Residual Analysis allows you to establish values for one or more items in the Data List so that a specified profit level is achieved. It can target values for virtually any cost or sale item in the Data List but is most commonly used to calculate Site Value.
Generally when using the Data List you enter values and observe the effect this has on profit and the profit statistic (normally Profit on Cost). Residual Analysis is this process in reverse in that you specify the desired profit level and Prodev will calculate the value(s) needed to achieve this target.
Selecting the Profit-Type
The default target profit statistic used in Prodev is Profit on Cost. This can be changed using the Profit-Type menu on the Data List and if not correct must be set prior to accessing the Residual function. The alternatives available are Evaluate to Profit on Cost, Evaluate to Profit on Sale and Evaluate to IRR. You will notice that the selected Profit-Type is shown shaded in the Data List profit box.
Whilst Site Value is the most common target for residual values, calculations can be applied to most items in the Data List or a combination of items. For example you can target values for single or multiple building costs, rents, yields, unit sizes and so forth. You cannot residualise timescales as these are dictated by the cashflow and have to be represented as an absolute number of months.
Calculating a Residual Site Value
The easiest way of understanding how the Residual facility works is to target the most commonly used subject used in such calculations: the Site Value.
Typically you will have already entered information for all other cost and sale headings along with timescales. For Site Value you will either have left it blank (i.e. zero) or entered an estimated value.
You access the Residual facility from the Data List by clicking the ‘Residual’ button. This will remove most of the command buttons from the bottom of the Data List and display only those relevant to Residual calculation.
If the ‘Clear’ button is active (i.e. not dimmed out) then click it, this will disable both the ‘Clear’ and ‘Find’ buttons. These buttons are used for multiple line residual calculations (explained later in this section) and are not required at this stage.
Highlight the Site Value entry. This makes the Site Value the subject of the residual calculation. Note: It is important that you do this to indicate that you wish to perform the calculation on the Site Value rather than anything else in the Data List.
Look at the Profit Box and make a note of the current profit statistic. If you require a Profit on Cost of 20% and the statistic is already at this level then no calculation is required. Generally the displayed profit statistic will be different which is the reason why you are carrying out this calculation. If the current Site Value is zero the profit level will (hopefully) be higher than the one required.
Click the ‘Calculate’ button, the item (Site Value in this case) will display at the top of the Data List and below, you will be prompted to type in the desired profit statistic. Do this then press the Enter key (in other words to enter a 20% target type ‘20’ then press Enter).
Prodev will calculate and display the target figure for Site Value in the Data List and the desired profit statistic will appear in the Profit Box.
If Prodev cannot calculate the Residual Value it will tell you so and reinstate the previous value. This can happen if the scheme makes a considerable loss, so much so that a Site Value of zero still does not measure up to the desired profit. It can also happen if the chosen profit statistic is IRR which is a far more volatile figure and therefore more difficult to calculate in certain circumstances.
Dealing with Negative Land Values
If you need to show a negative Site Value then this can be achieved by using the Project Income items. Set the Site Value to zero then use a Project Income line (as an amount - not annual income), calling it something meaningful (e.g. Site Shortfall) and set a timescale for it. If you residualise this value it will work out what cash injection is needed to make the scheme viable at the set profit target rate.
Calculating Residual Values for other items
In the residual site analysis example described above you will recall that Site Value was chosen as the residual subject simply by highlighting it in the Data List.
This method is the same for other items. If you wish to residualise a building cost or a rental value then you highlight the item in question, then, as before, you click the ‘Calculate’ button and enter your desired profit.
You may have a project where the Site Value is fixed because you know the vendor will only accept a certain price or you are aware that someone else has already bid that figure. However, after entering the known Site Value, your profit may well fall short of the target that you expect. In this case you could use the residual facility to target other values, for instance:
| • | You can highlight a rental value and residualise it to establish what extra rental level is needed to satisfy the profit requirement. |
| • | You can residualise the building cost to establish the appropriate building price needed to achieve the profit level. |
These are only two examples of how you can use the residual facility on different lines in the Data List in order to establish target values.
Multiple Line Residualing
So far we have established how you can select any line in the Data List (Site Value mainly) and use it in a residual calculation. However, sometimes the category that you wish to target exists on more than one line. For example, with building costs, there may be several individual costs (Unit Build costs and/or Fixed Build costs) that form part of the subject you wish to target. Other examples are groups of rental values or sales proceeds. These are situations where several lines within the Data List may constitute one single subject that you wish to residualise. In order to carry out these calculations you need to group these items together. This is done using the ‘Select’ button.
For example, suppose you have three building costs that you wish to residualise together. To do this highlight each building cost rate and click the ‘Select’ button in each case. You will notice that the letter ‘R’ will appear in the left margin of the Data List next to each item you have selected.
Click the ‘Calculate’ button, notice that the residual subject (displayed at the top of the Data List) will itemise those items that you have selected. Enter your target profit rate as described previously and Prodev will residualise all the items that you have chosen.
Where items are selected and calculated together in this way, Prodev will calculate the residual on a pro-rata basis, in other words it will apply the same proportionate change to each chosen item. For example if you have selected two rents, one at £40 per sq ft and the other at £20 per sq ft it is apparent that the first figure is twice the value of the second. During calculation Prodev will preserve this relationship so that the resultant values will remain in the same ratio to one another (e.g. if the first rent is reduced to £16 per sq ft the second rent will accordingly be reduced to £8 per sq ft). It is important to bear this in mind when grouping together items for residual calculation: they must have this pro-rata relationship with one another. When dealing with rental values bear in mind that different uses (e.g. shops and offices) may not be thus related. Prodev makes no judgement as to whether the items you have selected are logically related and it is up to you to check that this is the case.
Note: By default Prodev will calculate the residual value for the highlighted item unless you have used the ‘Select’ button to group items together. When items are selected, the position of the cursor (highlighted item) is no longer relevant. If you are trying to highlight say the Site Value for residual calculation and when you click the ‘Calculate’ button other items appear as the residual subject, this is because they are selected and therefore overriding your choice. In this case, simply click the ‘Clear’ button which will remove any selections and revert back to using the highlighted item as the residual subject. As a visual aid, see if the ‘Clear’ and ‘Find’ buttons are inactive (i.e. dimmed out). If so, nothing has been selected in the Data List. These buttons are only active if multiple items have been selected.
Residual commands
Calculate button
Carries out a residual calculation on the highlighted or selected item(s).
Select button
Selects multiple items for use within the residual calculation. Click this button to select an item, if an item is already selected then click this button to deselect it. You can also select and deselect items by double-clicking the mouse or pressing the spacebar on the keyboard.
Find button
If items are selected then click this button to highlight each selected item in turn. This button is only active (i.e. not dimmed out) when multiple items have already been selected.
Clear button
Whilst you can use the ‘Select’ button to deselect individual items, the ‘Clear’ button will deselect all items in the Data List. This button is only active (i.e. not dimmed out) when items have already been selected.
Reset button
The Residual calculation facility will change individual items or groups of items according to the profit targets you have set. This button reinstates the original values that were in place before you invoked the residual command and is useful for re-setting the values if you do not consider them to be relevant. Please note that this is only operational during each individual residual session. When you click Close to return to the Data List then any changed values will be implemented unless reset beforehand.
Close button
Exits the Residual Analysis section. Any new values established as a result of the Residual calculation will be retained unless reset beforehand.