A development company has purchased a development site with planning permission for a small commercial scheme comprising 2,500 square metres Gross Internal Area (GIA) with an efficiency ratio of 85%. The purchase price of the site was £650,000 and it is expected that the completed scheme will let for £180 per square metre and sell at an initial yield of 7.0%. The construction costs are calculated to be £975 per square metre and professional fees are estimated at 12% of cost. Site preparation works and external works are quoted to be £30,000 and £145,000 respectively. A contingency allowance of 4% should be included to cover any increase in costs.

 

It is expected that the scheme will have a lead time of 3 months and take 12 months to build. A letting void of at least 3 months is expected upon completion of the scheme. Planning costs are expected to total £75,000 and finance has been arranged at an interest rate of 8.0% per annum. Marketing and letting costs are calculated at £20,000 and letting agents and lawyers' fees are estimated at, respectively, 10% and 5% of market rent. Making any additional assumptions necessary:

 

(a) Calculate the total developer's profit on completion of the scheme; (60% of marks)

 

(b) Calculate the return on cost, return on net development value (NDV) and income yield (20% of marks)

 

(c) Briefly advise your client as to whether to commit to the scheme. (20% of marks)