Sensitivity Analysis

Sensitivity Analysis is the means by which best and worst case scenarios can be summarised as an addendum to the main appraisal and cashflow reports. In the main appraisal report you may be using a rent of, say, £20 per square foot. Even though you consider this to be the most likely figure, in reality the actual figure may be anywhere between £18psf and £22psf. Rather than having to print out separate appraisals for each of these scenarios; Sensitivity Analysis allows you to summarise this type of information more easily.

You access the Sensitivity facility from the Data List by clicking the ‘Sensitivity’ button. This will remove most of the command buttons from the Data List and display only those relevant to the Sensitivity facility.

The best way to see how the Sensitivity Analysis function works is by means of a example. Here we will change a single rental value. If you are not using a rent in your project then use a single Direct Sales figure or Building Cost. The example that follows assumes that rent is used.

First, if the ‘Clear’ button is active (i.e. not dimmed out) then click it. This will disable both the ‘Clear’ and ‘Find’ buttons. These are used for multiple line sensitivity calculations (explained later in this section) and are not required at this stage.

Highlight the rental value. As Prodev can perform a sensitivity on any item in the Data List, it is essential you tell it in this way which item you wish use in the calculation.

Click the ‘Calculate’ button and the chosen rent along with its current value will display at the top of the Data List. At the bottom you will be prompted to enter a variance as an amount. The variance is the amount by which you wish to change the base value. In our example we have a base rent of £20 per square foot and if you were to apply a variance of £0.25p then Prodev will both increase and decrease the base value in ‘jumps’ of 25p.

The simple sensitivity report contains 15 lines (7 up and 7 down plus the base value) so by applying a variance of 0.25 to the base value of £20 Prodev will produce a report showing rentals ranging from £18.25 to £21.75 (using gaps of £0.25p).

Enter your variance (0.25 in the above example) then press the Enter key, Prodev will calculate and display the sensitivity report showing the worst and best case scenario along with the revenue, cost and profit statistics. This report can be printed at this stage if required (see the section ‘Viewing, Printing and Exporting Reports’).

Note that if the variance you enter causes one of the line inputs to be negative, then Prodev will tell you so and not proceed with the calculation. In the above example this would happen for instance if you applied a £5 variance to the £20 per square foot base figure meaning that some of your entries would end up being negatives.

As you can see from the previous example, Prodev will, by default, take the base value and apply the variance in both a positive and negative direction meaning that the base value will appear in the middle of the report (£20 in the previous example).

In certain cases this may not be desirable if for instance you take the view that rentals will go up and not down. In this situation you need to set the £20 base value as the minimum figure in the report so the variance would apply upwards only.

To do this, use the ‘+’ key symbol in place of the Enter key when applying the variance. Therefore after clicking the ‘Calculate’ button and typing in the variance (in this case .25), do not press Enter, instead press the ‘+’ key (on most keyboards this can be found at the far right hand end on the number pad). The use of the ‘–‘ key works in reverse (i.e. reduces rather than increases values).

This is similar to the ‘Select’ facility within the Residual function in that it allows you to group together a number of items within a single report and is useful for multiple rents and/or building costs. The sensitivity report we have seen in the previous examples are set out vertically (Y-Axis) rather than horizontally (X-Axis). The use of the X-Axis is dealt with later so for the time being we need only consider the Y-Axis.

Note: By default Prodev will calculate a sensitivity for the highlighted item unless you have used the ‘Y/X’ buttons to group items together. As a visual aid see if the ‘Clear’ and ‘Find’ buttons are inactive. If so, nothing has been selected in the Data List. These buttons only become active when Y/X axis items have been selected.

Suppose you have two rental values that you wish to alter. To do this highlight each rental value and click the ‘Y’ button in each case. You will notice that the letter ‘Y’ will appear in the left margin of the Data List next to each item you have selected.

Click the ‘Calculate’ button and note that the sensitivity subject (displayed at the top of the Data List) will list those items that you have chosen.

You will probably now be asked for a Percentage variance rather than an Amount variance. This is because the values for the items used are different; in other words you have chosen two rents, one at £20 per sq foot, the other at £27 per sq foot.

In these cases applying an overall change of, say, £1 is not relevant because the items will not be changed in the same ratio. Instead Prodev will ask for a Percentage variance to apply in each case in order to preserve the pro-rata relationship. Enter the desired variance (5% in the example below) and press the Enter key. Prodev will both calculate and display the resultant report. Note that where a Percentage variance applies, this will show in the left hand column along with a schedule at the bottom of the report setting out the items that have been used.

The ‘+’ and ‘–‘ keys can be used in place of the Enter key to adjust values upward only or downward only as previously described.

As already explained, Prodev will alter your sensitivity report by a percentage or an amount depending upon whether single or multiple items have been selected on the Y-Axis. Changing by an amount is more convenient and clearer so Prodev will always try to use this if possible.

If multiple selected items (e.g. a range of rents) are used and they belong to the same category and are the same value, then Prodev will detect that it is relevant to change these by an amount and will do so if possible. Where this is not possible Prodev will revert to using a percentage variance.

This allows you to build in a second dimension into the report so you can combine two analyses within one report. In most cases this is used to show rents and yields together.

To incorporate another axis, first select one or more items (e.g. Rent) to go on the Y-Axis as previously described then use the ‘X’ button to select items (e.g. Yields) to display on the (horizontal) X-Axis.

When you click the ‘Calculate’ button, Prodev will prompt you for 2 sets of variances, one for the Y-Axis then one for the X-Axis and will calculate then display the sensitivity report.

The rules for amount or percentage variance are the same as if using the Y-Axis on its own and the ‘+’ and ‘–‘ keys can be used in place of the Enter key to adjust values upward only or downward only as previously described.

Note that the X-Axis cannot be used on its own, it can only be used in conjunction with the Y-Axis. For single dimension sensitivity reports use the Y-Axis only.

The reports produced using the Sensitivity Analysis facility have so far shown the effect upon profit when values are changed. Prodev can additionally use the sensitivity report layout to show the effect upon residual values when item(s) are changed and a single profit target is specified. This is typically used to show variations in Site Value.

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 Sensitivity 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.

The method is basically the same as previously described except you highlight the value you wish to residualise and use the ‘Residual’ button in place of the ‘Calculate’ button as described in the following example to obtain a table of residual Site Values:

•	Select your Y-Axis (and X-Axis if used) as previously described (if you only wish to change one item then select it as a single Y-Axis item).

•	Place the cursor on the item you wish to residualise (in this case Site Value). Do NOT select it as a Y/X Axis item as this is the result you wish to obtain rather than it being an input into the calculation. Merely place the cursor on it.

•

Click the ‘Residual’ button (not the ‘Calculate’ button) and you can enter your Y (and X) items as previously described. The rules for amount or percentage variance are the same as if using the Y-Axis on its own and the ‘+’ and ‘–’ keys can also be used in place of the Enter key to adjust values upward only or downward only as previously described.

•	Once the Y (and X) items have been entered the item selected for residual calculation will appear at the top of the display and you will be prompted for a profit target. Type this in then press the Enter key.

Prodev will then calculate and display a sensitivity analysis report showing (in this case) Site Values along with the profit target you have entered. If the profit target cannot be attained for the more pessimistic assumptions it will use an input value of zero and show the profit achieved at that level.

You can choose any single item as the target for a residual table of this type. If you are dealing with negative land values you would probably be using a Project Income item (as an amount - not annual income) in place of the Site Value. Obviously you cannot use an item already selected as a Y (or X) axis item as this would cause a conflict. Prodev will inform you if this happens and prevent you from proceeding with the calculation.

Carries out a residual based sensitivity calculation on the selected item(s) using the highlighted item as the value to target.

Selects multiple items for use within the sensitivity 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 ‘y’ or ‘x’ keys on the keyboard.

If items are selected then click this button to find each Y/X item in turn. This button is only active (i.e. not dimmed out) when items have already been selected. Note: By default Prodev will calculate a sensitivity for the highlighted item unless you have used the ‘Y/X’ buttons to group items together. As a visual aid, see if the ‘Clear’ and ‘Find’ buttons are inactive. If so, nothing has been selected in the Data List. These buttons only become active when Y/X axis items have been selected.

Whilst you can use the ‘Y/X’ buttons to deselect individual items, the ‘Clear’ button will deselect all items in the Data List at once. This button is only active (i.e. not dimmed out) when items have already been selected. Note: By default Prodev will calculate a sensitivity for the highlighted item unless you have used the ‘Y/X’ buttons to group items together. As a visual aid see if the ‘Clear’ and ‘Find’ buttons are inactive. If so, nothing has been selected in the Data List. These buttons only become active when Y/X axis items have been selected.