CHAPTER 6 - Development Budget and Appraisals

DEVELOPMENT BUDGET
AND APPRAISALS
Development
Developmentbudget
budgetand
and
appraisals
appraisals
Development budget and appraisals
CONSTRUCTION COST
Definition:
“…cost of total development component comprises of
elemental building cost and other necessary provisional
sum to complete the building construction projects…”
Prepared by Quantity Surveyors and contractors.

Prepared at preliminary stage by the QS and tendering
stage by the contractors.

Prepared according to element of buildings, nos. of
building, and infrastructural works in the Bill of

Quantities (BQ).
Development budget and appraisals
(cont’d)
Items included in construction cost:

 Preliminaries
 Building:
 Work below lowest floor level
 Frame
 Upper floor
 Roof
 Staircase
 Internal & external wall
 Door & ironmongery
 Windows
 Finishes (wall, floor, ceiling: internal & external)
 M & E services (plumbing, electrical, telephone, air-
cond, fire protection, lift, etc.)

 External works (drain, gate, porch, etc.)
 Infrastructure works (sewerage, drainage, water
reticulation, etc.)
 Other provisional works
Construction Revenue
 Definition: “Income or payment from the
construction sold products (building, etc.)”
 Construction revenue is prepared by:
 Mark up from construction cost per unit (e.g. high
cost apartment; mark up 60% from construction
cost)
 Build up selling price (analysis from construction
cost + development cost + profit)
 Rental rate that generated from the space lent
(office lots: RM100.00 x area ft2)
Development Cost
 Definition:“…all necessary cost related to development of
construction projects…”
 Prepared by employers (by QS or Estate Valuers).

 Prepared at preliminary stage before tendering or
launching the project/promotion.
 Items included in development cost:
 Construction cost
 Land cost (e.g. premium/ft2)
 Professional fees (e.g. 1% from sales)
 Local and authorities contribution (planning fees, etc)
 Management fees (supervisory cost)
 Contingencies
 Interest
 Tax
 Other related cost
EXAMPLE 1:
Kit Kat Sdn. Bhd. plan to develop a piece of land at Sri Iskandar, Perak with the
total area of 5250m2. Preliminary investigation shows that a construction of 16
storey of 2650m2/floor office tower and 3 storey of 3750m2/floor podium
block shopping complex seems to be feasible. The non-rentable floor area is only
20% of the gross floor area. Estimated average gross income is RM270.00/m2
per month. The annual outgoing is estimated at 30% from gross income.
The developer wishes to make 25% profit from the development. The site is for
sale at RM 340.00/m2 and the site work is estimated RM650,000.00. The rate of
return of similar project is about 10%.

The construction period is two (2) years and finance available at 12% interest per
annum. Legal fees, agencies and advertising cost are likely to be at 2% of Gross
Development Value. The professional fee is at 10% of the construction cost.

Determine the construction cost of the building, professional fee and cost of
finance for the project, and the allowable cost per meter square per gross floor
area. You may make your own assumptions where necessary.
a) Gross Development Income
 Office Tower = (2650/m2x 16 storeys x RM270/m2 x 12 months) = RM

137,376,000.00
 Podium (3750/m2 x 3 storeys x RM270/m2 x 12 months) = RM
36,450,000.00__+
• Subtotal = RM 173,826,000.00
• Rentable Area = Area – Non-rentable Area
=100%-20% = 80%
= 80% x RM 173,826,000.00 = RM 139,060,800.00
 Less outgoing = 30% x RM 139,060,800.00 = RM
41,718,240.00 -
 So, profit from development / annual expenditure = RM

97,342,560.00__
b) Gross Development Value (GDV)
RM 97,342,560.00
 Rate of Return = 100% / 10% x 10.00___
RM 973,425,600.00
c) Expenditure
Site Cost = RM340.00/m2 x 5250/m2 =RM 1,785,000.00
Land finance = RM1,785,000.00 x 12% x 2 years =RM
428,400.00
Site Work = RM 650,000.00
Legal Fees = 2% x RM 973,425,600.00 (GDV) =RM 19,468,512.00
Profit = 25% x RM 973,425,600.00 (GDV) =RM243,356,400.00 +
RM 265,688,312.00
Total Development Cost (b-c)
 ( Construction Cost + Professional Fees + Financial Cost) = RM
973,425,600.00
RM 265,688,312.00 –
RM 707,737,288.00
Let construction cost be Y =1.00Y
Professional Fees, 10% x Y= 0.10Y
Construction Finance, 12% x Y x 2 years = 0.24Y
Total = 1.34Y
If 1.34Y = RM 707,737,288.00
So, Y = RM 707,737,288.00 = RM528,162,155.20
1.34
Therefore, construction cost, Y = RM528,162,155.20
Professional fees, 0.10Y = 0.1x RM528,162,155.20 = RM52,816,215.50
Const. finance, 0.24Y = 0.24 x RM528,162,155.20
= RM 126,758,917.30
EXAMPLE 2:
Central Spectrum (M) Sdn Bhd is plans to construct 4000 units of luxury
apartment for rental purposes on a piece of land at West Port, Klang. The land
area is 5000m2. The average rental income is expected at RM200,000.00 per
week. The annual expenditure of the apartment is estimated at 25% of the
income.
The developer (CSSB) hopes to make 30% profit from the development. The site
is for sale at RM250.00 per meter square (m2) and the site works is estimated
at RM300,000.00. The rate of return for a similar project is about 20%.
The construction period is two years and finance available at 10% interest per
annum. Legal fees, agencies and advertising cost are likely to be at 1% of Gross
Development Value. The professionals fees is at 9% of the construction cost.
Determine the construction cost of the building, professional fees and cost of
finance for the project and the allowable cost per meter square per gross floor
area. You may make your own assumptions where necessary.
Development Appraisal
 Different techniques are available by which to
evaluate the original needs of development.
Investment appraisal techniques assess the
expected profitability of undertaking such work.
 In every situation, the necessity of understanding
the full financial implications is very important,
since whether the development is private or public
sector funded, there are only limited funds available
for investment purposes.
 If the project is to be effective then adequate
systems of investment appraisal must be adopted at
inception, while the concept is still little more than a
possible solution to meet either a need or desire.
Development Value
 The development value of a plot of land is the

different between the costs of development, which
will include the costs of the land, construction and
others.

 There are wide ranges of consideration influencing
the development of a construction site. These
include:
 Type of development predicted.

 Location
 Shape, size, topography, and access
 Ground conditions and site preparation
difficulties
 Availability of utility services
 Legal considerations
General determinants of
value
 The supply of property is relatively inelastic owing to a
number of factors, particularly the physical nature of land
and the length of time required for development purposes.
 Some of the major factors that effect demand, hence value
are as follows:
 Economy
 Structural changes in the economy
 Costs of ownership
 Location
 Condition
 Government
 Infrastructure
 Population
 Funding
Thank You

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CHAPTER 6 - Development Budget and Appraisals

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DEVELOPMENT BUDGET

Prepared by Quantity Surveyors and contractors.

stage by the contractors.

building, and infrastructural works in the Bill of

Items included in construction cost:

cond, fire protection, lift, etc.)

 Prepared by employers (by QS or Estate Valuers).

 Office Tower = (2650/m2x 16 storeys x RM270/m2 x 12 months) = RM

 So, profit from development / annual expenditure = RM

 The development value of a plot of land is the

 Type of development predicted.

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