181discount 63, 78, 102, 113, 119, 124,

125, 126, 130, 138, 160, 170, 172,181, 182, 187

discount to net asset value 160, 172discounted cash flow 54, 75, 78, 102,

104–6, 109–10, 114discounting 81, 125disposal 7, 8, 32–3, 48–9, 60, 70, 87,

105, 117, 130, 136, 145, 159, 171,172, 181, 185–6, 187, 189, 235–44

downside risk 117, 124, 126, 127, 145drop lock loan 173

economic analysis 48, 103Environmental Impact Assessment (EIA)

19, 41, 96, 232equity:

participation mortgage 93, 99schemes 100, 139, 141, 144, 147sharing 94, 96, 97

exchange value 11, 56existing use value (EUV) 8expected value 125–9

factory 16, 230–1fees 31, 42, 56, 57, 59, 62–3, 68, 70, 76,

84, 103, 110, 114, 117, 152, 153,163, 165, 224, 231, 244, 248

finance charges 7, 8, 60–1, 68, 96, 152finance lease 150, 154, 163, 166financial:

institutions 2, 7, 8, 14, 55, 58, 60–1, 68, 86, 103, 137–8, 152, 154,176–7, 188

status 33, 133, 146, 163

258 Index

fixed assets 170–1fixed rate 82, 151, 155, 159, 161–2flexibility 33, 146, 148, 186, 221–3, 239floating rate 161–2flood risk 10, 30, 43, 45–7, 202floor 139, 151, 159forecasts 6, 49, 51, 55, 70, 102–3, 111,

113, 124, 131, 177, 227, 238foreign banks 142–3, 153forward funding 137, 164–5forward sale 163–4funders 18, 63, 85, 87, 96, 97, 103, 141,

145, 149, 175, 247funding matrix 158

gearing 76, 95, 138–9, 148, 170, 180–1,186

general funding 163, 172–3government policy 28, 38, 47, 195‘green’ building 25greenhouse gases 20, 201green travel plans 21, 27, 42, 66, 208,

232gross development value (GDV) 6–9, 10,

56, 57, 63, 68, 75, 77, 78, 79gross funds 137gross internal area 59, 110ground rent 86–93, 97, 154ground conditions 10, 43–4growth 89, 90, 93–4, 113–14, 116, 137,

143, 150, 154, 182

handover 248–9health and safety 231hedging instruments 251high-tech 207, 241Homes and Communities Agency 2, 40,

48, 114, 204, 229Hong Kong 141, 188housing associations 2, 3, 14, 27, 34, 39,

230, 231

income 5, 11, 15, 54–7, 68, 73–5,78–85, 87, 89–108, 110, 116, 122,125, 127, 129, 134, 136, 137, 144–7,154, 165–6, 168, 175, 180–1, 185–7,188, 191, 210, 220

indirect funding 136, 156, 175, 177–8industrial development 3inflation 6, 69, 70, 75, 78, 79, 89, 103,

105, 113–17, 124, 134, 136–7, 139,169, 231, 237

infrastructure 5, 9, 10, 13, 16, 18, 32,40, 42, 45, 52, 96, 105, 196, 206

insolvency 173, 181institutional investment 176–9insurance companies 14, 103, 133, 136,

137, 142, 144, 145, 149, 175–6, 178integrated procurement 212

interest 2, 7, 8, 10, 12, 54, 56, 60–2,64–5, 68–9, 71, 73, 77, 78–80, 81–2,102–17, 21, 24, 26, 31, 33–40, 142,144–53, 158–70, 173, 176, 183, 186,188, 237

interest rates 12, 56, 62, 73, 111, 116,137, 139, 149–51, 153, 155, 161–2,168, 173, 237

internal rate of return (IRR) 79, 130investment market 24, 70, 80, 103,

134–5, 146, 175, 178investment method 9, 57, 79, 80, 228

JCT standard form of contract 194, 212,225, 230, 232, 247

joint ventures 2, 86, 103, 138, 140, 141,164–5, 188–90

Keynesian approach 16

land bank 31, 33, 35, 51, 86Lands Tribunal 9, 55landscape 13, 42, 43, 44, 59latent defects insurance 248Latham report 229launch ceremonies 246layout 17, 197, 199, 206, 245–6lease:

covenant 100full repairing and insuring (FRI) 116guarantee 166

lending criteria 133, 145, 149letting fees 62, 67–8, 99leverage 47, 139, 195, 229LIBOR 60, 139, 144, 148, 156, 161–2,

167, 173limited-recourse loans 139, 141, 162liquidity 80, 81, 84–7, 124, 139, 142,

144, 149, 159, 172loan terms 147loan to value ratio 138, 168, 143loans 5, 49, 54, 62, 78, 82, 84, 96,

116–17, 33–5, 138–41, 143–4,146–53, 156–8, 160–3, 167–73, 177,182–4, 189, 228, 231

Local Development Frameworks (LDFs)37–8, 39, 41

local authority 5, 13, 15, 27, 36, 38–9,40–2, 45, 47, 62–3, 66, 74, 85–9,90–7, 99, 100, 194, 196–7, 201, 205,207, 239

Local Housing Company 2local residents 15, 38location 4, 8, 9, 12, 16, 18, 24–6, 31, 47,

59, 56, 58, 64, 172, 180, 187, 194,206–7, 220, 236, 238, 240, 243, 244,246, 249

London Interbank Offered Rate (seeLIBOR)

Index 259

long-term liabilities 160lump sum contract 212–13, 224–6

mail shots 236, 240–1, 245–6Mallinson Report, the 55management contracts 211, 213–15,

221–3, 224management-orientated procurement

systems 213, 215margin 4, 8, 14, 17, 60, 71, 75, 78, 117,

139–40, 148, 150, 151, 162, 173marginal cost 17, 18marginal revenue 17, 18market:

analysis 48demand 5, 8, 9, 13, 24, 49research 49, 50, 52, 222, 235, 236–49

marketing:campaign 235–6, 241–2, 247mix 244plans 242–3strategy 5, 235, 240–1team 247

mean-variance analysis 130mean-variance method 130merchant banks 138, 142, 144, 149, 173Merton Rule, the 22, 23, 201mezzanine finance 138, 141, 171modern methods of construction (MMC)

219, 230–1MOF (see multi-option facility)Monte Carlo simulation 121–2, 131mortgage debenture issue 137, 140, 162mortgage-backed securities 184mortgages 78, 82, 105, 131, 135, 137,

139–40, 143, 150–2, 153, 156–8,162–3, 167–8, 178, 183–4

multi-option facility 140, 162

neo-classical economics 16net asset value 160, 172, 181–2, 187, 191net present value (NPV) 78–9, 102, 106,

117–18, 130net terminal value 105, 107NIMBYism 15non-cumulative preference shares 171non-recourse loans 138, 162non-voting shares 171

occupational lease 87–8, 90offices 25, 50, 57, 66, 74, 116, 135, 137,

189, 194, 206–7, 208, 210operating costs 10, 169options 38, 81, 149–50, 158, 168,

171–2, 211–12, 219, 221, 223, 239ordinary shares 139, 149, 170–1, 173,

175, 182overage:

agreement 30, 34, 48, 105, 154, 166

over-rented property 104overseas banks 133overseas investors 140, 177, 180, 188–9overseas lenders 143, 155

package deal 212, 216, 222–3Parry’s tables 80–1participation 89, 93–4, 99, 139–40, 144,

164, 189particulars 33, 62, 246partnering 86, 193, 212, 218–19, 225,

228–30, 232partnership 2, 3, 11, 14, 33, 66, 76,

85–100, 130, 138, 140–1pay-offs 158–9pension funds 2, 14, 103, 133, 136, 137,

144, 145, 175–6, 178, 187pension schemes 150period-by-period cash flow 104–5, 107–9,

112planning 4–5, 6–10, 11, 12, 15–17, 31–2,

34, 36–46, 48, 50–3, 59, 62–5, 73–4,84, 95–6, 153, 154, 165, 194–5,196–7, 198, 200, 205–7, 209, 226,239, 245

agreements 5, 13, 40application 5, 38, 40, 42, 43, 46, 63,

197authority 4, 5, 12, 13, 36, 42, 200history 32, 38obligations 3, 13, 39, 45permissions 10, 38, 64, 73, 74, 216, 239policy 16, 23, 37, 45, 95

Planning Policy Statement (PPS) 23, 37,45–6, 195

portfolio: 13, 14, 103, 122–6, 130,136–7, 145, 148, 159, 173, 178,180–1, 183–5, 187, 243

analysis 119theory 124–6

PPS (see Planning Policy Statement)pre-let 16, 63–4, 76, 139, 189, 236predicted values 113preference shares 149, 170–71present value 54, 57, 64, 80–2, 102–3, 107price 236pricing strategy 241priority of charge 90–4priority yield 166private finance initiative (PFI) 2, 138,

141–2, 316probability 69, 73, 119–20, 123–4, 125,

127, 130–1procurement 15, 141, 193, 210–25, 232product lifecycle 205product pricing 249professional team 11, 12, 13, 31, 194–6,

211, 213, 214–15, 217, 219, 225–6,229, 232, 247–8

260 Index

profit 4, 5, 6, 7–9, 11, 14, 16–18, 28, 30,34, 38, 54, 56–7, 66–7, 69, 70–3, 75,77–8, 85–7, 90–4, 99, 100, 102,105–12, 115, 120–2, 128–30, 137,139, 140–1, 145, 147, 151–2, 156–7,159–61, 164–9, 170–3, 176, 180–90,221, 224–5, 227, 231, 236, 240–1,249

profit erosion 72–3, 166profitability 6, 16, 18, 145, 187, 227profits method 9project finance 157–8, 160, 163–4project management 93, 137, 163,

214–15, 216–17, 222–3, 228project management fee 163project manager 11, 13, 14, 15, 59, 76,

145, 214, 216–19, 223–4, 226–8,247–8

promotion 31, 63, 236, 240–2, 244–5,247

property:appraisal 4–5bonds 178, 187companies 178–82, 187, 189company shares 136, 176, 178, 180,

186cycle 19development process 6, 28, 336investment companies 180–1, 187trading companies 180–1, 187unit trusts 178vehicles 159–60

public sector 2, 10, 48, 134, 141–2, 188,204, 216

quantitative easing 60, 153quantity surveyor 5, 13, 59, 214–17,

219–20, 225–6, 228

Real Estate Investment Trusts (REITs)136, 175, 186

recourse loans 141, 162Regional Spatial Strategies (RSSs) 37–8registered provider 2, 34, 39, 66, 230remeasurement contracts 224rent-free periods 104, 165rental void 154rents 5, 16, 55, 57, 62, 64, 66, 69, 70,

74–5, 78–80, 85, 87, 88–9, 90–9,100, 110–11, 114–21, 134, 136, 140,146–7, 152, 154, 165–6, 168, 176,185, 188, 241, 244

repayment structures 150required rate of return 79, 124, 173reserves 171, 182, 187residential estates 105residual valuation 1, 6–10, 39–40, 48,

54–60, 62–71, 73–5, 77–84, 103,106–7, 110–14, 128–30

retail hierarchy 95retail warehouses 58reverse premium 104RICS (see Royal Institution of Chartered

Surveyors)rights issues 170, 173risk 2, 4, 6, 11, 13–15, 18, 28, 30, 31–3,

35, 43, 45–8, 51–2, 54–6, 60, 62–3,66, 68–9, 76–8, 84–7, 91–100, 102,105, 106–8, 113–17, 119, 121–9,133, 135, 137–41, 150–60, 162, 164,167–72, 176, 178, 183, 185–91, 202,207, 209, 213, 215, 219, 222–8, 241,243

risk exposure 122–3, 137–8risk in a portfolio 124–5risk premium 126risk–return 123, 125, 130

Royal Institution of Chartered Surveyors25, 36–7, 41–2, 45, 49, 54

sale and leaseback 87, 137, 139, 154,163, 166, 173, 176, 185

Savills 153, 179scenario 120–1, 125, 130–1S curve 54, 60–2, 103–4section 106 agreements 10, 34, 36, 40,

44, 66, 67, 232securitisation 135, 165, 175, 183–6SEEDA (see South East England

Development Agency)segmentation 242selling 11, 13, 55, 65, 74, 138, 156, 167,

172, 181, 235, 240, 244–5, 249senior debt 141, 154, 167sensitivity testing 54–5, 69, 73, 75, 884,

119, 126sequential test 30, 45–6services 9, 10, 13, 21, 43–4, 59, 63, 66,

103–4, 134, 141, 170, 193–4, 205,218, 221, 223, 225–6, 228, 232, 241,246

shape (of buildings) 205share capital 148–9, 152, 160, 169, 179shareholder 149, 152, 155, 157–8, 160,

169–71, 179, 180, 183, 187shareholder’s funds 139shares 135–7, 139–40, 149, 156–60,

168–73, 175–9, 180–4, 186–7shop units 97–8short-term finance 98, 104, 163, 177show suites 242, 245–6simulation 121–2, 125–6, 130–1single-rate approach 82–3site boards 240, 246site finding 32, 137sliced income approach 115, 127Slough Estates Group (SEGRO) 12, 136,

181

Index 261

snagging list 248South East England Development Agency

33–4, 47speculative property development 52, 60,

244spider diagram 120spreadsheets 30, 102, 110, 114–16, 122stamp duty 30, 102, 110, 111–12, 81,

140standard deviation 122, 125–7, 129Stock Exchange, the 159, 172, 178, 183,

135–6Stock Exchange listing 148supermarket 2, 58, 97–8, 186, 208, 221–2supply 4, 16, 18, 23, 31–2, 35, 48–50,

69, 165, 170, 193, 212, 218, 220,229, 231, 235–6, 239–41

supply side policies 16sustainable development 19–24, 26, 28–9,

47, 51, 195, 197, 201, 208swap 151, 155, 162systematic risk 124–5, 130

taxation 137, 144, 169, 172, 176, 186–7technology 10, 22–3, 109, 209, 228,

230, 235tenant incentives 74, 104tender documents 4, 213, 224–5tender prices 58tenders 33, 35, 68, 225top slice 90, 92–6, 127, 141topography 10, 23, 42, 44, 199Town and Country Planning Acts 1990

10, 34, 36, 40, 44, 66, 67, 232toxic loans 14, 60traded security 161trader developers 10–11

traditional system (of procurement) 213,222

transferability 135, 172, 183–4, 187tree preservation orders 36

UK economy 153uncertainty 96, 119, 121–3, 125–33,

213, 216, 222–3, 226, 230unitisation 135, 158, 175, 183–4, 186unsecured debt 161–2unsecured loan stock 149unsystematic risk 124–6urban development corporations 3, 13urban land 17Use Classes Order 207users’ requirements 206

variable rate 71, 139, 150, 161, 181variance 125–30VAT 58–9, 64–5venture capital 122, 148–9, 171viability statements 111void period 64–5, 67–9, 74, 110–11,

116, 153, 165

warranties 153, 235, 247warrants 149, 171‘what if ’ scenarios 74, 114, 116worth 104

years’ purchase 57, 70, 80–2, 98, 104yield 39, 50, 54–8, 63, 67, 69, 70–9,

80–1, 87, 90–5, 98–9, 100, 106, 110,116–21, 128–9, 137, 140, 145, 164,166–8, 185, 198, 238

zoning 17, 51

262 Index

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