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Real Estate Development Terminology

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40 Questions

What is the difference between the estimated income and total outlay of a development?

Development profit

What is the risk associated with the implementation and completion of a development?

Development risk

What is the ratio of rental income to the actual cost of a development?

Development yield

What is the total market value of a proposed development, assuming it is complete on the date of valuation?

Gross development value

What is the rate of interest used to calculate the present value of a future cost or benefit?

Discount rate

What is the measurement of a building's external area, taking each floor into account?

Gross external area

What is the measurement of a building's internal area, excluding external wall thicknesses?

Gross internal area

What is the area of a residential dwelling, subject to certain inclusions and exclusions?

Net sales area

What is the initial development yield calculated over?

The entire project

What is the value of a property in its current state, without any development?

Existing use value

What is the highest and best use of a property?

The use of the property that would produce the highest value

What is holding cost in property valuation?

The cost involved in owning a site or property

What is hope value in property valuation?

An element of market value in excess of the existing use value

What is internal rate of return (IRR) in development appraisal?

The rate of interest at which the net present value is zero

What is market comparison approach in property valuation?

Assessment of appraisal inputs and outputs by reference to comparable transaction evidence

What is market rent in property valuation?

The estimated amount for which an interest in real property should be leased

What is market risk in property development?

The risk of changes in the economy and financial markets

What is net cash flow in property development?

The cash flows generated by a project

What is net internal area (NIA) in property measurement?

The usable space within a building measured to the internal finish of structural walls

What is net present value (NPV) in development appraisal?

The sum of the discounted values of a net cash flow

What is the opportunity cost?

The return or benefit foregone by pursuing an alternative action

What is an oversailing licence?

A licence to overhang public or privately-owned property

What is the purpose of a pre-let or pre-sale?

To secure a buyer or occupier for a project

What is the profit on cost?

The profit of a project expressed as a percentage of total development costs

What is the residual appraisal?

A valuation method that deducts costs from anticipated proceeds

What is sensitivity analysis?

A series of calculations that vary one or more variables to show differing results

What is a turnkey development?

A development where the property is constructed and fitted out by the landlord to a fully operational standard

What is the target profit?

The level of acceptable profit considering the risk of the particular project

What is the total development cost?

The total cost of undertaking a development excluding profit and land

What is simulation in the context of development appraisal?

A stochastic process that considers the probability of outcomes given certain variances

What is the attribute of an empty property that allows the owner or new owner/tenant to exclusively occupy and use it?

Vacant possession

What is the term for the projected growth or decline in the capital or rental value of a project's elements?

Value change

What is the market value of a property assuming it continues in its existing use with no expectation of change?

Value in existing use

What is the minimum return a company should earn in respect of an asset by reference to its capital structure?

Weighted average cost of capital

What is the term for the year's rental income as a percentage of the property's value?

Yield

What is the term for the special assumption of an alternative use to the existing use or permitted highest and best use?

Value in alternative use

What is the term for the ratio of the property's value to its rental income?

Yield

What is the term for the market value of a property assuming an alternative use?

Value in alternative use

What is the term for the return a company should earn in respect of an asset, considering its capital structure?

Weighted average cost of capital

What is the term for the growth or decline in the capital or rental value of a project's elements, normally projected for valuation purposes?

Value change

Study Notes

Development Appraisal Terms

  • Development profit: the amount by which the estimated income of a development exceeds the total outlay
  • Development risk: the risk associated with the implementation and completion of a development, including post-construction letting and sales
  • Development yield: the rental income divided by the actual cost incurred in realizing the development
  • Development yield (initial): the development yield calculated over the entire project, defined as the stabilized income divided by the total construction cost (excluding interest and fees)

Property Measurement and Valuation

  • Gross development value (GDV): the aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date
  • Gross external area: the aggregate external area of a building or footprint, taking each floor into account, measured with reference to the appropriate code of measuring practice
  • Gross internal area: the measurement of a building on the same basis as gross external area – but excluding external wall thicknesses
  • Net sales area: the gross internal area of a residential dwelling subject to certain inclusions and exclusions
  • Highest and best use: the use of the property that would produce the highest value of the asset, which must be physically possible, financially feasible, and legal

Financial Appraisal and Risk

  • Discount rate: the rate, or rates, of interest selected when calculating the present value of some future cost or benefit
  • Internal rate of return (IRR): the rate of interest (expressed as a percentage) at which all future project cash flows (positive and negative) will be discounted in order that the net present value (NPV) of those cash flows, including the initial investment, be equal to zero
  • Market risk: the uncertainty resulting from unknown future changes in the economy and financial and property markets, irrespective of the property being developed
  • Property- or project-specific risk: the uncertainty attached to the intrinsic development of a site or property in addition to the general market risk

Development Metrics and Ratios

  • Development profit: the profit of the project expressed as a percentage of total development costs
  • Profit on value: the profit of the project expressed as a percentage of the project's net development value (NDV)
  • Return (on capital): the ratio of annual net income to capital derived from analysis of a transaction and expressed as a percentage
  • Risk-adjusted return: the discount rate as varied to reflect the perceived risk of the development
  • Target profit: the level of acceptable profit considering the risk of the particular project normally expressed as an individual sum

Quiz on key terms related to real estate development, including profit, risk, and yield. Test your understanding of these concepts in property development.

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