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Write a report that explains how the developer’s profit on the project would be established and critically appraise the risks that might adversely affect this and the mitigating measures that could be taken. Include a residual profit calculation to support your discussion. Include a critical evaluation of the factors to be considered to achieve an excellent BREEAM rating and also meet the developer’s requirement for minimum running, repair and maintenance costs. Also include advice on alternative funding options for the project.
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The value of a construction project highly depends on different market factors like its geographical location or its potential or its rating. In this report, the different aspects of the development of a project and its appraisal will be discussed. First of all, the different methods used in the pre-contract of a construction project to allocate the cost of the project will be discussed. The residual valuation of the construction project will also be done, and the detail of the different component will also be given in this report. After which, the different factors which the construction building project has to considered and fulfil to get excellent BREEAM rating will be discussed.
Then the different financing options available in the construction project will be discussed. Mainly, two financing options will be discussed in this report, which consists of debt and equity and the different effect that these two financing options will have on the project. In the end, the summary of the findings of the report will also be given in the conclusion section. The objective of this report is to find out how different aspects of the construction project are developed, including its financing, valuation, rating and many other aspects like these and get a more clear understanding of the different aspects of the construction project.
Analysis of Residual Method Appraisal components
The residual Valuation method is a valuation method in which the value of the construction project relative to its different market situation is calculated (Saleh, 2017). In this section, the different component in the residual valuation method appraisal will be discussed. The first component is the construction period, and this is the time frame in which the construction project is estimated to be completed, and this construction project is estimated to be completed in 3 years time frame.
The second component is financed cost, and this finance cost means the total percentage of interest that the construction project has to pay for getting the finance amount from this project’s investors (Tonchia, 2018). The finance rate given in this project is 5%. The third component is the gross floor area, and this means the total area size in which the construction project will be conducted. The gross floor area is not used for calculating revenue in a construction project, but it is used for calculating the different construction cost of a building (Fan, 2018). The total gross floor area of this construction project is 16,000 m2. The fourth component in this valuation method is required yield, and under this component, the percentage of profit that the developer is a minimum requirement from this project calculated. The required yield of this construction project is 8%.
The fifth component in this valuation method is anticipated rent and this anticipated rent help in calculating the total revenue potential of the construction project and also the opportunity cost of this construction in its void period. The anticipated rent of this construction project is £450 per m2.
The sixth component of this valuation method is target construction cost of the construction project, and under this component, the total cost or expense that the construction project is estimated to incur is calculated. The target construction cost of this construction project is £2,800 per m2. The seventh component of this valuation method is lettable area, and this lettable area means the total percentage of the gross floor area of the construction project which can be rented out to other persons after completion of this project. This lettable area also helps in estimating the net floor area of the construction project. The total lettable area in this project is 90%. Therefore, the Net floor area of this project is 14400 m2.
The eighth component is estimated rental value, and under this component, the anticipated rent value is multiplied by the net floor area, which is 14400 m2. This gives the total estimated rent amount that the project can earn annually. This amount is multiplied by year purchase in perpetuity to get gross development cost of the construction project.
The ninth component is Years Purchase in perpetuity, and under this component, the year purchase in perpetuity is calculated by dividing the yield of the project by 1. This yield is generally estimated taking into account the different property which has similar characteristic and the average yield they are giving.
The tenth component in the residual method is gross development value, and the gross development value is calculated by multiplying annual rent of the construction project with the year purchase (Investment Property Partners, 2019). Gross development value is also the amount at which price; the construction project in overall will be sold in the market. This GDV amount does not only include the profit of the developer but also the different cost of the construction project.
The eleventh component is building cost, and this is the most significant cost in the residual valuation and under this cost, the different cost that the construction project has to incur in the time of site preparation and construction project. The twelfth component is a professional fee, and under this cost, the fee charged by the project designing team and project management team is considered. The professional fee generally is about 10% to 12% of the building cost and site preparation or investigation cost. The professional fees are mainly charged for designing the project but other than that; there are some additional services for which, the professional fee is charged (Cmu.edu, 2019). These additional charges include landscaping, health and safety consultancy, interior designing, building information modelling, environment impact assessment and many other additional charges like these.
The thirteenth component is development cost, and under this cost, the different cost that is incurred by the business in the time of construction or planning of the site is considered. The development cost is generally consisting of building cost and the professional fee of the total designing and project management team of the construction project (Murphy, 2017). The fifteenth component is void period, and it is considered to be that period in which the property will remain unoccupied and rental income can be earned in this period and this lost rental income of considered to another cost of the construction project (Legal For Landlords, 2019). The sixteenth component is developer profit, and under this component, the total profit that the developer is expecting from the construction project is calculated (Professional.sauder.ubc.ca, 2019). This profit is calculated based on a certain percentage of interest on the total expenses of the construction project, which include the land cost of the construction project and also different expenses incurred in this project.
The seventh component is agency and marketing fee, and this cost is consisting of the total cost that the construction project has to incur due to increasing the awareness of the project among its targeted buyers or customers. Also, the different cost that is incurred by the developer to sell or let the project to the different buyers is considered under the agency and marketing fee. This agency and marketing fee includes the commission of the agent who brings the buyer and also, any promotional activities are done for the construction project.
The eighteenth component is letting fee which includes the different cost which the developer or the construction project has to incur to let a portion of the construction project to its respective customers. This letting fee can consist of different types of cost like the legal cost of making the contract before letting or advertisement cost of advertisement the areas of the construction project which is available on rent or agent commission and many other costs like these. The nineteenth component is sales fee and under this sales fee, the different cost which is incurred by the construction project. These sales fees include agent commission for bringing prospective buyers, promotion cost and many other costs like these (InvestorWords.com, 2019).
The twentieth component is the land purchase cost and under this component, the cost which is incurred by the construction project to purchases the land in which the construction of the building of this project is being done. Another component is surplus, and this component is calculated by deducting all cost and developer profit from the gross development value of the project. In other words, it can also be said that the surplus is equalled to gross development value minus gross development cost. The financing cost which is also called the holding charges are not included in this cost. All these costs consist of the different component of the residual valuation calculation of a construction project.
BREEAM stands for Building Research Establishment Environment Assessment Method, and this method is used for planning of different infrastructure project. It consists of different standards that have been set in 1990 to assess the performance of the building in safeguarding the environment through effective management of different aspects of the building like designing, construction or refurbishment of the building. To get an excellent BREEAM rating, the building’s design, operation and construction should be able to perform well against the sustainability performance benchmark set against it. Some of the areas which the building management should take care energy conservation, land conservation, water conservation, healthy environment, low population level, effective waste management, low material use and many other areas like these. Each area discussed above has some set target which it has to fulfil to achieve high ratings (McPartland and Carson, 2019). In this assessment method, independent licensed assessors conduct the examination of the building, and the building is scored under each category’s criteria.
In this method, each criterion has some weighing according to the importance of that factors in the overall situation, and the score that the building gets under this assessment in each criterion is multiplied by the weighting of that criteria. There are two stages of assessment in this assessment method in which the assessment of the building will take place. The first assessment will take place in the time when the building design has been finalised, and then that design is assessed under each criterion. In the end, the certification is given in this assessment according to the score that the building has got under each category. This certificate is called the interim certificate (Tools.breeam.com, 2019). The next assessment takes place when the construction of the building is complete, and again, this time also, the same assessment process is used to get certification to the building. The certification in this stage is the final certificate, and a rating is awarded according to the overall rating that building got in this assessment method.
The weighting which is given to the different aspect in BREEAM rating has been discussed here. The highest credit and weighting is given to energy aspects, and the weighting of this section is 19%, and credit given to this aspect is 30. The second highest weighting is given to health and well being is 15%, and credit given to this section is 10. Then third important section in BREEAM rating is management in which maximum ten credits are given and 12% of the weighting. The fourth section in BREEAM rating is transported, and the maximum credit given to this section is 5 and weighting given to this section is 8%. The fifth section in this assessment is water, and the maximum credit is given to this section is 5, and the weighting given to this section is 6%. The sixth section in this assessment is material, and the maximum credit given to this aspect is 6, and the weighting given to it is 12.5%. The seventh section in this assessment is waste, and the maximum credit given to this aspect is 3, and the weighting is 7.5%. The eighth section is land use, and ecology and the maximum credit is given to this section is 5, and the weighting given to this section is 10%. The ninth section is pollution, and the maximum credit given to this section is 5, and the weighting given to this section is 10%. The tenth section is innovation, and it is an additional section, and the maximum credit available to this aspect is 2, and its weighting is 10% (Breeam.com, 2019). All these aspects form the assessment criteria and their weighting and maximum credit.
This rating can be divided into six scales, and each scale is rewarded to the building according to the overall scoring that the building has got. The first scale is unclassified, and this rating is giving when the overall scoring of the building is less than 30%. The second scale is pass, and this rating is given when the overall scoring is more than or equal to 30% but less than 45%. The third scale is good, and this rating is given when the overall scoring is more than or equals to 45% but less than 55%. The fourth scale is very good, and this rating is given when the overall scoring is more than or equals to 55% but less than 70%. The fifth scale is excellent, and this rating is given to a building when its overall scoring is equals to or more than 70% but less than 85%. The largest scale that is given to the building in this assessment is outstanding, and this rating is given when the overall scoring is more than or equals to 85%.
Each rating level of BREEAM represent the level of performance of the building in sustainability in the overall UK market, and these are performance level will be discussed here. The outstanding rating represents the building falls under the less than top 1% of the UK non-domestic building, and this category of the building is also called innovators. The building which has excellent rating is also the buildings which also fall in the top 10% of the non-domestic building in the UK market. This type of building is also called best practice building. The buildings which fall in very good rating are also considered to be in the top 25% of non-domestic buildings in the UK market. The type of buildings is called advanced good practice building. The building which has good rating is considered to be in the top 50% of the non-domestic building in the UK market, and this type of building is also called intermediate good practice building. The building which has pass rating is also considered to be the top 75% of the non-domestic building and is also called standard good practice building. All these forms the different details which the building construction project team will have to consider getting a good BREEAM rating of the building and the building construction team should concentrate on getting good BREEAM rating as its give high benefit to different stakeholder of the project. Also, it helps to increase the goodwill of the project in the market.
This report discussed different aspects of construction projects, including finance options available to the construction project, residual valuation of the project, BREEAM rating and many other aspects like these. The residual valuation of the construction project according to the circumstances given in the assignment brief had been done. Then the different components of the residual valuation method had been discussed. These different components of the residual valuation method which has been discussed are gross development cost, gross development value, professional cost, building cost and many other costs like these.
Then the financing option, which is available to the construction project, had been discussed. The financing options of the construction project include debt and equity option, and it has been found out that both financing options have been different financial consequences for the construction project. If the financing of the construction project is done by debt, the construction project, then the project has to pay the interest amount at a certain rate to the financer. If the financing of the construction project is done by the debt component, then the project has to give a certain percentage of profit to the financer. After which, the different factors which the construction project has to fulfil to get excellent BREEAM rating has been discussed. There are ten sections in this assessment, which the building which is being constructed have to fulfil to get an excellent rating. It had also been found out that that BREEAM assessment is done two times, and after the second assessment, the final certification is given.
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