What is a development appraisal?
A development appraisal (also called a residual appraisal or development viability assessment) is the financial model that determines whether a property development project is viable. It calculates the difference between what the completed development is worth (GDV) and what it costs to build — with the residual being the developer's profit (or the site value, depending on the approach).
Step 1: Estimate Gross Development Value (GDV)
GDV is the total market value of the completed scheme — the sum of all unit values if everything sells at the assumed prices. To estimate GDV:
- Research comparable sales in the immediate area (within 0.5 miles, within 12 months).
- Calculate price per square foot from comparables and apply to your unit sizes.
- Adjust for quality, specification, aspect, floor level, and parking.
- For commercial elements, use rental yields to calculate capital values.
- Consider whether to instruct a formal RICS valuation for lender credibility.
Step 2: Calculate build costs
Build costs include everything required to construct the development from the ground up (or from existing shell for refurbishments). Sources of cost information include:
- Quantity Surveyor (QS) report — the gold standard for lenders. An elemental cost plan from a QS provides line-by-line costs.
- Contractor tender — a fixed-price or design-and-build tender price.
- BCIS data — the Building Cost Information Service provides benchmark £/sqft data by region and building type.
Step 3: Add professional fees
Professional fees typically run at 10–12% of build cost and include: architect, structural engineer, M&E consultant, QS, planning consultant, project manager, CDM adviser, building control, and warranty provider (NHBC, Premier Guarantee, etc.).
Step 4: Include finance costs
Finance costs include arrangement fees, rolled-up interest on the development facility, monitoring surveyor fees, valuation fees, and lender's legal costs. Model interest on a drawdown profile — not the full facility from day one — to avoid overstating costs.
Step 5: Allow for contingency
A contingency of 5–10% of build cost is standard. Lenders expect to see contingency in the appraisal; its absence suggests the borrower is being unrealistic about risk. 5% is typical for refurbishments with a fixed-price contract; 10% is more appropriate for new builds or complex schemes.
Step 6: Calculate profit
Profit = GDV − Total Costs (land + build + fees + finance + contingency + sales costs). Express this as:
- Profit on cost — profit ÷ total costs × 100. Lenders want 15–20%+.
- Profit on GDV — profit ÷ GDV × 100. Typically 12–18%.
Step 7: Run sensitivity analysis
Test the appraisal under stress scenarios: GDV down 10%, build costs up 10%, build programme extended by 3–6 months. The deal should still show positive profit under reasonable downside scenarios. This is what lenders mean by "stress testing" the appraisal.
Frequently asked questions
What software should I use?
Many developers use Excel or Google Sheets. Specialist tools include Argus Developer, ProDev, and various broker proprietary models. Assesr generates the appraisal automatically as part of the credit paper, using data extracted from your uploaded documents.
Should I include my time as a cost?
If you are project managing the scheme yourself, it is good practice to include a notional project management fee in the costs. This gives a truer picture of profitability and means your profit figure reflects return on capital, not return on your labour.