Landowners
Why landowners and developers value the same plot differently, and a simple residual method for working out what land is worth.
Kisiel Group
17 September 2020
Valuing a plot of land is not a precise discipline. Ask a dozen different people to value a building plot and you are likely to get twelve different answers. Why? It depends who you ask, as each person will look on the piece of land from a different perspective.
Landowners want to achieve the highest price and often have a predetermined value below which they would not sell as they believe they have an appreciating asset. Whereas property developers want to achieve the lowest price so that they can build on the land with a greater margin. Basically, neither want to be deprived of making money: the landowner does not want to feel exploited and the developer does not want to be overcharged.
Land value with planning permission will be at a higher premium if full planning has been granted. How much the land is worth will reduce on a sliding scale if the land has outline planning permission or has no planning in place.
Land is just one ingredient in the equation to calculate how much land is worth on a plot.
Traditionally, a quick valuation has been to allow a third of Gross Development Value (GDV) for the land.
However, the GDV is an assessment of the value of the properties when sold to a willing buyer which can be open to market fluctuations, and this calculation also tends to assume that the cost of construction and the profit margin remain unchanged.
This method gives a quick ballpark figure, but it means that the land value will absorb any shift in house prices. It also does not allow for the differing costs of construction and other variables within your plan compared to other schemes.
Nowadays with more refined ways of looking at costs through value engineering, risk analysis, and cost planning it is no longer a given outcome that the cost of construction stays the same.
A more precise way to calculate the value of a plot is:
Value of completed buildings minus (all) development costs minus developer’s margin = COST OF LAND
It is worth noting that the Cost of Land should include all expenses incurred with the purchase and is not just the actual price of the land paid to the landowner. So, you can determine using the above equation how much a plot of land is worth and how much a developer will pay for it.
Let’s look now at how you can review the elements of the equation (end value and development costs) to allow you to improve your margins or to increase your offer on a plot of land if you are in a competitive market with other interested buyers.
Knowledge is the key to estimating the value you could achieve on the completed buildings and unlocking the potential of a plot of land.
Deciding on the end value figure is a combination of factors and the flair is in working out what the plot of land will support and not trying to over develop it. If you have a clear concept in your mind and have built up your local knowledge, you will be able to take a realistic view of what you can achieve as end value.
Broadly how much you spend will depend on the site, design, specification, and the build. Through cost analysis and value engineering you can focus on reducing unwanted costs whilst improving on function and quality. These development cost savings will change the balance of your calculation of the value of the building land.
Here are a few things to bear in mind that can cause unexpected development costs:
Other factors that affect how much a developer will pay for land are sites of special or archaeological interest, conservation areas and legal rights of way, covenants or wayleaves, because of the likelihood of higher development costs changing the balance of the Cost of Land equation.
Don’t underestimate the difference that people can make in your cost calculations. A legacy of problems with neighbours may involve calming hostilities. Although this will not halt your development plans, it can mean the cost of additional resources to engage with them, deal with complaints and communicate collectively and individually.
Simply put this is your profit and the main reason why you are a developer.
From your land valuation, you can calculate how much land is worth per square metre. Your analysis of development costs and sales value give you a total cost per square metre so you can arrive at an expected profit per square metre. A valuable tool to compare returns across the variety of your schemes.
In essence if you can reduce the development costs and maintain your margins you give yourself flexibility on the amount available for the purchase of land.
How much land is worth and how much you should pay for a plot are vital questions. Using these techniques, you can calculate land value and understand how much a developer would pay, enabling you to make an informed offer.
Before you commit to a purchase, it is advisable to undertake a feasibility study which focuses on the profitability and provides a check that the assumptions you have made about the land value were feasible before committing to the investment.
Tell us about it. You will speak to the people who make the decisions.
