With property prices at an at an all-time high in some locations, it’s understandable that one might assume that land value is increasing in line with the value of housing, however this is not always the case. In this blog we take a look at the method for valuing land to help you understand the reality of what to expect from your land valuation.
When landowners approach us, there can often be an unrealistic expectation relating to the perceived value of their land. The recurring misconception is that the land is worth is in direct correlation with the current property market but the reality is more complex. The process of land valuations does not simply consider the ultimate potential of the site but factors in all costs and issues associated with the potential development.
Although there are a number of different ways to calculate land values, typically it is determined using a residual approach. The residual valuation method can be simplified to a basic equation:
GDV – Developers establish the gross development value (GDV) based on the total resale value of new properties on that location once the build has been completed and sold. Within the residual equation GDV is based on current values not projected values. From this estimated final capital land value developers will subtract associated costs and margin to determine a realistic value for the land or property purchase.
Construction Costs – This takes into account all costs involved with the construction of the property or development. It is this area which is currently having a large impact on land becoming less valuable as the cost of labour and materials increase.
Fees – With any development there will be planning and legal fees involved. These may include surveys needed to obtain planning permission such as Ecology and Transport reports and fees charged by professionals who are involved in the process eg. solicitors, planning consultants, architects, engineers, property agents.
Profit – It is vital that the developer’s profit (normally 25%) is considered at this early stage as a lot depends on this figure. The developer will have their required return on their investment in mind when finalising how much to spend on a site for development.
Approaching land valuation with the residual method is an important part of a developers strategy and is a sound way of taking all factors into consideration at the start of embarking on a new development project.
Unfortunately there are still quite a few areas of the country where developing homes on land is not economic due to the price of homes for sale and the costs of building new homes.
If you have land to sell or are a developer looking for a new opportunity get in touch with us to discuss how Land Market can be of service.
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