How an accurate appraisal enables you to mitigate risk

Providing the best housing with the lowest risk requires a crystal ball, but since those don’t exist what is our next best option? The answer is – A robust appraisal.

The key focus in appraising potential schemes is to establish if it is financially viable or not.

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The financial appraisal is integral to the development process. Business decisions must be made on accurate data and recognised viability standards with key performance indicators such as NPV, IRR, or payback year. Ideally, viability by tenure and unit will be an output allowing development professionals to optimise the mix of tenures and units in their schemes.

 

NPV is possibly the most important metric used to demonstrate whether long term income will pay for the project. Using appraisal software gives you the flexibility to try different tenure mixes to determine the most suitable mix, whether this is for social need or profit. This can be viewed by tenure or unit and will make several thousand calculations without a delay as you focus on the key metric. Including the ability to forecast the repayment year for the loan.

 

Such software can be utilised to test the sensitivity (“what if” calculations) to understand the wider impact of changes in cost and value parameters affecting the viability of schemes. Scenarios can be put against the project for example; decrease in sales value, building costs, changes in the market, voids, bad debts or delays in construction. The risk of each of these and their impact on the project can then be weighed and decisions/contingencies can be made.

 

The confidence a robust accurate appraisal gives enables better value for money, more confidence in bidding for land and the trust the project will meet social and financial outcomes.

 

By not completing a thorough financial appraisal of your proposed development you are leaving yourself vulnerable to many risks, the biggest being the project will end up in a loss and never pay for itself or meet the need. Luckily there is software like SDS ProVal specifically designed for the social housing industry which can be utilised to help mitigate some of the development risks.

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