Abstract
The report below analyzes the strategies WestProp Development Ltd may undertake to control the amount of money it incurs in reconstructing 25 North Row W1K6DJ properties in Central London. Some of the costs that the report accounts for include land acquisition costs. Additionally, the research analyzes the assumptions in the entire cost estimation and discusses the gross development value witnessed in the development appraisal.
Introduction
The report below guides WestProp Development Ltd for showing interest in constructing office buildings in Central London. The company intends to use the property for mixed purposes such as commercial offices, residential areas, or retail for long-term investments. WestProp Development Ltd has shown interest in developing 25 North Row W1K6DJ buildings in Mayfair, London. The property should sit on an average piece of land between 10000 and 20000 sq ft and cost a maximum of £50,000,000. WestProp Development Ltd aims to estimate the actual progress from land acquisition to the development of the property with a target of obtaining an estimate of the expected profit rate and the risks associated with the project to make insightful decisions regarding the financing.
The report provides an analysis of the Gross Development Value of redeveloping the community to entail modern structures and accounts for the profit of the entire plan. WestProp might acquire a development profit yield of 22% based on risks arising from the process. A reasonable scheme should have a result between 20 and 25% since the uncertainties affect the company’s profit rate. Additionally, the report provides a finance strategy that aims to maintain the amount of equity and debt at very reasonable amounts. It uses the current financing rates to evaluate the values of the two components of the construction funds. It outlines the alternative strategies that the company may use to obtain the most appropriate amount of funds to affirm the success in conducting the plans without failures, such as through joint venture and forward funding.
The report analyses and develops the uncertainties and the profit ratios in the project through the use of sensitivity analysis. The land acquisition process is valued using the residual method, where the initial cost is the current asking price of £1,598,640. The assumptions within this project are supported by the calculations involved in the sensitivity analysis, which measures the controllable risks in the market.
Site Overview and Development Schemes
The Site Overview
Area
25 North Row W1K6DJ buildings
Total Proposal NIA: 24000 sq ft
The current 25 North Row W1K6DJ buildings are office and general residential areas available for rent per Knight Frank advertisements in 2022. The remaining units for renting are 323-807 sq ft and retail at £66.61 per sq. ft. However, WestProp Development Ltd will have to demolish the entire property to set up more partitioned offices that people may independently own and with extreme privacy. The new building will have more retail outlets, offices, hotels, car parking lots, sky gardens, and a swimming pool to ensure that all amenities people need are available within the premise.
Development Schemes
The car parking will be in an underground tunnel where the company will ensure tight security through guards and CCTV cameras to obtain live footage of the entire underground section. Having an underground tunnel for the car parking lot helps maximize available space use.
Retail Outlets
They will be on the first ground floor of the building and comprise all forms of businesses to allow the building users to access services from a fixed point and minimize interference on other floors by controlling noise from the retailers.
Company Use Office
WestProp Development Company will have its offices on the first floor to help people to access the management efficiently. The office on the first floor will be an inquiry site containing a customer care unit where the current tenants may table their complaints.
Coworking
The second, third, and fourth floors will remain exposed for any unified brand to seek space. The working area will host many companies that may be able to cater to long-term contracts, leaving the space occupied for a satisfactory period. Attracting and maintaining quality tenants presents one of the biggest challenges in property management (Nuñez, 2020). Thus, having successful brands within the region will eliminate commotion from the frequent exit of short-term businesses from the premise. It will be beneficial since it will reduce the maintenance costs incurred in rebranding the rooms to accommodate new clients.
Hotel and Swimming Pool
These will be on the fourth floor and help people obtain leisure services such as gaming and swimming. The fourth floor is reported to be the best location for the hotel in terms of security and is generally recommended by travel risk experts (Goddfrey, 2022). However, the main reason for having the area on the fourth floor is to increase comfortability and regulate the amount of noise from people having fun, thus minimizing obstruction in other sections of the building.
Sky Garden
This section will be on the final floor, where one can view the skies and an aerial projection of the beautiful scenery surrounding the premise. It will be a place that preserves serenity and maintains an excellent environment that allows people to remain relaxed.
Development Appraisal Assumptions
Assumptions are the actions that one believes to be true based on specific conditions. The assumptions in the redevelopment of this project are based on the market outlook and are supported by mathematical calculations projecting the market structure for the next two years. There is an 80% rental rate in the building since the sky gardens are not a rental space hence contributing to reduced efficiency. The redevelopment costs consume 10-15%.
Gross Development Value and Development Profit
The residual valuation method is the strategy used to determine the Gross Development Valuation and provides the following analysis regarding the costs. The Gross Development Value for the project is £44,280,450 whereas the Development Profit is £12,683,712.
Site Development Valuation £44,280,450
The company earns an average of £66.61 per month on each unit of space the client occupies hence a total of £19,183,680 each year for the entire property space. However, assuming that the average space rented is 80% then the earnings per year on the site is £12,683,712. The Gross Development Value for the property is £44,280,450.
Site Development Profit £7,985,000
Site Development Profit Rate
The Site development profit is £7,985,000 and the Total Development Costs (TDC) is calculated as £36,295450 so the evaluated Development Profit rate of TDC is hence the development profit rate is 22%. The profit is significantly affected by the land acquisition cost. Therefore, the 22% is a function of the current cost of purchasing the land.
Analysis of Development Cost
The development costs are a major contributor to the profit margins and risks present in the project hence the constructor has to critically evaluate them to obtain maximum results in the projects. 25 North Row W1K6DJ renovation plan total development cost is estimated to be £36,295450.
Cost of Land Acquisition
WestProp Development Ltd will need full possession of the property to help make final decisions that do not affect other parties. Purchasing the entire land helps eliminate the risks arising from interruption by other firms. Full possession of the land for investments will help the company to make decisions that will help them to maximize the profits, even if it is reconstructing a new building as in the plan. The company will, in the end, have to incur some extra costs in the process through undertaking land verification activities.
Professional fees
Professional fees are an important part of the development costs. The value of the property can significantly increase if the construction process follows appropriate professional standards. The average level of professional fees is 10%, but it can be slightly increased in order to achieve the desired results.
Building Construction Fee
The building construction fee comprises the funds that the company incurs in the demolition of the current building, the project approval, prices, and the entire costs it incurs directly or indirectly in the construction of the building. The maintenance cost of the project before the construction details are complete contributes to the increase of the construction costs. The business must account for all the costs of creating the dream premises.
Finance Fee
Funding Costs
WestProp Development Ltd may incur funding costs when seeking investors to help in fundraising for the project. The company has to frequently visit the financiers to update them on the progress of the plan and allows them to keep in touch. Funding costs are necessary and have to be present for any organization that seeks help from others to finance the programs. Funding costs help the company to reach its financiers effectively. It caters to the communication costs incurred through cell phones or in organizing meetings with the financiers.
Finance Interest
In the case under discussion, finance interest represents an ownership stake in the security of a debt. It is essential for the company to meet its financiers’ interests for che organization’s construction projects to be successful. WestProp Development Ltd has to frequently visit the financiers to update them on the progress of the plan and keep in touch.
Letting/Sales Fees
Letting Costs
These are the costs that the company may attain every single year after achieving the property. Early identification of the costs helps the company to determine the profit margin in advance. Besides providing the information on the profits, the company may pre-lent the premises before its plans to demolish and reconstruct new buildings undergo complete approval. The letting costs help the company to minimize the interest rates they incur while refunding the invested capital to the investors.
Promotional Costs
These are the costs that the company incurs in the promotion and advertisement of the plans to prepare the companies interested in renting space within the premises. Another advantage of the promotion is that it will boost the investor’s brand name and create a competitive advantage over other rival companies.
Sales Costs
These are the costs that the company incurs in completing transactions with long-term investors. It comprises charges such as the site visitation costs and those that the sales agents demand as compensation for making sales. The management must calculate the prices using the residual valuation model before and after WestProp Development Ltd acquires the property. A uniform valuation model helps the company to clearly understand the costs incurred in making the sales successful.
Other Fees
Demolition Costs
Demolition costs are costs that the company will spend on hiring people to destroy the current building to pave the way for the construction of the main project. The managers must evaluate all the costs they pay to the team. WestProp Development Ltd will pay for the destruction based on per unit area that the hired firm destroys.
Site Investigation
WestProp company must spend time investigating the building they are purchasing. A deep investigation of the site they are committing to buy will help evade the risks that may arise if they purchase an unfavorable area to form its company. The site investigation process consumes funds that must be accounted for in the profit and loss accounts to determine their impact on the company profits.
Site Planning Costs
These are estimated costs in filling for government approval to proceed with the plans to demolish and recreate the project. These site planning costs are informed of taxes the firm pays to receive a complete transfer of ownership of the land and any property under sale. The management must account for all the side planning costs that the company incurs.
Development Finance
It is advantageous for the company when it acquires a skilled developer experienced in project management and can easily account for the funds they spend on the project. The development company must have a supportive financier who clearly understands how to utilize different cashflow statements to conclude and makes sound decisions when investing more capital. The financier should provide essential development strategies such as marketing and planning to make the business plan a better success project besides providing capital. A well-equipped financier with great ideas and skills helps the company make wise decisions that manage costs and eliminate unnecessary spending.
Development Funding Evaluation and Suggestions: Forward Funding with Institution
Forward funding with institutions is a process by which companies agree to change ownership of a building before or after the completion of the construction. In forward funding, the developmental risks are shared between the investor and the developer (Dentons, 2021). The amount they charge for the property depends on the rental income of the building. Therefore, it is one of the strategies WestProp company may use to raise funds for undertaking its projects. Therefore, the site should be attractive for people to consider for forwarding funding.
Joint Venture
A joint venture is an association between two or more companies that agree to share all the conditions mutually affecting the business. The joint venture is appropriate where an entity may not fully provide all the investment capital required to run the entire project effectively. A joint venture allows the investor to spread the capital among different developments to mitigate risks, which causes the growing popularity of this funding method (Peterson, 2022). It is appropriate to use such a strategy to raise funds since it distributes the project risks based on each partner’s investment amount. Additionally, the approach provides knowledge and experience on how to handle different activities within the organization hence strong management skills.
Bank Loans
Bank loans are the most appropriate means of investment when the company strictly wants to benefit from the proceeds of the building alone. A long-term loan is not payable on demand provided that one does not bridge the lending conditions; hence the loan is payable in different specific periods as the contract indicates. Bank loans are easily accessible for strong developers within the market and do not consume much of the developer’s time in making the contracts. Bank loans generally cover 60% to 70% of land’s cost and all building expenses, with plans beginning at 4-5% yearly (Denehy, 2021). However, the greater the business’s risks in its construction process, the greater the interest rate a bank will charge on the loans.
Development of Interest by Residual Valuation Model
Interest evaluation is essential for the business since it helps them to determine which alternative is more affordable and cheaper for use as a source of funds to run the business operations. The residual valuation model allows the company to have real-time data that is critical in the decision-making processes on the choice of a financier.
Analysis of Development Risk and Uncertainty
Sensitivity Analysis
The sensitivity analysis is a financial model that determines the effects of input variables on the outcome of the target variables. It is an accurate strategy that a development company may use to scrutinize the costs related to the projects and how they may reduce the total fees by altering minimal factors that influence the prices in the end. The property-based Sensitivity Analysis provides substantial information about model factors and their effects (Iwanaga et al., 2021). Thus, sensitivity analysis helps the company to identify the relationship between different risk outcomes on its total budget and the profit margin. The sensitivity analysis that the company conducts in advance will help it determine additional costs and how it can mitigate losses in advance. Moreover, it allows the company to assess the viability of an investment.
Land Acquisition Advice
Acquiring land is a critical stage in the redevelopment plan, and the company should analyze all the conditions underlying the current structure. The land acquisition presents a significant part of the development deal and requires a fully formed vision (Burton, 2021). The site’s location is one of the intense areas that the business must consider before purchasing the land. I advise the contractor not to purchase the land before receiving all the critical information about the piece of land, such as permissions to alter the current state of the buildings by demolishing old ones to pave the way for the company.
Risk Management
Site Investigation
The site investigation process helps the company to identify unforeseen conditions that may result in delays in the formulation of the plan. The investigations provide insights into the property’s historic and environmental conditions and allow the managers to make decisions aware of the shortcomings (Erickson, 2021). The general aim of the land investigations is to minimize costs and risks that the investor may face leading to the termination of the construction. Site investigation is essential as it details the state of the environment to accommodate new structures that are more preeminent than the original ones.
Development Period
Development Period:
Site acquisition, preparation, and pre-contract/ 3rdhalf
Building contract/ 12thhalf
Letting period/ 13thhalf
Investment sale periodic/ 14thhalf
Total development period/ 15thhalf
The tables above indicate different seasons and phases within the construction plan parameters. The company will forward these plans to the chief constructor to seek approval to complete the entire process. The plan becomes effective since the land acquisition process is complete and the company needs permission to progress with its construction plan. It is necessary to have this plan because it provides a sense of direction and creates a timeline to handle the progress.
Valid and Foreseeable Exit Pricing Models
The valid and foreseeable exit pricing models help the firm determine the asset’s worth at phases where they may decide to withdraw from the investment and liquidate the assets. The business must analyze the vital exit points they may choose to quit the project and ensure they do not suffer extreme losses (Lin & Khazaei, 2020). Therefore, the company is strategically prepared to exit the project if they foresee losses if they continue with the project. Hence, it is favorable to have prior preparations and expectations of exit whenever something goes against the initial plans.
Conclusion
WestProp Development Ltd must have a structured plan to help acquire the land, and a step-by-step adherence to the project creates a reliable environment to promote the business operations. The report analyzes the conditions revolving around the initiation of the acquisition of 25 North Row properties W1K6DJ and its reconstruction to accommodate a new mixed-use building. The plan accounts for all the costs associated with the process, examines the risks involved in the entire program, and provides strategies to mitigate them.
Recommendation
I recommend that WestProp company examines the entire process and keenly scrutinize the whole process in every stage before conducting the actual plan. A sharp focus on the project from the land acquisition process will help the organization control the costs and have a budget that directs the financiers with the necessary information to evaluate the worth of the investment. The company must negotiate with the land owners to examine every detail that helps control prices and profit.
References
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Iwanaga, T., Sun, X., Wang, Q., Guillaume, J. H. A., Croke, B. F. W., Rahman, J., & Jakeman, A. J. (2021). Property-based Sensitivity Analysis: An approach to identify model implementation and integration errors. Environmental Modelling & Software, 139, 1 17. Web.
Knight (2021). The London office market report Q2 2021. Web.
Lin, C., & Khazaei, H. (2020). Modeling and optimization of performance and cost of serverless applications. IEEE Transactions on Parallel and Distributed Systems, 32(3), 615-632. Web.
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Peterson, C. (2022). Joint venture investing: the path to take? GCV. Web.