How do you value land?
An art or a science? How land is valued and what it actually sells for is not a straightforward process. What is important to realise is that no two sites are exactly the same and equally each developer will look at it in different ways therefore assuming different inputs in their valuation. For instance a care home developer will value a site with different inputs than a residential developer would hence they may get to a different land value.
To value land a Residual valuation is undertaken.
Put simply the sum of money available for the acquisition of land can be calculated by assuming a Gross Development Value (what the newly built scheme that a developer believes they can re-develop on the subject land, for instance the sales receipt for all the flats in a new build block of flats, will sell for) minus the total costs required to undertake the development (including a developers required profit). So the residue, i.e what is left after the development costs have been deducted from the Gross Development Value, is the land value and hence why it is called a residual valuation. If development costs are higher than the Gross Development Value then there is no perceived land value.
The complexity and some may say the art lies in the estimation of the Gross Development Value alongside the scale of development that a developer will speculate can gain successful planning permission on site. For instance if one developer assumes he will obtain planning consent for a six storey building on a site and every other developer assumes only a five storey building then he will be able to pay more for the land. However if the local planning don’t agree with the more bullish developer it is an expensive mistake to have been made!
Development is not a cheap game.
The following costs have to be deducted from the Gross Development Value before a residual land price can be reached:
- Build costs to deliver the proposed building (materials, labour, demolition etc)
- Professional fees (architects, quantity surveyors etc).
- Marketing and sales costs.
- Financing of the project over an assumed timetable for the project (Interest and fees).
- Other ancillary costs (remediation, surveys, void costs etc)
- An acceptable profit margin for the developer.
- Planning and CIL contributions
At Optimal land we have decades worth of experience of valuing land so please get in touch if you would like to discuss the value of your site and exactly how the site was valued in more detail.