SHF Viability Guidelines

G
2006
guidelines
Project Financial Viability Studies for Property
Development in the Social Housing Sector
G U I D E L I N E S PROJECT FINANCIAL VIABILITY STUDIES
c
Contents page
purpose
Purpose and
and scope scope
of the guidelines 3
introduction
Introduction to feasibilityto feasibility
studies 4
Why should feasibility studies be done before projects are executed? 4
What is a feasibility study? 4
What is measured and against which objectives? 5
Parts of an overall feasibility study 5
Socio-economic feasibility 5
Marketing feasibility 6
Legal feasibility 6
Physical feasibility 6
Financial feasibility/viability 6
Project feasibility and institutional sustainability 7
financial
Financial viability viability
studies 8
Parts of a financial viability study 8
Steps in carrying out a financial viability study 9
compiling
Compiling various
various parts partsviability study
of the financial 10
Cover page with project details 10
Executive summary 10
Statement of the investor’s financial objectives 11
Estimated total project development cost/total capital outlay: 11
Cost of surveys and studies 13
Land costs 14
Town planning and related costs 16
Land servicing costs 16
Interim rates and taxes 17
Escalated construction costs – top structures and site services 17
Professional fees and disbursements 22
Municipal plan scrutiny fees 25
Sundry legal and administrative costs 25
Initial marketing costs 25
Development contingency 25
Finance costs 26
Interim cost of capital 26
Estimated net project operational income (gross income less operational expenses) 27
Estimated project returns 28
Development and operational cash-flow projections 31
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page
Risk analysis 33
Lists of assumptions and exclusions 34
A brief outline of the specifications upon which the cost estimates are based 35
A brief outline of the outcomes of, or reference to the socio-economic, marketing,
legal and physical feasibility studies 35
woking
Worked example
example: Complete financial viability study 36
alternative
Alternative approaches
approaches to project
to doing project financial viability studies: 51
Income capitalisation method of determining financial viability 51

Quick (preliminary) square metre estimating and viability study without drawings
(based on 100% loan funding [no equity investment] for illustrative purposes) 56
annexures
Annexures 61
Annexure A: Estimating escalations on building contracts 61
Annexure B: Calculation of interim finance costs 67
Annexure C: Estimating project time frames for use in financial viability studies 69
2
p
Purpose and scope of the guidelines
The purpose of the guidelines is to assist the boards, management and staff of
Social Housing Institutions in playing a more meaningful role in the compilation,
interpretation and application of financial viability studies during the property
development process.
Undertaking and preparing financial viability studies is a specialised activity that

requires in-depth knowledge and understanding of the property market, financial
market conditions, property development costs, indicators, technical aspects, and
managerial and operational practice. The person or team carrying out a viability
study must also have highly developed analytical and arithmetical skills, including
an ability to read statistics and the ability to do discounted cash flow calculations.
These guidelines could be used to get a better understanding of what a financial

viability study is, why the study should be done prior to developing property, what
should be included in a financial viability study, and which objectives the financial
viability should be measured against. The reader can refer to examples of feasibility
studies included in these guidelines. Examples of basic calculations have been
included in order to illustrate how one arrives at certain figures required to calculate
the overall financial viability of the project.
What often happens in practice is that professionals (e.g. project managers and/or
quantity surveyors) are appointed to do the viability studies, and they work on
their own without much meaningful input from the client organisation (the Social
Housing Institution). These guidelines have been prepared to help the Social Housing
Institution to better understand the principles and process, in order to provide
meaningful input, and more importantly – to be able to interpret and question the
studies presented by specialists critically and intelligently.
These guidelines only will not be sufficient to develop the reader into a financial
viability study practitioner or expert, and attempting to do financial viability studies
without the requisite experience and insight can be dangerous.
n Note: These guidelines and examples are specifically for “investment”

(rental) schemes. Although financial viabilities for selling schemes such
as instalment or direct sale have many aspects in common with those
for investment schemes (e.g. land and construction cost estimates),
the approach to estimating and assessing yields (profits rather than
returns) is very different, and a discussion thereof falls outside the
scope of this document. When conducting a financial viability study
for a selling scheme, you may also have to consider additional costs
such as sectional title costs and agents’ commissions.
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iIntroduction to feasibility studies

Why should feasibility studies be done
before projects are executed?
Property development is sometimes defined as “taking the risk of sacrificing a
known present value (of one’s invested funds or equity) in return for an increased,
but uncertain, future value”.
To minimise the inherent uncertainty and risk, an investigation into the likelihood
of successfully executing a project should always be undertaken before actually
embarking on the project. This investigation is called a feasibility study. Feasibility
studies should be done very early in the life of a project, before detailed designs
and technical documentation are prepared, to ensure that time, energy and money
spent on detailed project preparations are not wasted on the wrong concept, and
to avoid irreversible commitments being made to unsuitable pieces of land.
Feasibility studies are essentially tools that are used to guide investment and
development decisions – the key “go”, “no go” (or “go back and revise”) decisions
taken at various stages in the life of the project.
What is a feasibility study?

Is it a feasibility or viability study?
Feasible means practicable, or capable of being accomplished, something that
can be done.
Viable means able to exist, or capable of developing and surviving without

outside help.
For our purposes, both terms refer to the desirability or otherwise of embarking
on a project and its sustainability after completion, and both can, therefore, be
used.
The likelihood of a project being feasible is reinforced when the feasibility study
indicates that the objectives of the investor (in this case the Social Housing
Institution or SHI) should be satisfied if a specific concept or idea is executed on
a particular piece of land. Arriving at the right match between concept and land
is, of course, a process where alternative concepts are tried and refined using
a series of cost benefit comparisons (feasibility studies) until the best solution is
found. This stage of project preparation is called the pre-feasibility phase, and
corresponds with the project validation and development appraisal stages in the
Social Housing Institutions Operations Manual
Further reading
See “Social Housing Institutions Operations Manual” and www.shf.org.za
4
What is measured and against which

objectives?
Feasibility studies are not about uninformed speculation. The Social Housing Institution
as property developer should be very clear about its development objectives, so
that the feasibility of every project concept can be measured against these pre-set
objectives. Development objectives must align with the organisation’s mandate and
mission, and must be set to ensure its long-term sustainability through the execution
of successful projects. In a typical Social Housing Institution development, objectives
are usually divided into non-financial and financial objectives.
Non-financial objectives can be of a socio-economic and/or a political nature, such

as promoting urban renewal in a particular area, contributing to local economic
development and community empowerment, and so on.
We set financial objectives to ensure the project will pay its own way and contribute
to the long-term financial independence and sustainability of the Social Housing
Institution. Financial objectives usually include:
• Realising a surplus of project income over project expenses (return on investment),
i.e. making a profit.
• Making sure project development costs don’t exceed the funding available
(subsidy, loans, grants, equity if any).
• Ensuring project pay-back within a certain time frame.
• Making sure actual cash inflows are available at the right time to meet actual
cash outflows (cash-flow projections).
Parts of an overall feasibility study

Financial feasibility studies, in order to be meaningful and not based purely on
speculative figures, need to be informed by the overall context and environment
within which the proposed development will take place. Feasibility studies are
therefore normally done in two parts.
The first part looks at the practical executability of a specific development proposal
on a specific site. This part of the overall study looks at the following aspects to
check their potential effect on project execution time frames, and on projected
income and expenses:
Socio-economic feasibility
This is a survey carried out to investigate demographic, socio-economic and urban
growth patterns and trends; and to see if the right target market and area for
development have been selected. In other words, is there a large enough population
with the “right” socio-economic profile to support the project?
Social Housing Institutions normally commission a specialist research company or

university to carry out this study (remember to include the costs in the financial
viability study – unless they are sponsored).
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WARNING: Socio-economic surveys are sometimes nothing more than

a re-hash of outdated or unreliable census statistics that attempt to
create a vague kind of comfort that demand is somehow guaranteed
through the existence of a large enough population in a certain income
category. It is very important to obtain relevant, correct, current
information, and the socio-economic survey should be accompanied
by a marketing feasibility study.
Marketing feasibility
The target market is more specifically analysed to see if actual demand (need backed
by “purchasing power” or income) for the product exists, and if the objectives with
regard to rental and occupancy levels are realistic.
Legal feasibility
The site description, ownership details and legal status of the envisaged site are checked
for problems with the title deed and transfer of ownership, legal encumbrances such
as registered servitudes, long-term leases and other restrictions, and to ensure the
site has the necessary development rights. The purpose is to identify and quantify the
possible impact of legal issues on development time frames and costs.
Physical feasibility
The physical features of the site are checked to see if it can be built on, how much
the site cannot be built on, and what impact its features will have on development
costs. The aspects investigated include:
• Site topography and vegetation – slopes, rocky outcrops, marshes and wetlands,
water courses and flood lines, trees to be removed or conserved.
• Geotechnical features – sub-surface soil conditions and their impact on design
and costs of foundations, services and roads.
• Location and access – is it a favourable location with regard to economic opportunities,
facilities and transport, ease of access for pedestrians and cars, traffic issues, etc?.
The second part of the overall feasibility study is the financial feasibility or viability
study:
Financial feasibility/viability
This part of the feasibility study uses the information supplied by the first part of the
study, as well as assumptions based on the experience and market knowledge of the
person or team doing the study, to test and fine-tune the concept (and alternatives
if necessary) until it provides an acceptable cost benefit solution that best meets the
project financial objectives. Final investment and development decisions are based
on the financial viability study, taking into account the other parts of the overall
feasibility study.
This guide concerns itself mainly with the financial aspect of project feasibility – the
Financial Viability Study.
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Project feasibility and institutional sustainability

When Social Housing Institutions engage in financial modelling for their business plans,
a common error is to combine project and institutional budgets and cash-flows into one
set of figures. What typically happens is that general management or overhead costs
are mixed with direct property management costs, and this presents a skewed picture
of project financials. Because the institution can seldom be carried by a single project
(unless it is very large, say 2,000-3,000 units), the temptation then arises to “massage”
the figures until they look good enough to sufficiently impress the funder(s).
The Social Housing Institutions business plan must, therefore, always reflect
separately:
1. Project feasibility for each project, together with a realistic time-frame. Projects
must not be delayed for too long as their income contributions to SHI overheads
are needed to help the company break even, and break the reliance on shortfall
funding within a reasonable time – i.e. 3 to 4 years.
2. Institutional feasibility based on the project feasibilities. This should show
clearly what contributions each project will make to the overheads of the SHI,
on a realistic cash-flow basis, until the organisation breaks even and becomes
self-sustaining. It should also clearly show what the overall operational shortfall
will be on a cumulative basis for the pre-development and development stages,
and how these shortfalls will be funded (bridging loans, grants, and donations in
money and in kind e.g. staff secondments, etc.):
Project 1:
Income R 10 000 000 Office rent R 350 000
Loan repayment R 5 000 000 Telephone R 40 000
Running costs R 4 000 000
Insurance R 10 000
Project surplus R 1 000 000
Equipment R 60 000
SHI general overheads: Salaries R 1 600 000
Consumption R 40 000
Board R 250 000
Project 2: Sundries R 50 000
Income R 12 000 000
Total overhead R 2 400 000
Loan repayment R 6 000 000
Income:
Running costs R 4 500 000
Project 1: R 1 000 00
Project surplus R 1 500 000
Project 2: R 1 500 000
SHI Surplus R 100 000
This guide focuses on project feasibility. Other guides and manuals

on how to achieve institutional sustainability and do overall financial
modelling have been prepared by the Social Housing Foundation (SHF),
and as part of the Support Programme for Social Housing (SPSH).
Further reading
See “Guidelines – Business Planning for Social Housing Institutions” and www.shf.org.za
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f
Financial viability studies
Parts of a financial viability study
A typical financial viability study consists of the following parts:
• An outer cover with the project name, who it is for, feasibility report number
and date (optional)
• An inside cover page containing project details
• A contents page
• An executive summary showing all the critical results and conclusions, including
a statement of the investor’s financial objectives
• Summary calculations of:
• Estimated total project cost, usually referred to as Total Development Cost
(TDC), or Total Capital Outlay (TCO)
• Estimated net project operational income (gross income less operational
expenses)
• Estimated project returns (return on investment, internal rate of return or
IRR, break-even and pay-back periods)
• Detailed breakdown calculations of:
• Estimated current construction cost
• Estimated construction cost escalations
• Estimated interim cost of capital
• Estimated annual property operating costs
• Development and operational cash-flow projections
• A risk analysis
• Lists of assumptions and exclusions
• A brief project description, and the specifications the cost estimates are based
on
• A brief outline of the main outcomes of the socio-economic, marketing, legal
and physical feasibility studies that informed the assumptions (optional), or a
reference to the other studies used
Refer to worked example of a typical financial viability study for a

residential development project, page 36
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Steps in carrying out a financial viability study

Armed with the information gathered during an analysis of the socio-economic, mar-
keting, legal and physical feasibility studies, the person or team doing the financial
viability study should follow the procedure as set out below:
1. Set down the financial objectives of the project in consultation with the board
and top management. This might entail decisions with regard to:
• Required rate of return on investment
• Required or desired operational break-even and capital pay-back periods
• Project and per unit cost limitations
2. Use experience and apply contextual and market knowledge to determine all
the main assumptions, for instance:
• Projected building cost escalation rates
• Projected loan interest rates
• Projected rentals
• Projected rental and operational expense inflation rates
• Estimated time frames for the various phases of the project. (This is crucial
as the time frame affects cost and income projections.)
3. Sit down with the professional team and agree on preliminary outline project
specifications and important design details to be used in the cost estimates (remember
that at this stage only very basic concept or sketch drawings are available to the
estimator. Also, the outline specifications are at this stage just a rough guide to assist
with construction cost estimating. The final detailed specifications will be developed
much later, but must, of course, be in line broadly with these preliminary outlines).
4. Decide on the funding structure and conditions for the project (subsidy, equity and
loans) in consultation with main stakeholders, the board and top management.
5. Do the calculations (estimated costs, income, returns and cash-flows).
6. Do a risk analysis. This is where the effect of possible changes in main

assumptions on project viability is analysed by asking the “what if?” questions.
Three broad scenarios are compared – optimistic, realistic (assumptions used in
the study itself) and pessimistic.
7. Draw conclusions and make recommendations to the board and management.
At this stage, honesty is required to make realistic recommendations, and the board
must display the wisdom and courage to “walk away” from a project if the study
shows the project to be unviable, or if the risk analysis indicates unacceptably
detrimental effects if certain parameters are changed. This is often difficult when
the organisation’s heart is set on a particular project, and when a lot of hard work
and planning has already gone into project validation and preparation. It is better to
feel the pain at this stage though than to sit with an unviable project for many years.
Remember that not too many serious contractual and/or financial commitments have
been made at this stage, and it is still possible to pull out without too much fruitless
expenditure and effort. Later, when final plans have been drawn and a contractor
has been appointed and placed on site, it may be too late to stop the project.
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S H F BP6 2006
cCompiling various parts of the

financial viability study
Note: For visual examples of the parts described below, refer to the worked
example, page 36
Cover page with project details

The outer cover (optional) is kept simple. It contains the names of the client and
the project, the report number and the date.
The inside cover page (which can also be used as the actual cover) contains the
following information
• Client details (who the study is for)
• Project description (Project number or code, name, location, street name,
stand number)
• Number and date of the study
• Name of architect
• Type and date of drawings on which building cost estimate is based
• Method used to work out building cost estimate (square metrage, elemental
analysis, rough quantities, etc.)
• Name of person or team carrying out the study (not necessary if cover is on
the letterhead of a professional firm carrying out the study)
All pages of the report must be numbered, and should carry a header or footer
with the project name or code, and the date and number of the report.
Executive summary page of critical results

and conclusions
This page shows at a glance the following summarised information:
• Brief project description (number of different types of units)
• Estimated project time frame (main elements only: planning period,
construction period, operational life used for projections)
• Project funding structure and conditions
• Statement of financial objectives
• Estimated escalated building cost and rate per square metre
• Estimated total project cost and rate per square metre
• Estimated gross income (and the rentals this figure is based on)
• Estimated net income
• Estimated returns and how they compare with the stated objectives
• Conclusions and recommendations
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Statement of the investor’s financial objectives

(Usually included in the executive summary above)
The objectives are determined by the board and top management, and may include
the following:
• Project cost limitations (based on industry norms where possible):
• Total project cost: e.g. R84 500 000 (It may be necessary to set this kind of
limitation to align with limitations pertaining to the funding available).
• Total costs per unit for different types of units: e.g. not more than R150 000
(R3 000/m2) for a two-bedroom unit.
• Required rate of return: e.g. 12.5% p.a. In private sector developments for
commercial gain, the required rate of return is usually determined by looking
at the cost of capital, possible returns on alternative “safe” types of investment
(money market, blue-chip shares, government bonds), and then adding a risk
premium because property development is more risky. On the other hand, the
investor also allows for the fact that good property will show capital appreciation
or growth over time in addition to operational return. It is a complex decision.
Social Housing Institutions may be guided more by what they consider to be
a return that will cover the cost of capital and contribute sufficiently on a per
project basis to long-term institutional viability. There are also sector norms and
social housing policy guidelines to consider.
• Break-even period: This period indicates after how many years operational
income should fully cover operational expenses. Ideally this should happen in
the first year of operation, but this is rarely achieved in property development.
It is more realistic to set a break-even target of 3 to 5 years.
• Pay-back period (optional): This period indicates after how many years the project
will have paid for itself. A realistic target for social housing is 12-15 years.
Estimated total project cost

Note: In the industry, the terms Total Development Cost (TDC) and Total
Capital Outlay (TCO) are used interchangeably to denote the amount
that represents the total capitalised investment in a development project,
and which is used for determining rates of return on investment.
Introduction
The TDC or TCO is the sum of all the “capitalised” costs incurred on the project (not
general overheads) from date of inception to the end of the development period (i.e.
the last day before commencement of the trading or operational phase. This usually
includes the costs associated with land and services installations, construction and
professional fees, but also some costs that would normally be viewed as operational
expenses during the trading phase, for example “interim” property tax and interest
on building loans during development.
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S H F BP6 2006
In ordinary commercial and social housing developments, the main components

of Total Capital Outlay could be spread as follows:
Approximate range: % of total project cost
Commercial Social housing

Component
projects projects
4.4.1 Cost of surveys and studies 0-1.5 0-1
4.4.2 Land costs 10-20 0.5-5
4.4.3 Town planning and related costs 0-2.5 0-2.5
4.4.4 Land servicing costs 0-10 0-10
4.4.5 Interim property rates and taxes 0.5-2.5 0.1-2
4.4.6 Escalated construction costs – top
structures and site services 50-65 75-85
4.4.7 Professional fees 10-15 6.5-9.5
4.4.8 Municipal plan scrutiny fees 0.05-0.3 0.1-0.5
4.4.9 Sundry legal and administrative 2-5 0-0.2
costs
4.4.10 Initial marketing costs 2-5 0.1-2
4.4.11 Development contingency 0.5-2.5 0.5-2.5
4.4.12 Finance costs 1-5 1-5
4.4.13 Interim cost of capital 5-10 3.5-8
Note 1: The ranges for some items can be quite wide. If you get land for free,
land cost will be a very small proportion of the total, meaning that one
or more of the other major components such as construction costs will
automatically constitute a larger percentage of the total.
Note 2: The percentages in the table above are percentages of total development
cost, and not of construction cost. Professional fees, for instance, may
only be 6.5-9.5% of TCO, but that could translate to 8.67-12.67% of
construction cost (if construction cost is 75% of TCO), or 7.65-11.18%
(if construction cost is 85% of TCO). Since professional fees are more
directly related to construction cost than to TCO, it is customary when
discussing or estimating or negotiating fees, to speak of them as a
percentage of construction cost.
In social housing projects currently, the land costs are usually close to zero, and cost
of capital is much lower because the injection of subsidies, grants, and “soft” equity
loans means that there is no, or little, loss of interest on equity.
Private commercial developments are normally funded through a combination of:

• Own capital or equity (20-40% of TCO)
• Loans for the balance required (60-80% of TCO)
There is no subsidy applicable, and the full project cost must be funded through
equity investment and borrowings.
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In social housing projects the funding is usually in the form of government subsidy,
grants, donations, debt funding from development finance institutions, and in some
instances limited equity from own reserves. The amount of subsidies and grants is
usually deducted from the TCO, and returns are calculated on the balance only.
This calculation indicates a favourably skewed picture when compared, for instance,
with returns in private developments, which are calculated on the full project cost,
for example:
Case 1 – returns based on full project cost without the deduction of subsidies:
Total Development Cost (TDC) R 100 000 000
Net annual income (NAI) R 10 000 000
Return on investment (ROI) = NAI/TDC = R 10 000 000/R 100 000 000 = 10.0%
Case 2 – returns based on balance project cost after deduction of subsidies:

Total Development Cost (TDC R 100 000 000
Less: Subsidies R 30 000 000
Balance of investment (mainly loans) R 70 000 000
Net annual income (NAI) R 10 000 000
Return on investment (ROI) = NAI/TDC = R10 000 000/R70 000 000 = 14.29%
In reality, the above effect is lessened (or even completely negated) by the fact that
the introduction of a subsidy caps the rental income below what could be charged
in the market, while development costs are not similarly capped, for instance:
Case 3 – returns based on balance project cost after deduction of subsidies

(but with rental income capped because of subsidy rules):
Total Development Cost (TDC) R 100 000 000
Less: Subsidies R 30 000 000
Balance of investment (mainly loans) R 70 000 000
Net annual income (NAI) (capped by subsidy requirements) R 6 000 000
Return on investment (ROI) = NAI/TDC = R6 000 000/R70 000 000 = 8.57%
Cost of surveys and studies

Socio-economic surveys:
Sometimes even before a particular project is identified and conceptualised, the
SHI will commission a specialist firm or university department to conduct a general
socio-economic survey of the target area. The cost of such surveys may be sponsored,
but if not, should be included as a project cost.
Environmental Impact Assessments (EIAs):

Once a project is identified it may be necessary to conduct an EIA in terms of
environmental protection legislation before permission can be granted to proceed
with development. The cost of this assessment may also be included under land
costs or professional fees.
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S H F BP6 2006
EIAs are usually required where the development requires new township
establishment or a major rezoning of land use. Township establishment is the formal
town planning procedure where “raw” farmland is converted into registered or
proclaimed urban development land via a simultaneous rezoning and sub-division
(optional) of property.
Archaeological investigations/Heritage conservation reports

Sometimes sites have known or potential archaeological remains, or these may be
uncovered during building operations. An archaeologist would then be appointed
to carry out an investigation and make recommendations on the relocation, or
conservation of the remains where they were found, and the costs (and effect of
possible delays) of this would have to be incorporated into project cost estimates.
Fortunately, this rarely happens on urban sites.
Existing buildings on certain sites might be protected by heritage conservation

legislation, and although the architect would normally be aware of this, it may be
necessary to commission extra reports before alterations and/or demolitions can
be carried out. Sometimes the existing buildings, or at least certain parts of them
(such as the external façade), may have to be incorporated in the designs for infill
or new builds.
Land costs
The typical components are:
• Purchase price/market value
• Transfer cost or VAT
• Geotechnical investigations
• Legal costs related to Land Availability Agreement (if any)
Purchase price/market value

In private sector developments, the cost of land is included at current market value
rather than at historical cost (or purchase price). This is because the true cost of the
land is its realisable value that could be converted into cash by selling it rather than
“locking” that value into the total investment made in the project, or “sacrificing” the
immediate return in exchange for a longer-term return. The logic of this is evident
where a property may have been inherited or obtained, long ago, at a historic cost
that does not reflect current reality. Where land has recently been bought, or is to
be acquired in the near future, the purchase price is usually similar to market value
(unless the buyer paid too much or too little), and the problem falls away.
An argument could be made that SHIs should follow the same principle, even
where land is donated or acquired at nominal cost, but this is usually not done,
which means that financial viability studies for social housing projects are not
done on the same basis as those in commercial developments, and returns cannot,
therefore, be compared with or benchmarked against similar developments in
the private sector.
14
However, SHIs have other costs that private developers may not have, such as
provision of social facilities, community development and tenant training. This may to
some extent negate the “undervaluation” of land costs in social housing projects.
Transfer cost/Value Added Tax (VAT)

By law all property transfers must be registered at the deeds office, and a tax is pay-
able to government in the form of transfer duties or Value Added Tax (VAT).
• Transfer duty is paid to government as a sliding scale percentage of the value of
all property-transfer transactions between natural persons who are non-vendors.
Non-vendor juristic persons (e.g. companies) pay a flat rate of 10% of the land
value. In property transactions that are not considered arm’s length (e.g. between
family members, or in the case of donations and special deals), the receiver will
insist on an independent valuation of market value, and base the transfer duty
on such valuation.
• Value Added Tax (VAT) is payable in place of transfer duty where property is
purchased from a vendor (such as a property developer).
• Transfer registration fees are paid to the conveyancer (attorney) attending to
the transfer (also on a sliding scale percentage based on the property value).
These fees are payable regardless of whether transfer duty or VAT is paid to
government.
The scales showing duties and fees payable, such as those in Moffat’s Improved Table
of Transfer and Bond Costs, are obtainable from any legal firm or legal publisher.
Geotechnical investigations
Problem soils (heaving clay, collapsible sands, dolomite) are common in South Africa,
and it is always prudent to carry out geotechnical investigations of a prospective
building site. They are done by specialists (some civil engineering firms also have
geotechnical divisions), and usually involve:
• Digging test pits over the site to expose the underlying strata for inspection
• Taking soil cores for analysis in a laboratory
• Preparing a report with diagrams showing the underground soil profile, and
recommendations with regard to foundation types and bedding, and jointing
of service pipes below ground
The cost of these investigations varies according to the size of the site and the
number of pits dug and core samples taken, and can be substantial on large or
problematic sites.
Legal costs related to Land Availability Agreement

If the Land Availability Agreement is with the local council, the municipality’s legal
department will draw up the agreement and there will be no cost to the SHI. Some
municipalities may, however, charge for this service (especially where the SHI is not
a municipal entity). The SHI may also wish to have the agreement checked by its
own lawyers, or may prefer to have it drawn up by them, and checked by council’s
legal people. Quotes or estimates of cost would then have to be included in project
cost estimates.
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Town planning and related costs

A number of options exist with regard to the status of the land earmarked or acquired
for the development:
• Raw farmland on which township establishment must still be carried out
The following main costs must be allowed for:

• Application fees to the local authority
• Advertising costs
• Cost of plans and printing
• Town planner fees
• Land surveyor fees
• Bulk service contributions to council (can be substantial)
• Cost of legal agreements
• Proclaimed land, but on which some formal town planning or legal procedures
such as rezoning, consent-use application, relaxation of development controls,
sub-division or consolidation are required
Some or all of the following, as may be required (check beforehand):

• Application fees to the local authority
• Advertising costs
• Cost of plans and printing
• Town planner fees
• Land surveyor fees
• Bulk service contributions to council (can be substantial)
• Proclaimed land with the necessary development rights and on which no further
procedures are required
No further costs except that the boundary beacons may have disappeared, and a
land surveyor will have to be paid to re-establish them.
Land servicing costs

Where proclaimed serviced land with the appropriate development rights (zoning)
is acquired, there are usually no further costs in this regard
Where land is rezoned, sub-divided or consolidated, there may be some costs

involved in establishing separate service connections, or upgrading existing
connections, and in the form of bulk service contributions to the municipality.
Where township establishment is required, there are substantial construction

costs and professional fees involved in designing and installing so-called internal
township reticulation services (such as roads, stormwater drains, water, electricity
and streetlights, and sewerage installations). These costs can range between R25
000 and R60 000 per erf for individual single dwelling erven, and between R8 000
and R20 000 per dwelling unit (unit, townhouse or row house) on medium-density
multi-unit complexes. On a site where 300 units in walk-ups are being developed,
services could cost between R2.4m and R6m (based on prices in 2006).
16
Municipalities are responsible for providing bulk and link service infrastructure and
connections to the new township. They usually obtain funding for this from national
government via the Municipal Infrastructure Grant (MIG), the Department of Water
Affairs and Forestry, the Development Bank of South-Africa (DBSA), and where
applicable, a combination of grants and loans from district councils.
Interim rates and taxes

Interim rates and taxes are usually not payable in the event of a land availability
agreement with the council, as transfer only takes place at the end of the development
period. From the moment a property is registered in the Social Housing Institution’s
name, the Social Housing Institution is responsible for paying property tax to the
municipality. Land is sometimes also acquired early on in the project cycle, which
means that the Social Housing Institution is liable for these taxes, even during the
period of the actual development of the property.
Property tax paid up to the end of the development period is capitalised, i.e. added
up and included in TDC/TCO. According to new property rates legislation, rates
are levied as a percentage of the total market value of land and improvements per
year.
NB: Remember that the value of property increases after township

establishment and rezoning, and that different amounts of tax,
therefore, apply before and after these procedures, which must be
factored into the cost estimates. In addition, property rates and/or
valuations upon which they are based are increased annually. In a
multi-year project, these increases must be taken into account in
the cost estimates.
Some councils levy additional penalties on undeveloped land (applicable where the
land is acquired and then delays in the development process occur).
There may also be charges for grass cutting and keeping sites clean before and
during construction. Always check carefully with your local council which of the
above charges apply.
Escalated construction costs – top structures and site

services
General
The purpose of estimating construction costs on behalf of clients or employers is to
predict the most likely contract price that will be obtained from contractors in the
market at a given time in the future, and most importantly – what the final cost will
be at the time of completion.
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S H F BP6 2006
At first, the construction cost is estimated as at the present time and under prevailing
construction market conditions (Estimated Current Construction Cost). It is possible,
however, to determine the estimated cost of a building at any time in the future by
making assumptions about the rate of escalation of construction costs due to inflation,
and the likely prevailing market conditions at that time, and then compounding the
estimated current cost by the necessary factors. Building cost estimates are usually
prepared for the employer by a professional quantity surveyor (QS or PQS) who must
have an up-to-date knowledge of building market conditions, trends and prices,
and of how contractors’ rates and prices are made up.
There are different ways of drawing up an estimate. Each method serves a particu-
lar purpose and requires different kinds of information. Where, for example, only
a rough indication is required, the “cost per unit” method of estimating could be
used. At the other end of the spectrum, a highly accurate estimate of cost can be
obtained by pricing out a detailed Bill of Quantities. The most reliable method is
the Elemental Building Cost Analysis, a method that is both quick and accurate.
Elemental estimates must cover the following main cost sections:
• Work carried out under separate contracts before the main contract starts (e.g.
bulk earthworks, piled foundations)
• Contract preliminaries
• Demolitions (if any)
• Alterations (if any)
• Primary elements (structure, shell and finishes)
• Internal service installations (plumbing and electrical)
• Special installations (including main contractor’s profit and attendance)
• External works and services
• Service connections
• Construction contingencies
• VAT
Some of the above are more troublesome than others, and additional guidelines
are given below:
Estimating the cost of demolitions

It can be difficult to estimate the costs involved in the demolition of existing buildings.
These are largely determined by the value of salvageable materials such as windows
and doors, roof timber, sheeting and tiles, sanitary and other fittings, wooden flooring
(in older buildings), etc. Unless the client specifically wants to retain these materials
for own use, the contractor may take them and allow a credit (reduction in price)
equivalent to their value. In some instances, the value of these items may exceed the
cost of breaking down and removing bulk materials such as concrete and brickwork.
In such cases, demolition tenders will contain two options – tenderers can insert a
cost, or more likely, an offer to “buy” the building from the client and pay for it.
18
Estimating the cost of alterations

Alterations can vary from simple refurbishment (cleaning, patching and painting)
to major structural and layout changes, as in the conversion of an office block into
residential flats. In the case of the former, it may be possible to develop inclusive
square metre rates for use in preliminary estimates from analysis of previous jobs, if
the work is similar. The only proper way to do the latter cost estimates is using more
detailed measurement (the guidelines in the Standard System of Measuring Building
Work published by the Association of South African Quantity Surveyors could be
followed here) and costing of such measured work required to be carried out.
A few points to remember:

• When solid components of a building are broken up, their volume for handling
and carting away purposes increases substantially (by up to 50% or more).
• Most municipalities levy a dumping charge at their landfill sites for building
rubble.
• Allow sufficient contingencies for what may be found once old structures and
components are opened up or removed.
• Doing alterations is more difficult and risky than new work – contractors tend to
apply higher mark-ups for alterations than for new work of the same value
• When an opening is cut in an existing wall, in most cases it is necessary to re-
paint the whole wall, or even the whole room, rather than just patching and
making good around the opening.
Estimating the cost of external works and services

As with special installations, external works and services are often incompletely
indicated on sketch plans, or not shown at all.
Pay special attention to stormwater disposal, landscaping (hard and soft) and planting,
garden furniture, etc.
Check with the local authority for an idea of their service connection fees. These
can be substantial. Where additional work is done at existing premises, it is often
necessary to allow for substantial and costly upgrades to services and connections.
Contingency allowances
This is one of the most misunderstood and abused aspects of estimating. Some
consultants (and their clients) see it as a simple case of “adding an extra 10% so we
have a bit of fat in the estimate”.
Instead, contingencies should be divided into two distinct categories of uncertainty

or risk, and each category should be considered rationally before deciding on an
allowance (past experience will help in this regard):
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S H F BP6 2006
1. “Design and detail development” – to allow for lack of detail at sketch plan at
estimating stage. This allowance should be high in the preliminary stages, and
reduce with each subsequent estimate as more detail becomes available from
the design team. Once tenders are in and construction is ready to start, this
could be reduced to a very small allowance, unless parts of the design are still
incomplete. It is usual to allow 2.5% to 5.0% of estimated final building cost in
the early stages of the pre-feasibility phase when designs are still basic, reducing to
around 1.0% when detail design development and technical documentation are
complete, and 0-0.5% when tenders are in. (For refurbishment and conversion,
the initial contingency should be increased to 7.5-10.0%). This allowance is part
of the construction cost, and has nothing to do with the architect’s fees.
2. “Building contract contingencies” – to allow for real unforeseen expenditures.

The circumstances of the project will determine the amount that should be
allowed. It should also reduce up to a point, but an amount should remain in
place until construction is well underway, or even to the very end of construction.
How much to allow depends on the circumstances. It is usual to allow 2.5-5.0%
of final building cost in the preliminary estimates, reduced to around 1.0-2.0%
when tenders are in, and reduced even more from time to time in cost reports
during the construction phase. (For refurbishment and conversion, the initial
contingency should be increased to at least 7.5-10.0%.)
The total contingency allowance (sum of the above) could vary from 5.0%-10.0%
initially (15.0%-20.0% for refurbishments and conversions), to around 2.0%-3.0%
once tenders are in.
Cost escalations – why estimate of current construction cost only is

not good enough
The starting point for all construction cost estimates is the day on which the estimate
is done. In other words, the rates used are those that apply on that day, as if the
project could be completed on the same day. This is usually called the “ESTIMATED
CURRENT CONSTRUCTION COST”. This is logical because the rates known to us
at this stage are from current or (recently) past tenders, and not from the future.
However, to estimate only the current building cost is not realistic. Financial feasibility
studies (of which the estimate of construction cost is an important part) first have
to be carried out, tender documentation must be prepared, tenders called for and
adjudicated, plans submitted for scrutiny, and permission to start building granted
by the local authority, etc. This can take from 4 to12 months, or longer on large
and complex projects.
During this time, construction costs will fluctuate in response to both macro-
economic and local construction market factors. Recently, these fluctuations have
almost always been upwards as a result of continued inflation, and it is expected to
remain that way for the foreseeable future. (For a brief period In the 1980s, building
costs went down slightly.)
20
The future tender price will always be higher than the estimated current construction
cost, which must therefore be escalated in full for the estimated total planning period
at a projected rate based on construction market trends.
Note: Worked examples of how to estimate both pre-tender and post-contract

building cost escalations are given in Annexure A.
The time factor

In order to be able to estimate preliminaries and escalation costs on a construction
project, one has to know how to estimate the length of the planning and construction
periods.
The project planning and construction periods (time) have an important effect on
time-related cost aspects such as:
• Preliminaries (especially salaries, plant and other time-related items)
• Pre- and post-tender construction cost escalations
• Financing cost (interim interest)
The effects of time on final building costs as outlined above must always be taken
into account in building cost estimates. This requires the highly specialised knowledge
and skill of a competent professional Quantity Surveyor.
Estimating project time frames

One of the first things the SHI management should do when a new project is initi-
ated is to draw up an overall time-frame or programme for the whole development
process. This is done in consultation with the board; key stakeholders such as council,
province and NHFC; and the project manager (if already appointed). It is a good
idea to divide this process up into the project phases, with critical milestones at the
end of each phase (and/or sub-phase) in the programme. This is a useful exercise
to help the parties:
• Get an indication of the workload ahead.
• Understand the many aspects of the process.
• Understand how activities interact with each other.
• Understand how the programme is affected by the workload, the duration of
activities and the required lead-times.
A time-frame or programme is required to perform the project management function,

and to enable Social Housing Institutions to monitor the project, its progress and
performance. It is an important tool when doing cost estimates and financial
viability studies (in which land-holding costs, interim finance costs and building cost
escalations are all based on time frames). A realistic development time frame will
also enable the SHI to clearly quantify operational shortfalls during the development
period, and focus on finding ways to fund these.
Note: More detailed guidelines on how to estimate project time frames are
given in Annexure C.
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S H F BP6 2006
Professional fees and disbursements

Professional fees
In preliminary estimates of construction projects, professional fees are generally
calculated as a percentage of final building costs, and are generally between 10%
and 20% of the final construction cost. The actual percentage depends on the size
and complexity of the project, the degree of repetition of standard unit designs, and
the level of professional services required by the client.
On projects with simple buildings, a lot of design repetition, and limited involvement
of the independent professionals in the post-contract administration and supervision,
such as low-cost housing schemes for government, professional fees may be as low
as 6% to 9% of the final building costs.
In modern office and shopping complex projects, with sophisticated electrical

and mechanical services, where the full range of professionals (project manager,
architect, consulting engineers, landscape and interior architects, etc.) are employed,
professional fees may range between 13% and 18%.
In labour-intensive community-based building or civil engineering projects where

training, mentoring and support services such as materials and construction
management are required in addition to normal design and supervision, professional
fees may be as high as 20% to 25%.
For social housing, professional fees are generally between 8.5% and 12.5% of final
building costs.
The correct way to estimate fees is to estimate the value of work in a project that each
consultant is responsible for, and then to estimate the fee for that consultant on the
basis of the recommended scale of fees and tariffs for that profession. For practical
purposes, some of the general principles behind fee-scales are as follows:
• They are based on percentages of construction cost (usually the final cost).
• These percentages work on a sliding scale – high percentages on small contracts,
or on the first parts of larger projects, and lower percentages on larger projects
or the remaining parts of these projects.
• Multipliers are applied for more complex or risky work.
The professionals usually employed on social housing projects include:

• Architects (who may also perform the urban design function)
• Structural/civil engineers
• Mechanical/electrical consultants
• Landscape architects (optional)
• Interior architects (optional)
• Quantity surveyors
• Town planners (if required)
• Land surveyors (if required)
• Project managers
22
SHIs should take care when structuring their professional teams to avoid duplication
of fees on the one hand, and gaps in responsibility on the other. This is especially
true of two key positions on project teams, namely the principal agent (PA) and
the project manager (PM). The PA is the leader of the professional design team and
takes prime responsibility for administering the building contract, assisted by the
various other professional consultants in terms of their appointments and briefs. The
PA does not necessarily provide overall project management. The project manager
is responsible for the overall management of the project or contract.
The conventional method is to appoint one of the members of the professional

team as the principal agent, with the employer (SHI) providing the overall project
management, which is the responsibility of the in-house development manager or
an external professional project manager. The position or function of principal agent
is to create the building contract, and as such speaks to “project management” only
of matters pertaining to the building contract itself. It does not include the many
additional project development functions such as managing stakeholder involvement,
co-ordinating and “chasing” parties involved in assembling and securing land, project
funding, etc. for which the employer (the SHI) must still take responsibility.
The roles and responsibilities of the PA and the PM must be clearly spelt out in the
different briefs and agreements. The customary way is for the PM to take on the
additional role of PA, or else have an overall PM, with the PA directly in charge of
building operations, and reporting to the PM on aspects pertaining to the building
contract. The PA would, for example, exercise cost control on the building contract,
with the PM assuming overall responsibility for cost control and reporting on all
aspects of the project. The PA’s building contract cost report would then be an input
into the PM’s overall project cost report. Special attention must be paid, however, to
the “grey” areas where responsibilities could be seen to overlap. This could lead to
important issues being neglected because the one party thinks the other is looking
after them. For instance, it should be made clear who is responsible for making
sure the boundary pegs of the property are in place prior to site handover, who
is responsible for chasing up service connections, and whose responsibility it is to
ensure that occupation and compliance certificates are obtained.
The principal agent can be any of the professionals on the team and there are two
streams of thought:
1. Architect as principal agent
As the main design agent and leader of the design team, it makes sense to
appoint the architect as principal agent because he or she has the best overall
grasp of the required end product, and best understands what is expected from
each member of the team.
2. QS as principal agent
It makes sense to appoint the QS as principal agent because he or she controls
the purse strings, has a better knowledge of contractual matters, and is generally
better at routine paperwork and administration than the more “creatively-
minded” architect.
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S H F BP6 2006
Both instances work, and the SHI’s decision should be based on an assessment of
leadership qualities and experience of the people involved, rather than the profession
they represent.
Another option is to appoint the PM as the PA as well, and have all the professionals
report to him or her. In this case, the architect and engineers will be responsible
for design only, while the PM/PA will run the building contract and supervise the
contractor. The design consultants may be consulted by the PM/PA on technical
or contractual matters on an ad-hoc basis. The QS will perform his normal duties
under the direction and control of the PA.
There are different models regarding appointing the PM/PA question:
Model one (for small/simpler projects):

• The SHI assumes overall development function.
• The SHI does overall project management in-house.
• The architect or QS is appointed as PA (based on who is the best person for the
job rather than the profession they represent).
• Other consultants (QS, consulting engineers) are appointed as normal for design
and supervision of their aspects of the work, under the direction of the PA.
Model two (for larger and more complex projects where specialised input from
a variety of consultants and service providers is required):
• The SHI assumes overall development function.
• The SHI appoints an external professional PM.
• The PM is also given the role of PA.
• Various professionals are appointed for design and limited consultation by the PM
on technical and contractual matters during the contract administration phase.
For estimating and feasibility study purposes, the important thing to

remember is that if a PM is appointed without taking on the role of
PA as well, then the PM fee should be reduced accordingly because
the person who acts as PA will be receiving payment for that function.
Likewise, if the PM is also the PA, the PM fee should be higher, and
the client should ensure that no other member of the team (such
as the architect, QS or engineer) is being paid a PA fee as well. A
duplication of fees could add up to 2.5% of construction cost to the
overall project cost, without adding any real value.
Disbursements (Out-of-pocket expenses)

Professional fees are like a salary paid to the consultants for their time and effort,
with a profit component to compensate them for risk. In addition, consultants
have out-of-pocket expenses (disbursements) that are not covered by their fees,
for example:
24
• Plan-printing costs (on large and complex projects there may be hundreds or
even thousands of drawings of which copies must be distributed to the client,
the quantity surveyor, other consultants, contractors and sub-contractors, etc.
• Typing, printing and copying of specifications, bills of quantities, minutes of site
meetings, etc.
• Travelling and sustenance for projects located out of town.
The above must be allowed for in the estimate, usually as a percentage of building
cost based on previous experience (usually 0.25% to 1.5% of building cost).
Municipal plan scrutiny fees

Before any construction project in an urban area can proceed, permission to do so
must be obtained from the building control section of the relevant local authority.
This involves scrutiny of the plans by their officials in different departments to ensure
that the plans conform to their requirements in terms of the health and safety of
occupants and the public, traffic safety (entrances and exits on busy roads or near
blind corners, etc.), town planning and development control measures, etc.
The local authority usually charges for this service at a rate per square metre of
building area, for example:
For areas with building work only: 10 000m2 @ R 7.00/m2 R 70 000

Additional charge for sections with drainage: 9 000m @ R 2.00/m
2 2
R 18 000
TOTAL R 88 000
Sundry legal and administrative costs

If the anticipated costs of the sundry legal and administrative costs are not known,
an allowance should be made, e.g. R20 000-R50 000.
Initial marketing costs

Ongoing marketing and tenant recruitment costs during the operational life of the
building are considered an operational expense against income. To fill the units
initially though, a marketing and recruitment campaign may be necessary.
The costs could take the form of fees and expenses to do promotions and advertising,
spotting and recruitment commissions to “runners” who bring successful applicants,
etc. Allowance should be made for initial marketing costs, even if the SHI believes
that the outcomes of the socio-economic survey and market-survey will automatically
lead to signing up of tenants without having to market the product.
Development contingency
In addition to the design and detail and building contract contingencies allowed
under escalated construction costs, an overall development contingency should be
included. This may range from 0.5% to 2.5% of TDC/TCO.
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S H F BP6 2006
Finance costs
In the process of securing project finance, there will be administrative and legal
costs such as:
• Raising fees/originator fees (sometimes “hidden” and paid off in the loan
repayments)
• Valuation fees
• Mortgage registration fees and duties (lawyer’s fee and deeds office)
• Structuring fees where one financial institution acts as main lender in a consortium,
and undertakes to “structure” the total financing package in collaboration with
other institutions.
Interim cost of capital

Social housing projects are usually funded through a combination of subsidies, other
grants, loans, and in very rare cases with some equity (own capital) contribution from
the Social Housing Institution itself. Some of this money is “free” (i.e. not repayable,
or repayable but at no interest) and some of it comes at significant cost. The interest
charges that form part of monthly loan repayments during the operational phase are
an operational expense. During the development period, however, some draw-downs
will be made on the loan(s) to pay developers, contractors, suppliers, professional fees,
etc. From the moment a draw is made it bears interest. The interest accumulated on
such draws is added together, “capitalised” up to the end of the development period,
and included as part of TDC/TCO.
Interest charges apply to all “normal” loans obtained from financial institutions such
as the National Housing Finance Corporation (NHFC), Mpumalanga Housing Finance
Company, and any of the commercial banks.
We calculate interim or capitalised cost of capital in one of two ways:

1. The “short” method:
• Split the TCO into an initial once-off outlay (e.g. land cost), and a spread
outlay (e.g. construction cost and fees).
• Calculate compound interest on the once-off outlay over whole development
period.
• Calculate compound interest on the spread outlay over the construction period
with cash-flow factor (0.4-0.6) to account for the spread nature of the spend.
2. The “long” method (more accurate but time-consuming):
• Estimate development cash-flow.
• Calculate interest on each net monthly cash-flow from the time of the cash-
flow up to the end of the development period.
Note: Examples of how to calculate interim cost of capital with both methods
are given in Annexure B.
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Estimated net project operational income

(gross income less operational expenses)
The net operational income after expenses (but before loan repayments and tax)
must be estimated before rates of return can be calculated, and before cash-flow
projections can be done.
Gross operating income is the “theoretical” total income that could be derived
from renting out full-time, without vacancy or bad debt, all residential units, facility
spaces (e.g. child-care facility), commercial spaces, and parking bays, together with
any recovery of operating expenses through levies (only in certain types of leases),
and sale of electricity, where the SHI is buying it in bulk from the municipality and
distributing to individual tenants.
In practice, the theoretical gross income is never fully collected. Some vacancies
always occur (for instance, when units are vacated from time to time, and need
repair, or when a replacement tenant is not immediately available). In addition,
some tenants will default on rental payments, and leave without the arrears being
collected, resulting in some bad debt write-off. Usual practice is to target around
2.5% of theoretical gross income for each of the above (5.0% total), and the result
gives gross collectible income. Many SHIs allow for only 90% collection in
their projections, but this sets too low a target, and leads to complacency and
inefficiency in collection. In the risk analysis at the end of the feasibility study, the
effect of a 90% collection rate can be illustrated in the “pessimistic” scenario.
Property operating expenses which are not recoverable through levies must be
deducted from gross collectible income to give net operating income before loan
repayments and taxes if applicable.
Property operating expenses usually include:

• Local authority charges:
• Municipal property rates on value of land and improvements
• Consumption and service charges on water, electricity and sewerage for
common areas (remember that tenants should be responsible for their own
consumption)
• Refuse removal
• Regular maintenance and cleaning:

• Cleaning service
• Building maintenance
• Gardening and grounds maintenance
• Lift maintenance (where applicable)
• Provisions and sinking funds:
• Long-term maintenance (depreciation and replacement allowances)
• Non-recoverable rent provisions (if not allowed for under bad debt allowance
in collectible income above)
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S H F BP6 2006
• Insurances:
• Property insurance
• Public liability insurance
• Loss of income insurance (if applicable)
• Other property costs and services

• Security
• Tenant relations (newsletter, facilities, contributions to activities)
• Auditing fees
NB: Be careful not to include general institutional management and

overhead costs such as office rental, the CEO’s salary and other
general staff salaries here. For once-off developments, it is normal
to allow in property operating costs for property management and
rent collection, including:
• Service provided in-house (staff costs, cost of system

amortisation and maintenance, ASDL lines, stationery).
• Outsourced (fee to service provider plus internal support
costs).
SHIs are meant to be long-term institutions that will develop and
manage many projects over time. It is therefore more appropriate
to allow for the above costs as a general overhead servicing
more than one project. These would not, therefore, be included
as property operating costs allocated to a particular project,
but rather as an overhead paid for out of the contributions to
overheads from the individual project cash flow surpluses.
Estimated project returns

Project returns can be measured in many different ways, ranging from simple initial or
first-year return on investment, to a number of more sophisticated discounted cash-flow
type analyses (such as Net Present Value or NPV, internal rate of return or IRR).
Note: Project returns on investment are calculated by using net income before
repayment of loans and income tax (where applicable). Loan repayments
are, however, taken into account when cash-flows (and budgets!) are
compiled. The reason for this is simple: Returns are estimated in order
to compare investment opportunities. Whether the money (which you
don’t have anyway) is invested in shares, the bank, or in the property
development project, it would have to be borrowed in all cases at same
cost of capital. Loan repayments would therefore be common to all
alternatives, and it is not necessary to complicate the calculations with
that factor.
28
• Initial or first-year return on investment = first year net income/TCO

This is calculated by dividing the estimated net annual income for the first year
by the TCO and multiplying this figure by 100 to give a percentage. For example:
first-year return on a 100-unit block of flats with a TCO of R9 000 000:
Gross rental income, two-bed units: 100 flats @ R 1 000 p.m. R 100 000
X12 = R 1 200 000 p.a.
Less: Provision for bad debt and vacancy 5% R 60 000
Gross collectible income p.a. R 1 140 000
Less:Property operating costs R 280 000
NET INCOME FOR FIRST YEAR R 860 000
Initial (first-year) return = R860 000/R9 000 000 x 100 = 9.56% p.a.
The main problems with this measure are as follows:

• Apart from using escalated development costs and operational incomes and
expenses, it does not take into account the value of money over time, or the
total and uneven spread of amounts invested and income collected over the
economic life of the building.
• It assumes that the project reaches full maturity from month one, i.e. target
occupancy and bad levels are achieved straight away, which is not realistic. It
presents the initial return as if it were the average return on investment (ROI)
over the operational life of the project, which is a good indicative measure of
overall project viability.
The major advantage of this measure is that income and expenses do not have to be
escalated too far into the future. This makes the projections more accurate (than say
a 20-year projection), and more easily understood in terms of the current value of
money. (Remember that even if it is acceptable for the calculation of estimated
return to assume an ideal situation from day one, the reality of lower initial
uptake [reduced initial income], and possible additional expenses in ironing
out early snags must be reflected in cash-flow and budget projections.
If assumptions are realistic, and estimates of both time frames and costs are done
properly, the initial return is often a better indicator of the health of a project than
the more sophisticated long-term cash-flow analyses used in financial modelling.
Long-term projections usually ignore possible cyclical fluctuations in inflation and
interest rates (i.e. assuming fixed or average rates over the period of study).
NB: It is also important to remember that if the initial return

shows that a project in its current form is not viable, no amount of
manipulation of long-term projections will make a difference to the
real problem of wrong project conceptualisation.
• Return on investment (ROI)

This is a further development of the previous method where the simple return for
each year over a 20-year period is calculated taking into account escalations in
rental income and operating costs, and then averaged out to give the average ROI
over 20 years. It still does not take into account that income and expenses
29
S H F BP6 2006
are spread over the year for each year, and not incurred or collected in one
go at the end of the year, but it is a slight improvement on the initial return
method, as the realities of first year(s) of operation could be accounted for in
the averages.
• Discounted cash-flow (DCF) measures of return
• Net Present Value (NPV): The sum of net annual incomes over the pre-
determined operational life-span of the project is discounted to its present
value, using the desired rate of return as the discount rate. If the NPV is
equal to or more than the TCO, then the desired rate of return has been
achieved. If the NPV is less than TCO, then the rate has not been achieved.
For example:
• CO on a project is R10 000 000
• Desired rate of return is 12% p.a.
Year of operation Net income (FV) NPV at 12%

1 R 2 500 000 n=1; PV = R 2 475 248
2 R 2 700 000 n=2; PV = R 2 646 799
3 R 3 000 000 n=3; PV = R 2 911 770
4 R 3 400 000 n=4; PV = R 3 267 333
5 R 3 900 000 n=5; PV = R 3 710 716
Sum of PVs: R 15 011 866
In this case, the NPV of future net incomes is more than the TCO if discounted
at the desired rate of return, meaning that the actual rate of return achieved is
far better than the discount rate of 12%.
• Internal Rate of Return (IRR): The IRR is the rate at which the total net cash-
flows on the project during both the development and operational periods
has an NPV of zero. Where the NPV method works with a pre-determined
discount rate to see if it is achieved or exceeded, the IRR provides the rate
at the end of the calculation. (The IRR method assumes that all positive cash
flows are re-invested in the project at the discount rate). For the example
above, you would have to feed all cash-flows into the formula (or financial
calculator), and compute the rate.
For both DCF methods, the cash-flow must assume an end-value. Usual practice is
to take an operational life of 20 years and an end value equal to 100% of TCO
Working out these returns manually is an extremely laborious task. Detailed monthly
cash-flows for the whole 20-year period first need to be estimated, followed by
a compound interest calculation with different factors for each of the individual
monthly cash-flow entries. It is easier to use a financial calculator with DCF functions.
You will still have to do the cash-flow projection though, as that is part of the input
of variables into the calculator. Different makes of calculator have different key-
strokes for entering variables and computing answers, but they all come with good
instruction booklets that also explain the concepts and principles underpinning the
various calculations.
30
• Pay-back period
The TCO is divided by the annual net income to show how many years it takes for
the project to pay for itself. For example:
TCO = R10 000 000; net annual income = R100 000
Pay-back period = R10 000 000/R100 000 = 10 years
Development and operational cash-flow

projections
Monthly cash-flow projections are done for the development period and for the first 5
years of operations. Thereafter, yearly cash-flows are done for years 6 to 15, or years
6 to 20. Some people do 20-year monthly flows, but it is very difficult (and some say
impossible) to project that kind of detail so far into the future.
A cash-flow projection is a table of actual cash receipts and payments for every month,
or quarter, or year, as the case may be. It should not be confused with a budget (forward
financial planning) or an income statement (retrospective financial reporting). The purpose
is to be forewarned of any cash crises that may arise, and to help the SHI plan for and
overcome these.
Cash-flow tables are compiled by taking into account predictable or known events (e.g.
paying for land against transfer, paying a certain percentage of professional fees when tenders
are in, and so on), and by projecting expenditure spreads such as construction cost with the
use of predictive techniques such as so-called “S-curves”, and “Californian envelopes”.
For an “S-curve”, real expenditure patterns on past similar building contracts are analysed,
corrections made for out-of-the-ordinary events, and the results plotted on a graph.
The horizontal axis represents cumulative time (usually in months), and the vertical axis
represents cumulative expenditure. The plots are then averaged out to give a single trend
line. The result may look as follows:
R 5.5
R 5.0
R 4.5
Cumulative expenditure (million rands)
R 4.0
R 3.5
R 3.0
R 2.5
R 2.0
R 1.5
R 1.0
R 0.5
R 0.0
0 1 2 3 4 5 6 7 8
Time (months)
31
S H F BP6 2006
Although these curves are commonly referred to as S-curves (if you look very carefully
you may see a flat S in the shape of the curve), they often do not show any marked
flattening out at the end of the contract period, and are more like a “C” lying on
its back at an angle.
From the above, a cash-flow table for an 8-month building contract with a value of
R5 300 000 can be read off as follows:
Row Month Cumulative expenditure in rands Expenditure for month in rands

(A) (B) (C=A-B)
1 1 300 000 300 000
2 2 700 000 400 000 (B2 minus B1)
3 3 1 300 000 600 000 (B3 minus B2), …etc.
4 4 2 100 000 800 000
5 5 2 900 000 800 000
6 6 3 700 000 800 000
7 7 4 600 000 900 000
8 8 5 300 000 700 000
Compiling the base S-curves from historical data is a difficult task, and requires
some knowledge of statistical mathematics. A more practical method is to compile
a simpler table, using actual expenditure tables from previous similar projects as a
rough guide.
Let us say a R9m contract is spread over 9 months. The average expenditure should
be R1m per month, but the actual pattern would look different, with amounts smaller
than the project average being spent in the first two or three months (low turnover
work such as site preparation, foundations, structural frame); amounts larger than
average spent in the middle months as the tempo picks up (high turnover work such
as brickwork, plastering, roofs), and the curve levelling off again towards the end
as final finishing is done.
The actual expenditure table on the previous similar building contract may have
looked as follows:
Month Actual payment to Theoretical average for Deviation from

contractor in rands straight-line spread of average (%)
payments in rands
1 600 000 1 000 000 Average less 40%
2 800 000 1 000 000 Average less 20%
3 900 000 1 000 000 Average less 10%
4 1 100 000 1 000 000 Average plus 10%
5 1 200 000 1 000 000 Average plus 20%
6 1 350 000 1 000 000 Average plus 35%
7 1 200 000 1 000 000 Average plus 20%
8 950 000 1 000 000 Average less 5%
9 900 000 1 000 000 Average less 10%
TOTAL 9 000 000 9 000 000
32
Let us say the current project for which the estimate (and feasibility study) is being
done is an estimated R9.9m building contract, also spread over 9 months. The
average is now R1.1m per month, and the table above can be used to guide us in
compiling a projected cash-flow for the current contract as follows:
Month Estimated/projected payment to Deviation from average

contractor in rands (using table above as a guide) (%)
1 715 000 Average less 35%
4 1 210 000 Average plus 10%
5 1 320 000 Average plus 20%
6 1 485 000 Average plus 35%
7 1 320 000 Average plus 20%
8 1 045 000 Average less 5%
TOTAL 10 000 000
In this case, the estimator decided that because the current project has a larger
value, but still has to be completed in the same time as the previous one, a quicker
start is required. The percentages in the first few months were adjusted to be closer
to the average. In the end it becomes a balancing game where the percentages are
tweaked according to experience, data available and intuition.
Some important things to remember when doing cash-flow projections:

• Allow for a realistic uptake rate in income projections. (It is not possible to have
300 or 500 tenants installed and fully paying within a month.)
• Allow for initially lower collection rates (70-80% for, say, the first 3 months) until
all collection and administration systems are running smoothly and hand-over
quality and maintenance issues have been sorted out.
• Allow realistic time-frames – development always take longer than expected.
Risk analysis
Financial viability studies are projections into an uncertain future, based on past
and current trends and assumptions. The question needs to be asked: how will
changes in variables or assumptions used in the calculations affect project returns
and sustainability? These questions are often called the “what if?” type questions,
e.g.: “What if, for loan-repayment purposes, the average interest rate over the term
is 12% p.a. rather than the 11% used in the calculations”; and “What if the rental
for a two-bedroom unsubsidised unit is only R1 400 per month, rather than the R1
600 per month used in the calculations?”
33
S H F BP6 2006
Typical variables that could be tested in a risk analysis are:

• Building cost rates
• Building cost escalation rates
• Initial rental structure
• Operating expenses
• Vacancy and bad debt factors
• Escalation in rentals
• Interest on loans
• Time frames (and therefore the effect of changes on escalations and other
projections)
It is usual to present three types of scenarios for each variable in sensitivity analyses:
• Optimistic (better than the assumptions used in the presentation of the viability
study)
• Realistic (the same figures used in the study)
• Pessimistic (worse than the figures used in the study)
While a sensitivity analysis illustrates the effects of changes in underlying assumptions,

it does not predict the statistical probability of such risk events actually occurring,
leaving the decision-maker to speculate about that. In countries like the United States
of America, more sophisticated models such as the Monte Carlo Simulations are
used, which take into account probability predictions. In South Africa there is not
yet sufficient research data available to do meaningful simulations and predictions,
especially in the social housing sector.
Refer to worked example, page 36
Lists of assumptions and exclusions

This is provided for two reasons:
1. Anyone reading the report can clearly see what assumptions have been made
and can question the basis on which these assumptions are made; or even ask
that they be changed (where the reader possesses better information than the
person doing the study).
2. Similarly, the reader or user of the report will have no false expectations as to
what is included and what not in the project cost estimates (especially with
regard to furnishings, furniture and fittings, equipment and special services).
34
A brief outline of the specifications upon

which the cost estimates are based
This is provided to allow the reader/user of the report to question the basis for
inclusion of certain specifications, and to give input and make suggestions to
optimise initial costs, and/or improve marketability, maintenance and functional
efficiency from the client’s experience and point of view (input from marketing
and operational property management and maintenance staff is crucial in this
regard).
A brief outline of the outcomes of the socio-

economic, marketing, legal and physical
feasibility reports
Including this information is optional. If it is felt that it would make the report too
bulky, reference should be made to the various other reports used to inform the
assumptions used.
35
S H F BP6 2006
w
Worked example:
complete financial viability study
Notes to the reader (not part of the viability report):
1. Only one measure of return has been estimated below, namely the simple
initial or first-year return. The more sophisticated cash-flow analyses
(NPV, IRR) requires more detailed figure work such as long-term cash-
flow projections, and including these would unnecessarily burden the
reader without really enhancing the illustrative value of the guidelines
and examples.
2. For the same reason as above, less detail than would often be included
in real reports was provided in the following sections:
• Detail breakdown calculations
• Risk analysis
• Project specifications
3. In the example below, calculations were done as if there were no subsidy

or equity investment involved, i.e. the project was deemed to be 100%
loan funded. This is, of course, not realistic, but since funding structures
can vary so widely, the above was done in order to keep the calculations
simple for clear illustrative purposes. Also, at the time of going to press,
it was not clear how the new capital grant funding mechanism would be
applied on projects. In real situations, the viability study for each project
should take into account the funding structure for that project (and the
effect of subsidy funding on the marketing mix and capping of rentals for
subsidised tenants).
4. In the example, it was assumed that the project would be completed in

one phase, and would be fully operational from the first year of operation.
In reality, projects are often completed in phases over a number of years.
In such cases, one could either treat each phase as a project in its own
right (but this would not easily allow for proper apportionment of land
and town planning costs, for instance) or make provision for the phased
completion and receipt of income in one study. The problem with this is
that it becomes difficult to show viable initial returns, because the early
phases are overburdened with costs that are incurred early on, but for
the ultimate benefit of the whole phased project.
36
Financial Viability Report No. 1
GOODHOMES PROJECT
for the
KOPANONG
HOUSING COMPANY
15 August 2006
37
S H F BP6 2006
Financial Viability Report No. 1

26 July 2006
CLIENT:
Kopanong Housing Company
PROJECT:
Project name: GOODHOMES FLATS, BIGTOWN x 17
Project no.: GHFBT 17/1
Erf no.: 2305/2 Bigtown Extension 17
Description: 180 two- and three-bedroom flats in three-storey walk-ups
ARCHITECT:
Nicedraw and Associates
QUANTITY SURVEYOR:
Fightwitharchitect and Partners
DRAWINGS ON WHICH BUILDING COST ESTIMATE IS BASED:

1:200 Sketch plans dated 28 July 2006
METHOD USED FOR BUILDING COST ESTIMATE:

Elemental analysis off sketch plans
38
Contents
Executive summary
Brief project description
Estimated project time frame
Project funding structure and conditions
Statement of financial objectives
Estimated project costs and rates
Estimated project income
Estimated project returns, and how they compare with the stated objectives
Conclusions and recommendations
Summary calculations
Estimated total capital outlay
Estimated net annual operating income
Estimated return on investment
Detail breakdown calculations

Estimated current construction cost
Estimated construction cost escalations (Annexure B)
Estimated interim cost of capital
Estimated annual operating costs
Development cash-ﬂow
Operational cash-ﬂow
Risk analysis
List of assumptions and exclusions
Outline specifications upon which cost estimates are based
39
S H F BP6 2006
Executive summary
Brief project description:
The project comprises 180 two- and three-bedroom flats for rental in six three-storey walk-ups on erf number
2305/2, Bigtown Extension 17, distributed as follows:
36 three-bedroom flats x 46m2 1 656m2

144 two-bedroom flats x 38.5m2 5 544m2
Sub-total flats 7 200m2
Common areas and circulation 720m2
Gross building area 7 920m2
Total site area: 13 200m2
Zoned residential 2 (no rezoning required)
Estimated project time frame:

Pre-tender planning period = 8 months: 1 August 2006 – 31 March 2007
Construction period = 12 months (including builders’ holidays):
1 April 2007 – 31 March 2008
Operational period = 20 years from 1 April 2008
Project funding structure and conditions

The total project capital cost of R34 879 938 is funded via an NHFC loan over 20 years @ 10.5% p.a.
Loan repayments (capital and interest):

R348 234 per month x 12 = R4 178 808 per year
Statement of financial objectives:

The company’s financial objectives with this project are:
• Initial return: 11.0% p.a.
• Total project cost ceiling: R32 472 000 (R4 100/m2)
Estimated project costs and rates:

Total cost in Rands/unit
Description R/m2
rands 2 Bedroom 3 Bedroom Average
Current construction cost 23 648 240 2 985.89 114 957 137 351 131 379
Escalated construction cost 28 225 212 3 563.79 137 206 163 934 156 807
Total capital outlay 34 879 938 4 404.03 169 555 202 585 193 777
40
Estimated project income:

Description Floor area R/m2 Monthly Gross annual Net annual
per unit m2 rental per rental in rental in rands
unit in rands rands
2 Bedroom flat (x 144) 38.5 50.00 1 925 3 326 400 2 215 772
3 bedroom flat (x 36) 46 48.00 2 208 953 856 635 380
Parking (x 120) 200 288 000 191 842
TOTAL 4 568 256 3 042 994
Estimated project returns, and how they compare with the stated
objectives:
Initial return = 7.7% p.a.
This compares unfavourably with the stated objective of 11.0% p.a.
Conclusions and recommendations

In its current form the project does not meet any of the stated financial objectives, nor will the estimated
net income be sufficient to carry both operational expenses and loan repayments. (The annual shortfall
in the first trading year = R1 135 814 after loan repayments, which accumulates to approximately R4.5m
plus interest before income meets expenses and loan repayments in the 8th year of trading only – see
operational cash-flow below.)
All possible savings in construction cost and operational expenses have already been considered in the
calculations below. Alternative funding structures with the incorporation of institutional subsidies have been
analysed, but because of the limiting effect of this on rental incomes, the situation actually looked worse. In
order for break-even between income and expenses to be achieved from year one, equity grants to the value
of R9 580 000 plus VAT would have to be injected into the capital funding for the project.
The recommendation to the board, therefore, should be that the project is not to be proceeded with in
its current form, but that it be re-conceptualised for a different target market, with different affordability
parameters. This will require a re-analysis of the social and marketing surveys, and possibly a new
demand study.
41
S H F BP6 2006
Summary calculations
ESTIMATED TOTAL CAPITAL OUTLAY (EXCL. VAT) R 34 879 938
VAT (@14%) ON TCO EXCL INTEREST (R33 197 773) R 4 647 688
ESTIMATED TOTAL CAPITAL OUTLAY (INCL. VAT) R 39 527 626
All amounts below exclude vat

Surveys and studies (0%) R 0
Environmental impact assessment (Not required-zoning correct) R 0
Socio-economic survey (sponsored) R 0
Land costs (1.29%) R 450 000
Cost of acquisition (donated by council) R 0
Transfer duty (10% of valuation of R4m) R 400 000
Conveyancing (fee negotiated) R 10 000
Geotechnical survey R 40 000
Cost of land availability agreement (by council) R 0
Re-routing of existing sewer (by council) R 0
De-registration of servitude (by council) R 0
Town planning costs (0%) R 0
Application costs R 0
Advertising costs R 0
Plans and printing R 0
Town planner fees R 0
Land surveyor fees R 0
Bulk service contributions R 0
Other R 0
Land servicing costs (0%) R 0
Water reticulation R 0
Sewer reticulation R 0
Storm water disposal R 0
Roads and kerbs R 0
Electrical reticulation R 0
Street lighting R 0
Other R 0
Interim rates and taxes (0.28%) R 96 000
1 Aug 06 – 30 Nov 07: not applicable (land availability agreement R 0
– transfer date 30 Nov 07)
1 Dec 08 – 31 Mar 08: 9% p.a. of municipal valuation of R 96 000
R3.2m x 4/12 (Land only – New Municipal Rates Act not yet
implemented in this council. Municipal valuation = 80% of market
valuation)
Escalated construction costs (80.92%) R 28 225 212
Current construction cost R 23 648 240
Design and detail development (say 2.5%) R 600 000
Contingency allowance (say 2.5%) R 600 000
Pre-tender escalation (8 months @ 1.0% p.m.) R 1 959 415
SUB-TOTAL: ESTIMATED TENDER SUM R 26 807 655
Contract escalation (12 months x 0.75% p.m. x 0.6) R 1 417 557
SUB-TOTAL: ALL ESCALATION R 3 376 972
42
Professional fees and disbursements (8.91%) R 3 104 774

Project manager (2.3% of escalated construction cost ) R 649 180
Architect and urban designer (3.55% of escalated construction cost) R 1 001 995
Quantity surveyor (2.3% of escalated construction cost) R 649 180
Civil/structural engineer (1.2% of escalated construction cost) R 338 703
Electrical engineer (1.2% of escalated construction cost) R 338 703
Landscape architect (0.25% of escalated construction cost) R 70 563
SUB-TOTAL FEES (10.8% of escalated construction cost) R 3 048 324
Disbursements (0.2% of escalated construction cost) R 56 450
Municipal plan scrutiny fees (0.2%) R 71 280

Construction area: 7 920m2 @ R7/m2 R 55 440
Drainage: 7 920m2 @ R2/m2 R 15 840
Sundry legal and administrative costs (0.06%) R 20 000
Allow R 20 000
Initial marketing costs (0.49%) R 172 000
Promotions and advertising R 145 000
Marketing commissions (180 x R150) R 27 000
Development contingency (1.37%) R 480 000
Allow 1.5% of R32 139 266 say R 480 000
Finance costs (1.66%) R 578 507
Mortgage origination fee (not applicable) R 0
Mortgage registration, including valuation fees (1.8%) R 578 507
Finance structuring fee (not applicable – loan only from NHFC) R 0
Interim cost of capital (4.82%) R 1 682 165
Loss of interest on equity (not applicable – no equity investment) R 0
Interim interest on loan draw-downs during development period R 1 682 165
ESTIMATED NET ANNUAL PROJECT INCOME R 3 042 994

Estimated gross annual income R 4 568 256
2-bedroom flats unsubsidised rental (38.5m2): 144 x R1 925 p.m. R 277 200
3-bedroom flats unsubsidised rental (46m2): 36 x R2 208 p.m. R 79 488
Parking: 120 x R200 p.m. R 24 000
Sub-total: gross income per month R 380 688
X12 R 4 568 256
Estimated gross annual collectible income R 4 339 844
Estimated gross annual income R 4 568 256
Vacancies: 2.5% (R 114 206)
Provision for unrecoverable rent (bad debt): 2.5% (R 114 206)
Estimated project operational expenses (R 1 296 850)
(29.88% of gross income)
Local authority charges R 442 051
Maintenance and cleaning R 223 200
Provisions and sinking funds R 348 799
Insurances R 32 000
Management and rent collection R 151 200
Other property costs and services R 90 000
Auditing fees R 9 600
43
S H F BP6 2006
Estimated net annual income (before loans and tax) R 3 042 994
Estimated gross annual collectible income R 4 339 844
Estimated annual operating costs (R 1 296 850)
Estimated net annual income R 3 042 994
ESTIMATED RETURN ON INVESTMENT

Estimated initial (first-year) return on investment 7.7% p.a.
Estimated net annual income/Estimated TCO 7.7% p.a.
=R3 042 994/R39 527 622
Detailed breakdown calculations

ESTIMATED CURRENT CONSTRUCTION COST R 23 648 240
Description Unit Quantity Unit Cost R Cost/unit Cost/m2 Cost %
Primary Elements 7 920 m2 17 357 808 2 191.64 2 191.64 73.4
Foundations 7 920 m 2
496 613 62.70 62.70 2.1
Ground floor construction 2 640 m2 307 427 116.45 38.82 1.3
Structural frame 7 920 m2 3 405 347 429.97 429.97 14.4
External envelope 3 696 m 2
2 861 437 774.20 361.29 12.1
Roofs 2 704 m2 1 608 080 594.70 203.04 6.8
Internal divisions 2 696 m2 733 095 271.92 92.56 3.1
Floor finishes 7 920 m 2
969 578 122.42 122.42 4.1
Internal wall finishes 7 359 m2 733 095 99.62 92.56 3.1
Ceilings and soffits 7 920 m2 283 779 35.83 35.83 1.2
Fittings 7 920 m 2
307 427 38.82 38.82 1.3
Internal electrical 7 920 m2 2 979 678 376.22 376.22 12.6
Internal plumbing 845 no 2 293 879 2 714.65 289.63 9.7
Fire service 72 no 94 593 1 313.79 11.94 0.4
Balustrading, etc. 780 m 283 779 363.82 35.83 1.2
Special Installations 7 920 m2 591 206 74.65 74.65 2.5
Access control 7 920 m2 141 889 17.92 17.92 0.6
Stoves no 425 668 2 364.82 53.75 1.8
Signage m2 23 648 2.99 2.99 0.1
External work and services 7 920 m2 3 263 457 412.05 412.05 13.8
Soil drains 962 m 449 317 467.07 56.73 1.9
Storm waterdrainage 412 m 189 186 459.19 23.89 0.8
Water supplies 1 086 m 354 724 326.63 44.79 1.5
Fire service 876 m 283 779 323.95 35.83 1.2
External electrical 7 920 m2 307 427 38.82 38.82 1.3
Connection fees 4 no 94 593 23 648.24 11.94
Earthworks 2 108 m3 141 889 67.31 17.92 0.6
Boundary andscreen walls 478 m2 189 186 395.79 23.89 0.8
Gates 1 no 23 648 23 648.24 2.99 0.1
Roads, paving, etc. 4 102 m 2
733 095 178.72 92.56 3.1
Minor construction work 42 m2 118 241 2 815.27 14.93 0.5
(gate houses)
Sports facilities 4 no 118241 29 560.30 14.93 0.5
Garden works 1 211 m2 260 131 214.81 11.94 0.5
Preliminaries 7 920 m2 2 435 769 307.55 307.55 10.3
Contract preliminaries 7 920 m2 2 435 769 307.55 307.55 10.3
44
ESTIMATED CONSTRUCTION COST ESCALATION (SHORT METHOD) R 3 376 972

Description Present value Term in Compoun- Future value Escalation
(PV) months (n) ding rate (i) (FV) (FV-PV)
Pre-tender escalation R 23 648 240 8 12/12= 1.0 R 25 607 655 R 1 959 415
Current construction cost R 23 648 240
Contract escalation R 25 607 655 12 9/12=0.75x.6 R 27 025 212 R 1 417 557
=0.45
Estimated tender sum R 25 607 655
Notes:
1. No escalation during tender adjudication period – assumed immediate go-ahead.
2. Pre-tender escalation based on BER tender price indices.
3. Contract escalation based on projected Haylett-formula CPA indices.
4. Cash-flow factor for construction cost expenditure taken as 0.6.
ESTIMATED INTERIM COST OF CAPITAL(SHORT METHOD) R 1 682 165

Description Present value Term in Interest rate Future value Interim interest
(PV) months (i) (FV) (FV-PV)
(n)
Land cost R 546 000 4 11/12=0.916• R 566 297 R 20 297
Transfer fees R 450 000
Interim rates R 96 000
Fees, etc R 1 934 144 12 11/12=0.916• R 2 157 961 R 223 817
Professional fees (60%) R 3 104 774
X60% =
R 1 862 864
Municipal fees R 71 280
Finance costs R 578 507 15 11/12=0.916• R 663 364 R 84 857
Spread costs R 30 139 122 12 11/12=0.916• R 31 492 316 R 1 353 194
X0.4=0.36•
Escalated construction cost R 28 225 212
Professional fees R 3 104 774
(40%) X40% =
R 1 241 910
Sundries R 20 000
Development contingency R 480 000
Initial marketing R 172 000
Notes
1. Land transfer assumed 4 months before project completion.
2. Interim rates and taxes assumed paid in advance for remaining 4 months of development period from date of
transfer.
3. Professional fees: 60% payable after award of tenders; 40% spread evenly over construction period.
4. Bond registered 3 months before construction start.
5. Initial marketing costs spread evenly over construction period.
6. Cash-flow factor for interim interest taken as 0.4 (0.6 taken for escalations).
45
S H F BP6 2006
Estimated annual property operating costs R 1 296 850

(29.88% of gross income)
Description Calculation Amount p.a. in rands
Local authority charges 442 051
Property rates R 3 200 000 x 9% p.a. 288 000
Common areas consumption 720m2 x R 93.96/m2 p.a. 67 651
Refuse removal 180 x R 40 p.m. x 12m 86 400
Maintenance and cleaning 223 200
Units maintenance 180 x R 30 p.m. x 12m 64 800
Common areas maintenance Estimate 12 000
Common areas cleaning 2 cleaners x R 2 100 p.m. x 12 (inclusive of 50 400
cleaning materials, uniforms, etc.)
Garden services R 8 000 p.m. x 12m 96 000
Management and rent collection 151 200
Outsourced service 180 x R 70 p.m. x 12m 151 200
Provisions 348 799
Long-term maintenance R 34 879 938 x 1% p.a. 348 799
Other services 90 000
Security 2 shifts/day x R 3 500 p.m. x 12m 84 000
General Allow 6 000
Auditing fees Allow R 9 600
46
Development cash-flow (EXCLUDING VAT)

Sheet 1:
Item Total Aug 06 Sept 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07
Total in planning period R 2 512 651 578 507 1 934 144
Professional fees R 1 862 864 1 862 864
Municipal plan fees R 71 280 71 280
Finance costs R 578 507 578 507
Sheet 2:
Item Total Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sept 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08
Total constr
R 30 685 122 1 476 668 1 664 836 1 853 009 2 041 172 2 511 592 2 699 760 2 720 013 2 839 713 3 527 792 3 243 713 3 144 534 2 962 320
period
Land costs R 450 000 450 000
Interim rates R 96 000 96 000
Construction R 28 225 212 1 317 176 1 505 344 1 693 517 1 881 680 2 352 100 2 540 268 2 560 521 2 680 221 2 822 300 3 084 221 2 985 042 2 802 822
Professional
R 1 241 910 103 492 103 492 103 492 103 492 103 492 103 492 103 492 103 492 103 492 103 492 103 492 103 498
fees
Sundry costs R 20 000 1 667 1 667 1 667 1 667 1 667 1 667 1 667 1 667 1 667 1 667 1 667 1 663
Marketing
R 172 000 14 333 14 333 14 333 14 333 14 333 14 333 14 333 14 333 14 333 14 333 14 333 14 337
costs
Dev
R 480 000 40 000 40 000 40 000 40 000 40 000 40 000 40 000 40 000 40 000 40 000 40 000 40 000
contingency
Notes to reader:
1. Professional fees were split into a once-off 60% payment at tender completion, with the balance paid in equal monthly payments
spread over the construction period. In reality there will probably be stage payments during the planning phase as different “work
stages” are completed.
2. Construction cost escalations are included in the monthly payments as if they are calculated and paid in the month to which they
apply. In reality there is a lag time of 3-6 months in the publication of indices needed for calculating each month’s applicable
escalation, which means that there will still be escalation and maybe other final account payments up to 6 months after contract
completion. The liability is, however, incurred in the month in question, and it is therefore prudent to portray it as such so that the
provision can be made timeously.
3. The interim cost of capital is reflected as a cost in the estimated TCO elsewhere, but is not included in the cash-flow above. This
is because the usual practice is for it to be capitalised at the end of the development period, added to the loan amount, and
amortised (paid off) over the term of the loan as part of the monthly instalment. It is therefore not a cash expense in the development
period.
4. If there were some equity investment, the table above would show the cash-flow demand (and maximum requirement) on equity
and loans separately, so that the SHI could plan for the availability and release of own funds which may be tied up in investments,
or may have to be diverted from other provisions on a temporary or permanent basis.
47
S H F BP6 2006
Operational cash-flow (EXCLUDING VAT)

Description 2008 2009 2010 2011 2012 2013 2013 2014
Gross income 4 568 256 4 796 669 5 036 502 5 288 327 5 552 744 5 830 381 6 121 900 6 427 995
Vacancy and bad debt 228 406 239 833 251 825 264 416 277 637 291 519 306 095 321 400
Collectible income 4 339 844 4 556 836 4 784 677 5 023 911 5 275 107 5 538 862 5 815 805 6 106 595
Operating expenses 1 296 850 1 361 693 1 429 777 1 501 266 1 576 329 1 655 146 1 737 903 1 824 798
Net income 3 042 994 3 195 143 3 354 900 3 522 645 3 698 778 3 883 716 4 077 902 4 281 797
Less: Loan repayments 4 178 808 4 178 808 4 178 808 4 178 808 4 178 808 4 178 808 4 178 808 4178808
Annual surplus/(shortfall) (1 135 814) (983 665) (823 908) (656 163) (483 030) (295 092) (100 906) 102 989
Expenses 1 296 850 1 361 693 1 429 777 1 501 266 1 576 329 1 655 146 1 737 903 1 824 798
Local authority charges 442 051
Property rates 288 000
Common areas consumption 67 651
Refuse removal 86 400
Maintenance and cleaning 223 200
Units maintenance 64 800
Common areas maintenance 12 000
Common areas cleaning 50 400
Garden services 96 000
Management and rent collection 151 200
Outsourced service 151 200
Provisions 348 799
Long-term maintenance 348 799
Other services 90 000
Security 84 000
General 6 000
Notes to reader:
1. The operational cash flow can be done for 5, 10, 15 or 20 years. In the example above it was done up to the point where there is a
surplus after expenses and loan repayments. It shows that net income will be able to meet expenses and loan repayments only in
the 8th year of trading, with an accumulated shortfall of almost R4.5m (plus interest). The project in its current form is therefore not
sustainable from a cash–flow perspective, and should be re-conceptualised.
2. Both income and expenses were escalated by 5% p.a., while loan repayments were kept static at the initial rate of interest. More accurately,
the anticipated average interest rate over the term should be used for calculation of loan repayments, but the approach is that if loan
rates were to change, it would generally be accompanied by related changes in inflation rates, meaning that income and expenses would
change as well.
48
Risk analysis
Parameter changed Amount of change and its effect on initial return
Optimistic Realistic Pessimistic
Escalated construction -5% As is 7.7% +5%
cost (see note 1 below) 8.08% 7.36%
Interest rate Change to 10% p.a.: As is (11% p.a.): Change to 12% p.a.:
(see note 2 below) 7.74% 7.7% 7.67%
Rentals +10% As is 7.7% -10%
(see note 3 below) 9.44% 7.13%
Vacancies and bad debt Change to 2.5%: As is (5%):7.7% Change to 10%:
(see note 4 below) 7.99% 7.13%
Notes to the reader:

General: The sensitivity analysis above is a much-simplified one just to illustrate the principle. It does not cover all the
variables that should normally be included in the analysis, nor does it show the effects of possible combinations of
changes, e.g. interest rates and vacancies rising at the same time. The possible combinations are theoretically endless
though, and it is part of the trouble with sensitivity analyses that they do not indicate the statistical probabilities of risk
events, or combinations of them, occurring.
1. Changes in construction cost will usually have a knock-on effect on professional fees, finance costs, interim cost of
capital and development contingencies, all of which must be taken into account in calculating the effect on returns
(and cash flows).
2. Changes in interest rate will affect the interim cost of capital, and the long-term loan repayments on the operational
side.
3. Changes in rentals may, or may not, have a direct proportional effect on some of the operational expenses, but not
on all of them. It may, for instance, change collection and management charges where these are a percentage of
the rent roll, but will not have any bearing on municipal charges.
4. As above, vacancies and bad debts may, or may not, affect certain expenses such as collection and management. In
addition, if higher vacancy and bad debt allowances are made, the question should probably also be asked whether
one should not then increase expenses to allow for more marketing and vacated unit maintenance, as well as more
intense credit control measures.
List of assumptions and exclusions

Main assumptions:
Pre-tender construction cost escalation rate 12% p.a.
Post-contract construction cost escalation rate 9% p.a.
Interest rate 11% p.a.
Project start date August 2006
Construction start date April 2007
Project completion date March 2008
Land transfer date December 2007
Start of trading April 2008
Funding structure and terms 100% NHFC loan at 11% p.a. over 20 years
Rental escalation rate 5% p.a.
Expenses inflation rate 5% p.a.
Vacancy rate 2.5%
Bad debt rate 2.5%
49
S H F BP6 2006
Exclusions from development cost estimates:

• Socio-economic survey/demand study (sponsored)
• Cost of acquiring land (donated by council)
• Loose furniture and furnishings in units
• Tenant training (sponsorship to be found)
Exclusions from operating expense estimates:

• Post-occupancy evaluations/Tenant satisfaction surveys (sponsorship to be found)
Outline specifications
Item Description
Foundations 600 x 200mm strip footings under walls; 800 x 800 x 400mm reinforced pads
under columns
Structural frame Reinforced concrete columns 230 x 230mm, and 200mm thick flat slabs (150mm
for walkways and balconies)
External walls and finishes 220mm brick walls faced outside (Prime cost (P.C.) for supply of face bricks =
R1 800/1000)
Internal walls 110mm brick
Internal wall finishes Cement plaster and washable acrylic paint; ceramic tiles in showers and splashbacks
(P.C. for supply of tiles = R50/m2)
Roofs Concrete tiles on timber trusses at 26 degrees, with plastic underlay; fascias and verges,
but no gutters or downpipes
Ceilings Slab soffits externally: Off-shutter concrete unfinished
Slab soffits internally: cement plaster and PVA
Under trusses: 6mm Gypsum board, painted and with 40mm mineral wool insulation
Floor finishes Balconies and external walkways: Untinted granolithic
Stairs: Untinted granolithic with reeded treads
Bedrooms and living rooms: carpet tiles (P.C. supply and lay = R70/m2)
Kitchens and bathrooms: 2mm vinyl tiles on screed
Fittings 1500mm double bowl kitchen sink on white steel cabinet
1800mm melamine wardrobe in main bedroom
1200mm ditto in other bedrooms
Plumbing 3-bedroom flat: Bath, whb, WC, sink and 150l geyser per flat
2-bedroom flat: Shower, whb, WC, sink and 100l geyser per flat
Electrical Pre-paid metering unit in each flat
1 light and I 15 amp power socket per room
Isolator for stove and geyser
Fire service Fire hose reel and 2 extinguishers per floor
2 hydrants for fire engine connection on site
Access control Swipe card system for tenants
Security guard and intercom at entrance gate
Boundary walls 1800mm high steel palisade fence between face-brick piers at 3m centres
Gates 3m and 1m motorised remote-controlled motor and pedestrian gates
Roads and parking Bevelled concrete block paving
Sport and recreation facilities 1 basket ball court, playground equipment, tennis practice wall
Garden works Instant lawn, shrubs, trees and flower beds as plan
50
a
Alternative approaches to doing
project financial viability studies
Income capitalisation method of
determining financial viability
The way investors and their consultants often go about doing financial viability
studies is as follows:
1. Determine demand for product type and mix (one-/two-bedroom flats, etc.).
2. Develop concept design and work out development cost estimates.
3. Determine what the rentals should be to justify the cost.
4. Find out too late that the projected rentals were too optimistic, and that the
detail design and documentation are based on unaffordably high product
specifications.
A more prudent approach involves first determining realistic rental levels affordable
to the target market, and then “forcing” the design to result in a development cost
that is viable within the constraints of realisable income. This technique is commonly
used in commercial developments, and is called the income capitalisation method
of setting development cost targets or limits. In simple terms, it works as follows:
1. From the social and market surveys, determine the product demand as before,
and then set realistic rentals for the different products.
2. Calculate the estimated total net income that could be realised on the basis of
those rentals.
3. Divide the net income by a capitalisation rate (cap rate for short) acceptable to the
investor (in other words, the investor’s desired rate of return on the project).
4. The result of the calculation in 3 above is the total allowable amount of total
development cost (TDC) or total capital outlay (TCO) that must be adhered to
if the desired rate of return is to be achieved at the determined rental levels.
5. From this amount, deduct the known cost of land, and then do a residual value
calculation to eliminate interim finance costs and professional fees, leaving a
balance that could be spent on actual building cost. This then becomes the cost
parameter for design purposes.
51
S H F BP6 2006
Example of income capitalisation calculation:

Estimated net income from indicated product mix (based on market surveys):
100 two-bedroom units @ R1 150 p.m. R 115 000.00
Less: Provision for vacancies and bad debt (10%) R 11 500.00
Gross collectible income R 103 500.00
Less: Operating costs p.m. (rates, insurance, maintenance, etc.) R 33 500.00
NET MONTHLY INCOME R 70 000.00
NET ANNUAL INCOME (R70000 x 12) R 840 000.00
The investor must now decide on an acceptable cap rate. Deciding on an

appropriate cap rate is usually an exercise involving much debate and hand wringing
in commercial developments. One has to look at returns on alternative forms of
investment, and then make allowances for risk premiums, tax implications and the
like. Absa publishes statistics on commonly acceptable cap rates for a wide variety
of property developments. At the moment, these are around 10-11% on average.
For this exercise let us assume that the investor’s desired rate of return is 10% p.a.,
and that it decides on this figure as a cap rate. Now divide the net annual income by
the cap rate factor: 10% = 0.1:
R840 000.00 ÷ 0.1 = R8 400 000.00.
The allowable TDC is R8 400 000.00 (Check the reverse calculation: R840 000.00
net income over R8 400 000.00 TDC gives an initial return of 10% p.a.)
Now calculate the residual building cost:
Allowable TDC R 8 400 000.00

Less: known land cost
- Market value R 340 000.00
- Transfer cost say 5% R 17 000.00
- Geophysical survey say R 43 000.00
R 400 000.00
Balance available for building cost, professional fees, R 8 000 000.00
Sundry development costs and interim finance cost
Less: Interim finance cost (see note below) R 800 000.00
Balance available for building cost, professional fees, R 7 200 000.00
Sundry development costs and interim finance cost
Less: Interim finance cost (see note 1 below) R 200 000.00
Balance available for building cost and professional fees R 7 000 000.00
Less: professional fees (say 10% of final building cost) R 636 364.00
R 7 000 000 x 10/110
Balance available for escalated building cost R 6 363 636.00
Less: Building cost escalation (see note 3 below) R 863 636.00
Balance available for current building cost R 5 500 000.00
The above is equivalent to R5 500 000/100units = R55 000 per unit.
52
If we know that the current building cost for two-bedroom units in a walk-up is say
R1 800/m2, our allowable size is R55 000/R1 800 = 30.55m2. Now the question is
whether or not 30.55m2 for a two-bedroom unit is a marketable size for a rental of
R1 150 p.m. The answer is probably no, so we must look at it from the marketing
side and say that the units must be at least 42m2, meaning that the allowable current
building cost rate is R55 000/42 = R1 310/m2. Is this feasible or will it result in too
low a specification and quality? We have to reach a workable compromise between
realistic income, and a marketable but affordable product. We will have to try
different product and tenant mixes, where some units can be let at market-related
rentals to non-subsidised tenants in order to make the scheme work.
We can short-circuit the above calculation by taking the allowable TDC of

R8 400 000, dividing it by the number of units (100) = R84 000/unit, and checking
that against the known TDC rate (say R2 700/m2), which again gives a size of around
31m2.
The process should proceed more or less as follows:

1. The concept is validated against the target market demand as found in the results
of the market survey.
2. The residual allowable TDC and current building costs are determined through
the income capitalisation method.
3. The design team is briefed on the cost parameters as determined above (indicative
unit sizes and specifications based on the cost parameters, but always checked
against marketability and long-term maintenance implications).
This means there needs to be constant interaction between the design team
on the one hand, and the marketing and property management teams on the
other, and it is up to the development manager and/or project manager to
ensure this happens!
4. The design team prepares a preliminary concept or sketch design, and the QS
does a cost estimate and preliminary viability study. If the estimate falls within
the cost parameter, OK, if not – it is back to drawing board. Savings could be
achieved through:
• Reducing unit size and specifications (but not below marketable levels, and
not in a way that will result in maintenance problems).
• Simplifying complicated building shapes and details, improving layouts to
shorten service pipe runs, improving design efficiency i.e. achieving the
optimal ratio between lettable and common spaces respectively.
• Consulting with property and marketing managers to see if certain facilities
and amenities could be provided in rudimentary form initially (or even left
out), and gradually introduced or upgraded in a phased manner as income
improves or additional donor funding is obtained.
53
S H F BP6 2006
Note 1 (Interim capitalised finance cost): Doing this calculation accurately is a

complicated process, which your QS should be able to do. It involves
some financial mathematics with compound interest calculations in
reverse. What you need to understand is that a portion of interim
finance cost (capitalised interest) will accumulate from an early date as
you draw down on the loan to pay for land, and a substantial portion
of professional fees will be payable at documentation and tender
stage, while the major part of interest will accumulate progressively
over the building period as draw downs are made to pay monthly
progress payments to the contractor and professionals. Don’t forget
the initial finance charges such as bond valuation and registration
fees, originator’s commission and/or structuring fees, if applicable. For
illustrative purposes in this example, we assume an interim finance
cost of 10% of TDC.
Note 2 (Sundry development costs): This includes allowances for interim

capitalised rates and taxes, municipal plan scrutiny fees and incidental
costs such as legal agreements, market surveys, marketing and
promotion costs, etc.
Note 3 (Building cost escalation): Again, this is a complex calculation similar

to the interest calculation above, but accumulating on reducing
balances rather than accumulating balances. The full amount of the
current building cost will escalate at tender market rates (projections
available from Stats SA and the Bureau for Economic Research,
Stellenbosch University) during the pre-contract planning period. As
monthly progress payments are made and taken out of the escalable
amount, the reducing balances will escalate at contractual escalation
rates (based on indices supplied by Stats SA).
Residual land value calculations to determine a realistic/affordable price that

can be paid for land:
In the above examples, we worked on the premise that the land cost was known
and fixed. This is not always the case. Sometimes we need to check the asking price
against what we can afford, to enable us to negotiate the price on a realistic basis.
Sometimes we will still need to search for suitable land. In that case we could do
a hypothetical calculation (say 500 units at a certain density and price, and for a
certain target market as identified in our social/market survey). We could also do
an estimate of what the total development cost should be, in order to render an
acceptable return by using the income capitalisation method as above.
The same principles as above can then be applied to determine what the maximum
price is that can be paid for a piece of land, and the search for suitable land will
then narrowed down to properties that fall within that price range.
54
Example (using same figures as above, but assuming land value is

unknown and a norm needs to be established):
Assume the following development time-frame:
Project validation and appraisal: 2 months
Land transfer: 2 months
Design development and documentation 4 months
Municipal plan approval 2 months
Tenders (concurrent with municipal plan approval)
Sub-total planning period 10 months
Construction 9 months
TOTAL 19 months
Allowable TDC as before (based on income capitalisation): R 8 400 000
Less: “Known” escalated building cost as estimated by QS:
Say 100 units @ R65 000/unit R 6 500 000
Balance left for fees, sundries, finance costs, and land R 1 900 000
Less: Fees (say 10%): R6 500 000 x 0.1 R 650 000
Balance left for sundries, finance cost and land R 1 250 000
Less: Sundries as estimated R 200 000
Balance left for finance costs and land R 1 050 000
Less: Finance costs (see note 1 below) R 850 000
Balance left for land R 200 000
Less: Geophysical survey as before R 43 000
Balance left for land and transfer R 157 000
Less transfer costs (say 5%): R157000 x 100/105 R 149 523
Unless we change one of the other variables (building costs, time-frame, income,
etc.), we can only afford R149 523 for the land. The cost of the land in the previous
exercise – R320 000 – is therefore too high for this project.
55
S H F BP6 2006
Quick (preliminary) square metre estimating

and viability study without drawings (based on
100% loan funding [no equity investment] for
illustrative purposes)
The following is an example of a very preliminary quick method of estimating
building and development costs, and a rough viability study which is done before
any drawings are available. It may be used in cases where the investor/developer has
seen a site that attracted their attention because of its location or some other feature
that indicates development potential, and they wish to do a quick investigation
into whether or not it warrants further work in the form of sketch designs and more
detailed feasibility studies.
Information with regard to size, development rights, etc. of the site is obtained
from the town planning office of the local authority, and is used to calculate gross
construction or floor areas of the different types of buildings that are permitted on
the site in terms of the “Town Planning Scheme” of the local authority.
Information about the site obtained from local

authority:
• Area – 10 000m2 (= 1 Ha)
• Current zoning – Residential (flats)
• Coverage – 40% (which means that “footprint of all buildings at ground level
may not exceed 40% of site area”)
• Floor Space Ratio (FSR) or bulk – 1.2 (means the total covered floor area of all
buildings at all levels may not exceed 1.2 times the site area)
• Height restriction – 13m (4 storeys if flat roof, 3 storeys if pitched roof)
• Building lines – 9m in front, 5m at back and sides
• Municipal valuation – R800 000 (approx. 80% of market value)
• Municipal land tax – R0.10/R p.a.
• Parking requirements – 0.25 bays/unit (30m2/car including circulation areas):
Information from own sources:

• General:
• Transfer cost – 10% of purchase price
• Geotechnical survey – R10/m2
• Current building costs:
• Flats: R2 100/m2
• Service buildings: R1 800/m2
• Paving: R100/m2
• Car ports: R400/m2
• Oversite earthworks – R120/m2
• Landscaping – R200/m2
56
• Professional fees and disbursements:

• 10% of escalated building cost
Other assumptions:
• Time required for project validation and appraisal: 2 months
• Time required for purchase and transfer of the property: 2 months
• Design development, and documentation: 4 months
• Plan approval: 2 months
• Tenders: 2 months (but overlaps for 1 month with plan approval)
• Total planning period: 11 months
• Construction period: 13 months
• Total development period: 24 months
• Bond registered in month 4
The project will be 100% loan financed (this of course not realistic, but is assumed
just to simplify the calculations below)
In this case, for the sake of simplicity, no township establishment or rezoning is

involved. Costs would include application and advertising, town planner and land
surveyor fees, development contributions to local authority and so on. Theoretically,
the developer could, in order to save time, assume some overlapping of the above
processes. If he is reasonably certain, for instance, that he will purchase the property
if this quick feasibility study indicates a positive result, and if he is confident that the
rezoning application has a good chance of succeeding, then he could submit an
application for rezoning in the name of the seller as soon as his offer to purchase has
been accepted, and before transfer of the property has taken place. The rezoning
process involves approval by various departments within the local authority, as
well as a period of usually about two months during which the proposed rezoning
is advertised to invite objections from the public and interested parties (e.g.
neighbours). As soon as the objections phase is over (this could be about two months
before final approval), the developer could take a chance and ask the professional
team to start the documentation and procurement for construction.
The above is a high-risk approach to feasibility studies, however, as many things

could go wrong before final approvals are obtained, and the developer could end
up paying for a lot of work which may be fruitless in the end. In this example, we
follow the low-risk approach with minimal overlapping. The total development
period therefore, is 24 months, made up as follows:
Planning period: 11 months

Construction period: 13 months
57
S H F BP6 2006
With the information above, the estimator can now do the following calculations:
Total area of site that may be covered with buildings – 40% x 10 000m2 = 4 000m2
Total permissible floor area of buildings at all levels – 1.2 x 10 000m2 =12 000m2
The obvious development configuration is 3-storey walk-ups (3 floors of 4 000m2 each

will comply with the allowable bulk and total height restriction on the site of 13m. From
experience we know that we should add approximately 5% to the building area for
service areas, cleaners’ stores and electrical switch rooms. These areas are not counted
in the FSR. Our total building area is therefore, 12 000m2 + 5% = 12 600m2. (We
will assume that all the service areas will be on ground level.)
We will also assume that, from our general market knowledge, we know that the
most popular accommodation is 2-bedroom flats of 40m2. We also know from past
experience that design efficiency for this type of building is 90% (meaning that 90% of
our 12 000m2 or 10 800m2 is available for flats, with the remaining 10% being used
for stairways and other circulation areas). We can therefore, fit 10 800 m2/40 = 270
units on the site.
The next critical aspect is parking. Available on site is an area of 5 400m2 after deduction
of ground floor built area of 4 600m2. Of this, about 600m2 is unsuitable (rocky outcrop
and wetland in SE corner), leaving 4 000m2. We estimate that another 1 300m2 is
needed for garden and recreational areas, refuse yards, walkways, etc., leaving only
2 700m2 for parking on site. At 30m2 per car, this gives us space for 90 parking bays
on site. The total parking requirement as laid down by the local authority is 0.25 bays
per unit = 270 x 0.25 = 68 bays (2 040m2 of paving). (In practice, it is usually a lot
harder to satisfy the parking requirement.)
We can now do a quick financial viability calculation as follows (or preferably using
the income capitalisation approach illustrated earlier):
58
Estimated Total Development Cost (Tdc) Land Cost:

-Market value R 1 000 000
-Transfer cost (10% of likely purchase price): R 100 000
-Geotechnical investigation: 10 000m x R10/m2 2
R 100 000
Sub-total land cost R 1 200 000
BUILDING COST:
-Flats and circulation areas: 12 000m2 @ R2 100/m2 R 25 200 000
-Service buildings: 600m @ R1 800/m
2 2
R 1 080 000
-Paving: 2 040m @ R100/m
2 2
R 204 000
-Carports: 68 x 15m2 = 1 020m2 @ R400/m2 R 408 000
-Oversite earthworks: 10 000m @ R120/m
2 2
R 1 200 000
-Landscaping, etc.: 1 300m2 @ R200/m2 R 260 000
Sub-total R 28 352 000
-Preliminaries: 7.5% R 2 126 400
Sub-total R 30 478 400
Contingencies:
-Allow for detail design development: 2.5% R 761 960
-Allow for unforeseen events: 2.5% R 759 640 R 1 521 600
Estimated current building cost R 32 000 000
Building cost escalation:
-During planning period:
R 32 000 000 x 14%p.a. x 11/12m R 4 106 667
-During construction period:
R 36 106 667 x 0.5 x 12% p.a. x 13/12m R 2 346 933 R 6 453 600
Sub-total building cost R 38 453 600
PROFESSIONAL FEES AND DISBURSEMENTS:
-Fees: R38 453 600 x 10% R 3 845 360
-Disbursements say R 54 640
Sub-total fees and disbursements R 3 900 000
SUNDRY DEVELOPMENT COSTS:
-Interim rates and taxes on land:
R800 000 x R0.10 x 20/12m R 133 333
-Municipal plan fees: 12 600m x R6/m
2 2
75 600
-Market surveys R 60 000
-Marketing and promotion R 146 400
-Sundry admin and legal costs R 31 067
Sub-total sundry development costs R 446 400
SUB-TOTAL BEFORE FINANCE COSTS AND COST OF CAPITAL R 44 000 000
FINANCE COSTS:
-Loan costs (admin and legal) R 1 415 920
INTERIM COST OF CAPITAL:
(interim interest on draws on loan during development
period @ 10% p.a.; therefore i=10% p.a.):
-On land: R1 200 000 for 20m R 216 654
(PV = R1 200 000, n = 20m, FV = R1 416 654)
-On fees at tender: R3 900 000x0.6=R2 340 000x15m R 310 194
(PV=R2 340 000, n=15, FV=R2 650 194)
59
S H F BP6 2006
-On finance costs: R1 415 920 for 20 months R 255 637

(PV=R1 415 920, n=20, FV=R1 671 557)
-On balance of fees, sundries and building costs:
Total before finance cost R 44 000 000
Less:
Land (R 1 200 000)
60% of fees (R 2 340 000)
Balance R 40 460 000
x0.5 = R20 230 000 for 13m R 2 304 582 R 3 087 067
(PV = R20 230 000, n = 13m, FV = R22 534 582)
Sub-total finance costs R 4 502 987
DEVELOPMENT CONTINGENCY
-Allow 4.5% of R44 000 000 R 1 980 000
ESTIMATED TOTAL CAPITAL OUTLAY (EXCL VAT) R 50 482 987
VAT (14%) ON TCO EXCL INTEREST (R48 178 405) R 6 744 977
ESTIMATED TOTAL CAPITAL OUTLAY (INCL VAT) R 57 227 964
It is now possible to do the rest of the financial viability study from the information
above. Lettable areas of buildings and, therefore, projected income and returns on
investment can be estimated.
ESTIMATED PROJECT INCOME:

-Flats: 270 units @ R2 200 p.m. R 594 000.00
-Carports: 270 @ R150 p.m. R 40 500.00
Sub-total R 634 500.00
GROSS ANNUAL INCOME x12 = R 7 614 000.00
Less: Provision for vacancy and bad debt: 5% R 380 720.00
GROSS COLLECTIBLE ANNUAL INCOME R 7 233 280.00
Less: Operating costs R 1 833 280.00
NET ANNUAL INCOME (BEFORE LOAN REPAYMENTS) R 5 400 000.00
ESTIMATED RETURN ON INVESTMENT:
-Initial or first year ROI:
Net income x 100 R 5 400 000 x 100
Total capital outlay = R 57 227 964 = 9.44% p.a.
Note: To complete the viability study, cash-flow projections should be done

to see if income will cover loan repayments, and how much the project
will contribute to general management expenses (overhead costs). The
rough indication of initial ROI in this case suggests, however, that it
may be worthwhile to spend a bit more time and money on proper
detailed feasibility studies, and perhaps even to try to obtain an option
on the land for a month or two to allow time to carry out such studies
without fear of losing the land to other interested parties.
60
ANNEXURE A
Estimating escalations on building
contracts
Contract Price Adjustment Provisions Of The JBCC
(Formerly Known As The Biac (Haylett) Formula)
Introduction
A Manual and Reference Guide for practical application of the formula is published by and available from
the Joint Building Contracts Committee (JBCC), with revisions and interpretations issued from time to time.
Students are advised to obtain a copy of this manual, and to continually keep up to date with new revisions
and interpretations.
How the provisions work

• The CPAP provides for the adjustment of contracts in respect of:
• General and industrialised building work.
• Subcontract work carried out by nominated, selected and non-nominated subcontractors.
• Direct contract work comprising specialist and engineering installations related to building projects.
• Standard composite indices have been compiled in consultation with CSS to include the weighted labour,
material and plant components applicable to a number of defined work groups. CSS in Statistical Release
P0151 publishes these composite indices each month.
• In brief, the CPAP operates as follows:
• A number of work groups are defined into which the work contained in a building contract can be
subdivided.
• CSS publishes a like number of sub-indices, reflecting price movements of labour, material and plant
content of each work group.
• The principal agent values the work executed for certificate purposes in the normal way but, in addition,
he or she allocates the value of the work to the respective work groups.
• In a particular month, the value of the work certified in each work group is adjusted in relation to the
movement in the index value for the applicable month compared with the index applicable at the
tender date. This is done so that the work executed in a particular period is adjusted in relation to the
index value for approximately the same period.
• The work groups have been restricted to a practical number to limit and simplify the work required at the
time of certification.
• The approach adopted is that certain materials lend themselves to grouping for costing purposes and
consequently reference is made to “work group” rather than “trade” as is customary in documentation
in the building industry. For example, steel windows, steel door frames and suspended steel ceilings are
assembled to limit the number of groups, as the materials originate from the same basic source and the
percentage fluctuations in labour costs are likely to be similar.
61
S H F BP6 2006
Calculation of adjustment
• The principal agent will calculate an amount of adjustment for each valuation period in respect of each
work group using the formula:
Xe
A = 0.85 V ( Xo - 1)
Where:
A = the amount of adjustment

0.85 = a constant which provides for a 15% non-adjustable element
V = the work value for adjustment in such work group and the valuation period
Xe = the value of the index applicable to such work group and the valuation period which
shall be the value for:
(a) The month before that during which the progress certificate is dated in respect of
certificates issued up to and including the 15th day of the month
(b) The month during which the progress certificate is dated in respect of certificates
issued after the 15th day of the month
Xo = the value of the index applicable to such work group for the base month
Contract Price Indices

Due to continuous inflationary escalation in the cost of labour, materials and other resource inputs, a contract
price index is vital for updating past records used for estimating purposes.
At present there are two bodies that provide the building industry with contract price indices together with other
relevant statistics on a continuous basis, namely:
1. Bureau for Economic Research, University of Stellenbosch

This bureau publishes two quarterly publications namely Building and Construction and Trends in Building
Costs. The first of these is distributed to firms who pay a certain annual subscription fee whilst the second
publication is distributed free of charge to all participating quantity surveying firms. (Participating QS firms
are firms who analyse certain bills of quantities and submit the information on a standard form provided by
the bureau.)
2. Central Statistical Service: Contract price index for buildings

This is a monthly index that is distributed to all quantity surveying firms. All firms are compelled to provide
information to the Central Statistical Service on its prescribed standard forms on a continuous basis.
Estimating Pre-tender Escalation On Construction

Projects
The starting point for all construction cost estimates is the day on which the estimate is done. In other words, the
rates used are those applying on that day as if the project could be completed on the same day. this is usually
called the “estimated current construction cost”.
Starting and completing construction on the very same day is, of course, not possible. Feasibility studies (of
which the estimate of construction cost is an important part) first have to be carried out, tender documentation
62
must be prepared, tenders called for and adjudicated, plans submitted for scrutiny, and permission received
from the local authority to start building, etc. This can take from 4-12 months or even longer on large and
complex projects.
During this time, construction costs will fluctuate in response to both macro-economic and local construction
market factors. Recently, these fluctuations have almost always been upwards as a result of continued inflation,
and are expected to remain that way for the foreseeable future.
The anticipated future tender price for the work will invariably be higher than the estimated current construction
cost. The estimated current construction cost must therefore be escalated for the estimated total planning period
at a projected rate based on construction market trends.
Example: Estimating Pre-tender Escalation (Or Escalation During

Planning Period):
Basic information:
• Estimated current building cost: R 10 000 000
• Estimated planning period: 6 months
• Anticipated rate of escalation in construction market prices for next 6 months: 1.25%/month
Estimated escalation during planning period:

Using the formula for compound interest Sn = K(1 + i) n , and the following values for the symbols:
• K or initial capital or present value = R 10 000 000
• i or escalation (interest) rate = 1.25%
• n or number of periods = 6
The compounded future value can be calculated.
In this case, the interest or accumulation factor is 1.07738, and the future value or estimated tender sum is
1.07738 x R 10 000 000 = R 10 773 800. The pre-tender escalation is therefore the difference of R 773 800.
The anticipated tender sum is R 10 773 800.
If calculated with a financial calculator:
PV = R 10 000 000; n = 6; i = 1.25
Compute FV, subtract PV, and the difference is the escalation.
63
S H F BP6 2006
Estimating Post-tender Escalation On Construction

Projects
“Short” Method (Less Accurate Than Longer Method)
Escalation During Tender Adjudication Period:
Once tenders have closed, the base-date or starting index for construction contract escalation is fixed (this
usually happens in the month before the closing of tenders if tenders closed before the 15th, and the month in
which tenders closed if after the 15th day of the month). This means that while tenders are being adjudicated,
escalation on the tender sum is running.
A different type of index is now applicable in accordance with the contract conditions for civil engineering and
building projects.
Example: estimating contract escalation during tender adjudication

period – short method, building contracts using cpap, haylett formula:
Let us assume in the example above, that the estimate was exactly right, and that the lowest viable tender came
in at R 10 773 800 (highly unlikely of course). We will also assume that tender adjudication will take one month.
The entire 85% of the tender sum that is subject to escalation will escalate for a month before construction even
starts. If the projected contract escalation rate is 0.5% per month, the escalation during tender adjudication will
be calculated as follows:
K (or PV) = R 10 773 800 x 0.85 = R 9 157 730

n=1
i = 0.5%
The compounded future value as calculated or read from the tables is then: 1.005 x R 9 157 730 = R 9 203 519.
In other words, while the tender was being adjudicated, the building cost escalated by R 45 789
(R 9 203 519–R 9 157 730)!
The building cost has therefore gone up in this time by R45 789, from R 10 773 800 to R 10 819 589.
This means that by the time the builder gets the go-ahead to go onto site and start work, the building
cost has already gone up to R10 819 589 from the tender price of R 10 773 800.

PV=R 10 773 800 x 0.85=R 9 157 730; n=1; i=0.5
Escalation during construction:

Expenditure curves on construction contracts usually show that more money is spent during the second half of
the contract period (because of slow starts, site establishment, high volume/low value work in the early stages,
etc.) The effect of this is that more than 50% of the contract value is subject to escalation for longer than the
average period that each payment would have been subject to escalation if expenditure had been spread evenly
across the contract period. This is sometimes referred to as the “cash-flow factor”, or the “S-curve factor”, which
can be anything between 0.4 and 0.65.
64
Example: estimating escalation during construction

(short method, building contracts using CPAP, haylett formula)
Assuming a factor for our example of 0.6, estimated escalation during construction for our example above,
would be as follows:
Basic information:
i = 0.5%
n=4
K (“Vtotal” x 0.85 x 0.6) = R 10 819 589 x 0.85 x 0.6 = R5 517 990
Estimating the escalation:

R 5 517 990 x 0.02015 = R 111 187
Estimated final escalated building cost in accordance with the short method:
1. Estimated current building cost R 10 000 000
2. Estimated pre-tender escalation R 773 800
3. Estimated tender sum R 10 773 800
4. Estimated post-tender escalation:
4.1 During tender adjudication: R 45 789
4.2 During construction: R 111 187 R 156 976
Estimated final escalated building cost R 10 930 776

PV = R 10 819 589 x 0.85 x 0.6 = R 5 517 990; n = 4; i = 0.5
“Long” method (most accurate method)

Note: In this case it will not be necessary to calculate the escalation during the tender adjudication
period separately, as you will see in the example below.
From the end of the first month of construction activity, the contractor will receive progress payments. An amount
of 0.85 of the value of each progress payment will only escalate from the base date to the date of certification,
and no further.
To estimate the escalation on each payment, a construction cash-flow or payment projection must first be made.
Estimated escalation for each monthly payment must then be calculated, using the relevant contract adjustment
formula and the projected escalation rates for the construction period.
Worked example 1: estimating escalation during construction

(Long method, building contracts using cpap, haylett formula)
Basic information:
1. Projected contract escalation rate during construction: 0.5% per month
2. Projected construction cash-flow or payment schedule:
65
S H F BP6 2006
Month 1: R 2 000 000 (“V1”)

Month 2: R 2 800 000 (“V2”)
Month 3: R 3 500 000 (“V3”)
Month 4: R 2 473 800 (“V4”)
TOTAL R 10 773 800
Estimating the escalation (i = 0.5%):

Month K (“V1” to “V4” x 0.85) n (months from Factor 1-(1+I)n Escalation this Cumulative
base) month escalation
1 R 2 000 000 x 0.85 = 1 700 000 2 0.01002 17 042.50 17 042.50
2 R 2 800 000 x 0.85 = 2 380 000 3 0.01508 35 890.40 52 932.90
3 R 3 500 000 x 0.85 = 2 975 000 4 0.02015 59 946.25 112 879.15
4 R 2 473 800 x 0.85 = 2 102 730 5 0.02525 53 093.93 165 973.08
Note: that n for the first payment = 2 (one month tender adjudication before construction starts! – first payment
only two months after tender closing: this takes care of the escalation taking place during the adjudication
period).
Estimated final escalated building cost in accordance with the long method:
1. Estimated current building cost R 10 000 000
2. Estimated pre-tender escalation R 773 800
3. Estimated tender sum R 10 773 800
4. Estimated post-tender escalation:
4.1 During tender adjudication: (incl below)
4.2 During construction: R 165 973 R 165 973
Estimated final building cost R 10 939 773
Note: In this example, the figure calculated using the long method differs by only R8 997 from the short method,
but the differences can be far greater if the “cash-flow factor” is chosen differently for the short method.
If in the above example, for instance, a factor of 0.5 was used in the short method, the calculation would
have looked as follows:
Basic information:
i = 0.5%
n=4
K (“Vtotal” x 0.85 x 0.5) = R10 819 589 x 0.85 x 0.5 = R4 598 325
Estimating the escalation:
R4 598 325 x 0.02015 = R92 656 instead of the R111 187 for a factor of 0.6.
If calculated with a financial calculator (i = 0.5 in all cases):

PV1 = R 1 700 000 n1=2 Compute FV1 (escalation for month 1)
TOTAL FV1+FV2+FV3+FV4 = total escalation during construction
66
ANNEXURE B
Calculation of interim cost of capital during development
period
Introduction
The SHI can obtain capital required for construction or property development projects from different sources,
such as:
• Equity or own capital (from own accumulated cash reserves/investments) – this is currently rare as most
SHIs are struggling just to meet operational expenses, let alone put away surpluses
• Government subsidies and grants, and donor grants
• Loans from financial institutions and aid agencies
In theory, all project capital comes at a cost. If it is borrowed, there is usually an interest charge. Equity invested
in a project is withdrawn or withheld from being invested elsewhere, thus losing out on the opportunity to be
earning interest, capital appreciation, dividends or operating profit depending on the alternative (investment in
bank, property, stocks and bonds, or stock for trading). This loss of potential interest or other form of return or
yield is referred to as the opportunity cost of equity. In practice, subsidies and grants, and interest-free loans
are considered to be “free money” that comes at no cost to the property developer (SHI).
Capital is invested in a project in varying amounts from time to time during both the planning and execution
phases. As soon as a certain amount is spent (invested), it either loses interest or the opportunity to provide
yield (equity), or it attracts interest charges (borrowed capital). Both opportunity costs on equity, and interest on
amounts borrowed (to pay for land, professional fees, construction and so on) during the development period
must be calculated up to the end of the development period and “capitalised” or included in the total capital
outlay or project development cost. The sum of these constitutes the interim cost of capital.
For purposes of estimating and feasibility studies, interim cost of capital can be calculated in one of two
ways:
• Using the so-called long method – done on the basis of a detailed project cash-flow, and therefore, more
accurate (but also quite time-consuming)
• Using the so-called short method – done without a detailed cash-flow of expenditure, and therefore, less
accurate
The long method of estimating interim cost of capital

In this method, a detailed monthly cash-flow projection for the development period must be drawn up first. The
interest/opportunity cost for each month’s expenditure then needs to be calculated from the time the expenditure
takes place up to the end of the development period.
Worked example: estimating interim cost of capital during development

period (long method)
Basic information:
For calculation purposes, each actual expenditure (investment in the project) is the Present Value (PV) of that
investment. The period from the date of investment up to the end of the development period is the term of the
investment (n). The opportunity cost/interest charge is then calculated for that term by using the opportunity
rate or the interest rate, as the case may be. To simplify the illustration of the principle, in the simple example
below no distinction is made between equity and borrowed capital (i.e. all the “investments” are considered to
be either equity or borrowings, alternatively opportunity rate on equity and interest rate on borrowings taken as
equal: 10% p.a. nominal rate in this case, or i = 10% p.a.)
67
S H F BP6 2006
Month (of development period)

Item Total per item
1 2 3 4 5 6
Land 100 000 100 000
60% of fees 60 000 60 000
40% of fees 40 000 10 000 10 000 10 000 10 000
Finance cost 10 000 10 000
Marketing cost 20 000 5 000 5 000 5 000 5 000
Construction cost 750 000 120 000 180 000 230 000 220 000
TOTALS PV) 980 000 110 000 60 000 135 000 195 000 245 000 235 000
n (months) 6 5 4 3 2 1
Future Value (FV) 1 003 689 115 616 62 542 139 557 199 916 249 100 236 958
At i=10% p.a.
Present Value (PV) (980 000) (110 000) (60 000) (135 000) (195 000) (245 000) (235 000)
Cost of capital (FV-PV) 23 689 5 616 2 542 4 557 4 916 4 100 1 958
(Total of months 1-5)
The total estimated cost of capital during the 6-month development period (2 months’ planning, 4 months’
construction) is R 23 689.00.
The short method of estimating interim cost of capital

If expenditure were spread evenly across the contract period, 50% of expenditure would have been incurred
when 50% of time had elapsed, meaning that on average only 50% (0.5) of the contract value is subject to interest
charges for the full 4 months; alternatively the full amount is only subject to interest for 50% of the time. This is
referred to as the “cash-flow factor”, the “S-curve factor” or the “spread” factor, which in this case is 0.5. This is
another way of saying that either the Present Value (PV) of the whole contract sum, or the interest rate (i) must
be multiplied by a factor of 0.5 (it doesn’t matter which one is adjusted).
As seen in the cash-flow table above (and in Annexure B), expenditure curves on construction contracts
usually show that more money is spent during the second half of the contract period (because of slow starts,
site establishment, high volume/low value work in the early stages, etc.) The effect of this is that less than 50%
(usually around 40%) of the contract value is subject to interest accumulation for half the time. In the example
above, 40% of construction contract value (R 120 000 + R 180 000 = R 300 000 out of R 750 000) is spent when
50% of the contract time (2 out of 4 months) has elapsed. The cash-flow factor is therefore 0.4. (We would not,
of course, have done the cash-flow for this particular project, but we would know the expenditure pattern from
analysis of previous projects, and from experience).
Using this factor of 0.4 for our example, the estimated cost of capital during construction would be as below.
We would still have to do separate calculations for lone-standing major expenditures such as land cost, fees
payable at tender stage and so on. For practical purposes, the balance of fees and other small expenditures
can be lumped together with construction cost and adjusted by the cash-flow or spread factor of 0.4:
PV of all spread costs (months 3, 4, 5 and 6):

40% of fees: R 40 000
Construction: R 750 000
Marketing: R 20 000
TOTAL R 790 000 x 0.4 = R 316 000
FV (i = 10%p.a.; n = 4m): R 326 666
The cost of capital = FV-PV = R 326 666 – R 316 000 = R 10 666

Add (calculated as per long method):
Cost of capital month 1: R 5 616
Cost of capital month 2: R 2 542
TOTAL COST OF CAPITAL R 18 824
This is less than the amount calculated via the long method (which is more accurate).
68
ANNEXURE C
Estimating project time frames for use in financial viability
studies
Key agreements that need to be put in place
A useful framework for guiding the drawing up of a critical path programme is to identify and arrange in critical
sequence all the key administrative approvals and project governing agreements needed, as these usually
take up the most time. The technical work taking place in between approvals and go-aheads is not normally
the problem. Some of these agreements and approvals are shown in the table below more or less in critical
sequence (you can think of more that apply to your specific case):
Agreement/ approval Parties Depends on: Is a predecessor to:

• Land availability • SHI/council • Council resolution • Transfer of property to SHI
agreement (LAA) or or • Subsidy agreement
or • Accepted offer to purchase • Bulk services availability agreement
• SHI/seller
• Deed of sale • Loan agreements
• Bulk services availability • SHI/council • Alignment with council IDP and budget cycles • Proceeding with development planning
agreement and/or and township establishment
• Municipal Infrastructure Grant allocations
• Proclaimed township and • SHI/council • Approval of application within technical • Permission to develop
open deeds register departments • Connecting to bulk services
• Advertisement • Selling units on instalment sale or
• Overcoming public objections direct sale
• Engineering services agreement with council • Funding agreements
• Lodging guarantees for service installations
• Approved general plan by surveyor general
• Rates clearance certificates
• Approved business plan • SHI • Market surveys • Funding applications
• Feasibility studies
• Subsidy agreement • SHI/province • LAA or proof of ownership of property (title • Top-up loan applications
deed) • Building contract
• PM/PA contract • SHI/PM and/or PA • Selection and funding for appointment Optional
• Professional services • SHI or professional • Selection and funding for appointment • Design, documentation, tenders,
contracts service providers contract admin
• Approval of designs and • SHI or professional • Compliance with brief • Detail design development and
feasibility studies by team technical documentation
management and board
Municipal plan approvals:
• Site development plan • Council committee • Fitting in with development framework and • Proceeding with building plans for
approved • Building control town planning scheme submission
• Building plans approved office • Compliance with National Building Regulations • Construction start
and town planning scheme • Loan disbursements
• Loan agreements • SHI/NHFC • Approved business plan • Appointing contractor and going
and/or • Due diligence on SHI ahead with construction
• SHI/bank(s) • Approval by lender credit committee • Initiating marketing
• Acceptance of term sheet by SHI board and
management
• Inter agreement between NHFC/bank where
applicable
• Building contract • SHI/main contractor • LAA or land ownership secured • Construction start and completion
• Town planning and municipal approvals in place
• Funding in place
• Due tender process followed
69
S H F BP6 2006
Some of the questions the programmer now needs to ask him/herself are:
• What work needs to be done by the technical project team before an application for approval can be made, or
a key agreement drafted, and how long will it take, including the research or information gathering stage? (e.g.
How long for management to prepare a proposal to council requesting a land availability agreement?)
• At what level are internal approvals required, and how long will it take? (e.g. The proposal for LAA must first
get board approval for the selection of land as well as proposed terms – how long to convene board, must
it first go through technical/legal/finance sub-committees, and allow for come-back and re-submission?)
• How long does the external approval process take? (e.g. The request for land will first have to be investigated
and agreed to by various technical departments within the council. Is the land available, is it developable
in terms of geotech, availability of services, etc. – then it must be submitted to council for a resolution in
principle, then given to legal for drafting of the actual agreement, and finally accepted by both parties, and
then the board’s and the town manager and/or mayor’s signature/s must be obtained).
Next, the programmer needs to decide in consultation with the board, the PM and key stakeholders on a high-,
medium- or low-risk approach to how long administrative processes should take, and the degree of overlapping
that is prudent.
Programming techniques/tools
Programming tools vary from simple charts where activities are listed in sequence from top to bottom along
the vertical axis, and the time an activity takes and where it belongs in the sequence are depicted graphically
by lines or bars on the horizontal axis time-scale (bar chart or Gannt chart), to complex computerised network
techniques.
Programming requires a good understanding of the development process, and how changes in the duration
and/or sequence of activities in the process impact on each other and affect the completion date.
The pre-tender project planning time-line

At the time the first cost estimates are done, much work still has to be done before the actual construction work
starts. All or most of the following processes and activities may still need to take place:
• Acquire and secure the land (option periods, offer to purchase or land availability agreement, registration
of transfer in deeds office) – anything from 2-6 months (during this time preliminary designs and feasibility
studies can be done).
• If required, township establishment or rezoning, or other formal town planning/legal procedure, including
an Environmental Impact Assessment (EIA) to clear obstacles to development – anything from a minimum
of 6 months for rezoning (more realistically 8-9 months), to 9-24 months for township establishment.
• If the above is not required (as the land is already zoned for the intended purpose), then proceed to the
next step, namely –
• Architect prepares site development plan, followed by other drawings for municipal submission (2-4
months).
• Await municipal approval and permission to build, which can take anything from 2-4 months (during this
time the professional team could proceed with preparation of technical and tender documentation, and call
for tenders so that municipal approval and the go-ahead to the contractor more or less coincide).
70
A typical time-line for pre-construction project planning where the land is

already proclaimed and correctly zoned, and requires no further formal
town planning procedures:
Activity Time in months
1 (to 3?) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Define project
Identify land
Acquire land
Market surveys
Feasibility
Documentation
Plan approval
Tenders
A typical time-line for pre-construction project planning where the land is

already proclaimed, but requires rezoning:
Activity Time in months
1(to 3?) 2 3 4 5 6 7 8 9-16 17 18 19 20 21 22
Define project
Identify land
Acquire land
Rezone land
Market surveys
Feasibility
Documentation
Plan approval
Tenders
The above are indications only. Real times will be affected by the degree to which the SHI is willing to take the
risks involved in overlapping some activities, the availability of money to fund land acquisition, rezoning costs,
professional fees for documentation, etc., and administrative delays in getting land availability agreements set
up, etc.
Realistically, the shortest time between project initiation and getting a builder on site is probably 12-16 months
for straightforward cases, and 20-24 months where complications such as rezoning are involved. These periods
will vary considerably according to individual circumstances and the degree of overlapping the SHI is willing
to risk (for instance initiating land acquisition before preliminary studies are complete, proceeding with town
planning procedures on risk before the property is transferred, preparing full tender documentation before plans
are approved, etc.)
Township establishment could take slightly longer than rezoning in simple cases (where a single piece of land
is owned by council), or could add anything from 12 to 24 months to the normal process in cases where, for
instance, a new estate has to be planned on previously unproclaimed land. This is because new land-use layouts
will have to be prepared and submitted to various government departments for input.
71
S H F BP6 2006
The critical element method for estimating construction periods

The most accurate way of estimating the construction period is to measure rough quantities of the critical
elements (bulk earthworks, basements, concrete and steel structures, etc.) and then draw up a bar chart or
critical path programme by calculating the duration of each critical activity according to its quantity and typical
production rates.
This would be far too time-consuming at the time of estimating, and a quicker method is required at this stage.
A simplified version of the critical element method is therefore probably the most appropriate estimating tool. It
is based on the observation that the concrete frame in the case of multi-storey buildings, and the walls, slabs
and roofs in the case of walk-ups are usually the main critical elements. The method is to first estimate the time
needed for the structure, and then to add time for start-up and finishing off.
Further reading
See “Guidelines - Construction Management Good Practice” and www.shf.org.za
72
Ground floor, Milner Place
32 Princess of Wales Terrace
Parktown, Johannesburg
Postnet Suite 240

Private Bag X30500
Houghton, 2041
Tel. (011) 274-6200

Fax. (011) 642-2808
www.shf.org.za

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Income capitalisation method of determining financial viability 51

Undertaking and preparing financial viability studies is a specialised activity that

These guidelines could be used to get a better understanding of what a financial

n Note: These guidelines and examples are specifically for “investment”

iIntroduction to feasibility studies

What is a feasibility study?

Viable means able to exist, or capable of developing and surviving without

What is measured and against which

Non-financial objectives can be of a socio-economic and/or a political nature, such

Parts of an overall feasibility study

Social Housing Institutions normally commission a specialist research company or

WARNING: Socio-economic surveys are sometimes nothing more than

Project feasibility and institutional sustainability

This guide focuses on project feasibility. Other guides and manuals

Refer to worked example of a typical financial viability study for a

Steps in carrying out a financial viability study

5. Do the calculations (estimated costs, income, returns and cash-flows).

6. Do a risk analysis. This is where the effect of possible changes in main

cCompiling various parts of the

Cover page with project details

Executive summary page of critical results

Statement of the investor’s financial objectives

Estimated total project cost

In ordinary commercial and social housing developments, the main components

Approximate range: % of total project cost

Commercial Social housing

Private commercial developments are normally funded through a combination of:

Case 2 – returns based on balance project cost after deduction of subsidies:

Case 3 – returns based on balance project cost after deduction of subsidies

Cost of surveys and studies

Environmental Impact Assessments (EIAs):

Archaeological investigations/Heritage conservation reports

Existing buildings on certain sites might be protected by heritage conservation

Purchase price/market value

Transfer cost/Value Added Tax (VAT)

Legal costs related to Land Availability Agreement

Town planning and related costs

The following main costs must be allowed for:

Some or all of the following, as may be required (check beforehand):

Land servicing costs

Where land is rezoned, sub-divided or consolidated, there may be some costs

Where township establishment is required, there are substantial construction

Interim rates and taxes

NB: Remember that the value of property increases after township

Escalated construction costs – top structures and site

Estimating the cost of demolitions

Estimating the cost of alterations

A few points to remember:

Estimating the cost of external works and services

Instead, contingencies should be divided into two distinct categories of uncertainty

2. “Building contract contingencies” – to allow for real unforeseen expenditures.

Cost escalations – why estimate of current construction cost only is

Note: Worked examples of how to estimate both pre-tender and post-contract

The time factor

Estimating project time frames

A time-frame or programme is required to perform the project management function,

Professional fees and disbursements

In modern office and shopping complex projects, with sophisticated electrical

In labour-intensive community-based building or civil engineering projects where

The professionals usually employed on social housing projects include:

The conventional method is to appoint one of the members of the professional