Wimbledon Park Development Report

Introduction

This report focuses on the land adjacent to the Woodman Public House, The Crescent, Wimbledon Park, London, SW19 8DR as illustrated in Figure 1. The site is available with vacant possession, as such giving the purchaser the right to exclusive use of a property on completion of the sale with any previous occupants having moved out.

There is planning permission for 7 houses, 4 private flats and 7 shared ownership flats with a combined residential Net Saleable Area of approximately 1,576 sqm (16,961 sq ft). This includes all floor area including internal walls, mezzanines, hallways, bathrooms but excludes common spaces in flats, patios, balconies. This development site has been purchased for £4.2 million. The next steps are to determine the demand for a portfolio of properties proposed on the site: thus, giving the opportunity to change the mix if the figures prove this would be prudent. Also to determine the likely construction costs.

Market research

The aim of market research is to gather data on customers and potential customers in order to determine whether there is demand for the completed buildings that will yield an acceptable profit for the developer. This will cover the market opportunity’s strengths and weaknesses. The collected data aids business decision making. This therefore reduces the risks involved in making these decisions. In this case the market research aims to determine the likely buyers for the properties and what are the associated attractors. In this case the buyers are outright owner-occupiers or buy-to-let owners for the private houses and flats and Housing Associations for the shared ownership flats.

Schools

Nearby state schools are:

Pelham Primary School, which is 0.1 miles and has an Ofsted rating of Good (Ofsted, 2017) St Mary's Catholic Primary School 0.2 miles and has an Ofsted rating of Outstanding (Ofsted, 2011)

Public transport

33% of households in the Borough of Merton do not own a car (cf 31% in Outer London, 42% across Greater London) (Merton, 2017) as such the provision of public transport is important. This site is well served by public transport. This includes: Wimbledon Park Underground station (District Line) is approximately 300m (0.2 miles) to the west, providing direct services to Paddington (26 minutes) and London Victoria (27 minutes) (source: tfl.gov.uk). Earlsfield station is approximately 1.4 km (0.9 miles) to the north east of the site and provides direct services to London Waterloo (13 minutes) via Clapham Junction and Vauxhall (source: nationalrail.co.uk).

Other options for public transport are illustrated in Figure 2.

Local amenities

A range of local amenities can be found along Arthur Road and Leopold Road in Wimbledon Park including a number of independent cafes, restaurants and shops , such as the renowned restaurants, Holy Smoke and NYEAT. A more extensive range of shops, restaurants and bars can be found in Wimbledon town centre which is located approximately 2.5 km (1.6 miles) to the south west

Future developments in the area

With reference to Figure 3 a check of the Borough of Merton’s planning portal found that only 2 other applications had been made for similar type developments had been applied for in the last 6 months.

Existing properties in the area

Existing developments in the near vicinity of the projected land development also need to be considered as they will be in competition. A number of similar properties are illustrated in Figure 4.

However, it was noted that there were very few 2 bedroom properties for sale (most houses were 4 bedrooms for more) and there were only limited number of flats ( most flats were one bedroom). This is encouraging as the client would be providing something slightly different into the market. In addition to the market it will be necessary to undertake due diligence prior to making a final decision. This will involve addressing matters including: Designated land use as specified in the Borough of Merton development plan. Land and project evaluation, to cover zoning laws, adjacent properties, traffic access points. Cost and feasibility of providing utility services connections ( gas, water, electricity and telecoms), including ascertaining whether there are any wayleaves or easements already in place on the land.

Monthly cash flow forecast

Construction costs are not incurred linearly (or straight-line). Typically, there is less spend during the earlier months during the pre-construction and mobilisation periods. This ramps up during construction when there is more labour and equipment on site and materials procured and then less in the latter months as construction winds down and the main activities are testing and commissioning. The total construction costs have been estimated based on the Net Saleable Area of approximately 1,576 sqm, for 7 houses, 4 private flats and 7 shared ownership flats, but a breakdown of the areas between these has not been given and assumptions have been made based on likely selling prices practices. This is not usual at this stage in a project: during the subsequent stages, as more information becomes available and more decisions are made, adjustments are made to fine tune decisions regarding areas. Spon’s Architects’ and Builders’ Price Book 2018 gives a range of average building costs for various types and is considered a reliable source cost information. This has been used to estimate a construction cost using a m2 basis – as opposed to building up the costs based on estimated material and labour costs.

Thus, an estimated construction cost of £ 2,829,306 will be used. Note that VAT and professional fees should be added to this and cost excludes land purchase, fees and VAT. In addition, the overall construction time needs to be known. This has not been advised but is estimated to be one year, based on experience on similar projects. Using this information, the following S-curve has been generated for the construction costs.

Figure 5 illustrates for construction costs using the S-curve formula for this project. Note that at 12 months the graph shows that the construction cost sped in 99.57% and not 100%. This is because there are always residual costs at the very end: for example, release of retentions after a defects period that are not expended typically until a year later.

Profit evaluation

The profit evaluation for the development can be calculated using the discounted cash flow (DCF) method. The DCF is a valuation method used to estimate the value of an investment based on its future cash flows. DCF analysis finds the present value of expected future cash flows using a discount rate. DCF analysis rests on the principle that an investment now is worth an amount equal to the sum of all the future cash flows it will produce, with each of those cash flows being discounted to their present value. In this case we have used the 1Q 2019 values for costs, rents etc. and undertaken calculations for the next 5 years.

The basic formula used is

Where

DCF is the sum of all future discounted cash flows that the investment is expected to produce.

CF is the total cash flow for a given year. CF1 is for the first year, CF2 is for the second year, and so on. r is the discount rate in decimal form. The discount rate is basically the target rate of return that you want on the investment. The first step is to calculate the Net Present Value for each of the properties. This is based on the most recent actual selling values (as opposed to the prices advertised at) that are published in the Land Registry (Land Registry, 2019). This does mean that there is a lag, as it takes time for the figures to become publicly available, but it does mean that the client has base values that can be updated over time. Using the actual postcode did not yield any useful information – there were only 2 transactions, which were both not of comparable property types. Thus, the search was expanded to include other nearby areas. This resulted in the selling values given in Table 3.

A value of £10,222.08/m2 is also calculated as a unit rate for sale value. As a check this figure is compared with the ONS statistics for the Merton area of £6,805/m2 (as illustrated in Figure 6). Whilst these seems quite different it does confirm that this development intends to provide more up-market and offers owners new and energy efficient accommodation.

Thus, the potential profit at Day 1 can be calculated as: Cost to develop = Cost of Land + Cost of Construction = £4,200,000 + £2,829,306 = £7,029,306 And the potential cost of sales = £16,110,000

The calculations are usually done using a freely available on-line calculator template. In this case we have used a template found at CFI (2019) which has yielded the following results.

Sensitivity Analysis

This is technique used to determine how independent variable values will impact a dependent variable under a given set of assumptions is defined as sensitive analysis. It helps in analysing how sensitive the output is, by the changes in one input while keeping the other inputs constant.

Table 4 summarises the independent variables and how they may vary under different conditions

Environmental brief

There is a number statutory requirement regarding environmental issues which the client must follow: for example:

Building Regulations, Part L which covers the contains requirements relating to the conservation of fuel and power. The provision of Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations. Town and Country Planning (environmental impact assessment) (England and Wales) Regulations.

In addition, there are also several policies that will need to be followed: for example

CRC Energy Efficiency Scheme. Zero carbon homes. Green deal. Renewable Heat Incentive. Feed-In Tariff scheme (FIT). Carbon Emissions Reduction Target (CERT).

However, it is recommended that the client signs up to and follows a voluntary scheme: for example the Home Quality Mark and/or the Building Research Establishment (BRE) Environmental Assessment Method (BREEAM) (BREEAM, 2018) The Home Quality Mark (HQM) is the badge of a better home. It enables house builders to showcase the quality of their homes, and to distinguish them from other houses on the market. HQM provides impartial information from independent experts on a new home’s quality. It clearly indicates to home buyers and renters the overall expected costs, health and wellbeing benefits, and environmental footprint associated with living in the home. In short, HQM helps everyone to fully understand the quality, performance and attributes of a new-build home. HQM has two elements, a five-star rating system that gives the overall picture of a home’s quality, and a set of indicators on individual aspects of its performance – such as build quality, running costs and health benefits. BREEAM which aims at providing the highest contemporary standards in connection with the environmental performance of buildings throughdesign, specification, construction and operation. This can be used in the marketing efforts for the buildings as it enables the Developer to demonstrate the quality and added benefits of the properties – such as being likely to need less maintenance, being cheaper to run, better located, and more able to cope with the demands of a changing climate. And for the home owner independent certification provides reassurance, giving confidence in quality and impartial information on aspects of design, construction. This provides a structured framework for assessing the options and determining the best options. This particular project would fall under the BREEAM Residential, and there are many opportunities for compliance. A useful case study can be found at https://www.breeam.com/case-studies/residential/31-35-craven-hill-gardens/. This describes many useful measures that could be applied to this project, including the provision of solar water heating, incorporating water efficient fixtures and flow control fittings throughout the residential units, and 100% of the timber used in this development was FSC certified and legally harvested. Other examples of items that could be considered include external walls improved by adding high thermal performance insulation and construction site impacts managed and minimised through monitoring of carbon emissions, energy and water consumption, hazardous and other materials by using best practice of an effective SWMP.

Conclusions and recommendations

This report has demonstrated that the scheme appears to be feasible in order to return a profit on the client’s investment, based on the following broad figures Thus the potential profit at Day 1 can be calculated as: Cost to develop = Cost of Land + Cost of Construction = 4,200,000 + 2,829,306 = 7,029,306 And the potential cost of sales = 16,110,000 However, there are additional costs: for example, for professional fees, taxes, cost of transaction and other legal costs, but even after these the development should still be profitable. However, it is recommended that further investigations are done to reduce the risks. The client should also understand that viability of the project is subject to changes in external factors, over which he does not have any control and are typically difficult to anticipate: for example, recessions, changes in government policies and legislation, competing projects arising in the same area. As such it is important to have a strong strategy to continuously monitor and update the information which is used for the basis of decision making.