Single-variable tests, the break-even of each, and a two-way table, on an illustrative £52,000,000 residential scheme.
Run a development appraisal sensitivity by flexing one input at a time, then two together, and solving for the break-even of each: the build cost overrun, the fall in sales values and the delay that would each eliminate the profit. On an illustrative £52,000,000 scheme with a 21.7 per cent profit on cost, profit disappears at a 27.4 per cent build cost overrun or a 17.8 per cent fall in GDV. Those two numbers belong on the front page of the appraisal.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A residential scheme on land already under contract, so the land price is fixed and profit is the output. Fees and contingency are set as a share of build cost, and finance is charged on land for the whole programme and on construction at half its cost on average during the build, then in full through the sales period. All figures are illustrative.
| Line | £ |
|---|---|
| GDV, net of sales costs | 52,000,000 |
| Land, with 7% acquisition costs | 7,490,000 |
| Build cost | 26,000,000 |
| Professional fees, 12% of build | 3,120,000 |
| Contingency, 5% of build | 1,300,000 |
| Finance at 7.5%, 24-month build, 6-month sale | 4,826,625 |
| Total cost | 42,736,625 |
| Profit | 9,263,375 |
| Profit on cost / on GDV | 21.7% / 17.8% |
| Test | Profit | Profit on cost | Change in profit |
|---|---|---|---|
| Base | 9,263,375 | 21.7% | |
| Build cost +5% | 7,571,262 | 17.0% | −18% |
| Build cost +10% | 5,879,150 | 12.7% | −37% |
| GDV −5% | 6,663,375 | 15.6% | −28% |
| GDV −10% | 4,063,375 | 9.5% | −56% |
| Delay of 6 months | 8,412,125 | 19.3% | −9% |
A 5 per cent fall in GDV costs £2,600,000; a 5 per cent rise in build cost is £1,300,000 on the build line but £1,692,112 all-in, because fees, contingency and finance follow it. Each month of delay costs £141,875 of interest. This is the gearing of development: a profit of under a fifth of value absorbs every movement in value and cost, so small percentage changes in the inputs become large percentage changes in the output.
Instead of asking what happens at plus 5 per cent, ask how far each input can move before profit is zero. Goal Seek does it in Excel; set profit to zero by changing the flex cell.
Break-even GDV fall = profit / GDV = 9,263,375 / 52,000,000 = 17.8% (£9,263,375 of value)
Break-even build overrun: solve profit(build × (1 + x)) = 0, with fees, contingency and finance following, x = 27.4% (£7,116,777 on the build line)
Break-even delay: finance only, about 65 months
Excel: Data > What-If Analysis > Goal Seek, set cell Profit to 0 by changing BuildFlex
The GDV break-even equals the margin on GDV, because value falls pound for pound into profit. The cost break-even does not equal profit divided by build cost. That shortcut gives 35.6 per cent, which overstates the cushion by eight points, because it forgets that every pound of overrun brings fees, contingency and interest with it. The delay figure looks comfortable only because it carries interest alone; in practice a long delay brings build cost inflation and a different sales market with it, and those are the larger risks.
| Build cost | GDV +5% | GDV 0% | GDV −5% | GDV −10% |
|---|---|---|---|---|
| −5% | 33.0% | 26.7% | 20.4% | 14.0% |
| 0% | 27.8% | 21.7% | 15.6% | 9.5% |
| +5% | 22.9% | 17.0% | 11.2% | 5.3% |
| +10% | 18.4% | 12.7% | 7.1% | 1.5% |
Build it with an Excel data table (What-If Analysis > Data Table, row input GDV flex, column input build flex). The cells that matter are the ones a credit committee will ask about: a 5 per cent overrun with a 5 per cent fall in values leaves 11.2 per cent on cost, roughly half the base. Add a six-month delay and profit is £4,091,494, 56 per cent lower than the base, or 9.0 per cent on cost.
Most appraisal sensitivity tables show plus and minus 5 per cent on each variable, one at a time, and stop. That presents the risks as independent and modest, when in practice they arrive together: the delay that pushes completion into a weaker sales market is often the same one that exposes the contractor to inflation. A table that stops at 5 per cent also never says how far an input can move before the profit is gone, which is the question a lender actually asks. Report the break-evens, the joint downside and the cost per month of delay, and the sensitivity becomes a decision tool rather than a ritual. To see the same arithmetic run backwards into a land bid, see how to calculate residual land value.
The book runs these stress tests on its own appraisal, and the free workbook for this case computes them live alongside a quarterly cash flow and its peak funding. For a template of your own, see the residual land valuation model.
Solve for the overrun that sets profit to zero, letting fees, contingency and finance follow the build cost. On the illustrative scheme a 21.7 per cent profit on cost is eliminated by a 27.4 per cent overrun. Dividing profit by build cost gives 35.6 per cent and overstates the cushion by eight points.
At minimum, the interest on the money drawn. On the illustrative scheme, with land and half the construction cost drawn during the build at 7.5 per cent, each month of delay costs £141,875, and six months reduce profit by £851,250. Delay also exposes the scheme to build cost inflation and a different sales market, which this figure leaves out.
At least sales values, build cost, programme length and the finance rate, one at a time and then together. On the example a 5 per cent fall in GDV costs £2,600,000 of profit and a 5 per cent rise in build cost £1,692,112 all-in. The break-even of each is more useful to a committee than any single plus or minus 5 per cent row.
The residual appraisal and its stress tests are worked in chapter 3 of The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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