One of the most common questions that land owners raise is how much their site is likely to be worth with planning permission. Answering that question isn’t as simple as it might seem. In this post, we explain how you to go about working out a site’s value.
Two approaches to valuation
There are two main approaches to valuing development sites.
- Looking at comparable sites.
- Carrying out a site specific calculation.
Here we’ll introduce each of those approaches and point out some of the pitfalls.
If you want to learn more about them, detailed guidelines for each method are set out in the RICS’s Red Book.
The first option involves looking at other sites with planning permission nearby that have recently sold. Those sales values can then be compared with your site.
So, if a 2 acre site down the road has recently sold for £1m, your 4 acre site must be worth £2m. That’s obvious, right? Perhaps not.
There are a number of reasons why it isn’t always as simple as that:
- Land doesn’t sell that often, so there might not be any sites nearby to compare with.
- The exact terms of a sale vary from site to site, so working out exactly how much was paid can be difficult. For example, was the money paid all in one go, or phased over a number of years?
- House values can change quickly in a short distance. Sometimes living just a few hundred yards in one direction can make a house much more, or much less, expensive. Is that site just a mile away in an area with similar house prices? And if not, how has that effected the land value?
- Every site has unique characteristics which can influence the costs of development. Is the site nearby steeply sloping while yours is flat? Did that site have buildings on it but yours is a green field? Did that site need to provide a new area of open space, but yours won’t? How do those factors influence the value of a site?
While the comparable method can be useful, those variables mean it often isn’t a good guide to what a house builder will actually pay.
Site Specific Calculation
The second approach is to carry out a specific calculation of the value of your site. This is the method that the development industry almost always uses to work out a land value. The calculation works like this:
- Work out what the completed development will sell for. For example, if there are 100 houses which you think will sell for £200,000 each, then in total the development will generate £20m of income. This is known as the ‘Gross Development Value.’
- Work out how much profit the developer needs to make. Most developers will expect to make a profit equivalent to about 20% of the Gross Development Value. That’s to reflect the risk they are taking in building and selling the homes.
- Work out how much it will cost to build the development. This cost is made up of a number of different elements. There is the cost of building the houses themselves; the cost of building the new roads and sewers; the cost of preparing the site for development (like demolition). Some of those costs will be the same on all sites, but others are specific to each particular project. For example, what is the exact sewer design? How deep do the foundations need to be? Is there any contamination in the ground that needs cleaning up?
- Work out what’s left over. The amount that a developer can afford to pay for a site is simply what’s left of the total income when you deduct their profit and the construction costs. Because of that, this approach is usually called the ‘residual method’ of calculation.
You can already see how there is much more work involved in this method. That extra work makes the calculation much more accurate though – the valuation is precisely tailored to your site.
But it isn’t totally free of difficulties. Let’s look at some of the risks.
Pitfalls of the Residual Method
Despite its strengths, the residual method of calculating land value is very sensitive to the numbers you put into it.
The starting point for the calculation is how much the houses will sell for once they’re built. That is difficult to work out. If you’ve sold your own house, you’ll know that different estate agents will give you different estimates of value; they don’t always get it right.
It also depends on the sort of planning permission that you get. What if instead of getting planning consent for 100 homes, you got permission for 95? Or 105? How will that impact the value? And how will you know if a developer could have permission for more homes?
Costs are also difficult to work out. Sometimes they are based on estimates, but how accurate are those estimates? And they depend on the design too. Does the development really need foundations that deep? Or is there a cheaper solution?
These points might not seem important, but they can have a huge influence on the value of your site.
Take a look at the table below as an example. If you reduce the total income by just 5%, and increase the total build costs by just 5%, then the land value falls by 35%. That’s why there is often a wide range of values when house builders make offers for a development site.
What this means for your site
The difficulty of determining the value of a development site is one of the reasons why it pays to have expert assistance when it comes to dealing with developers.
The Strategic Land Group is a specialist land promoter. That means we work with land owners to deliver planning permission on their sites at our cost and risk – our return is a share of the site’s value once it is sold.
We benefit from maximising the value of the site. That means you can be sure we’ll be working hard to get the most valuable planning permission we can.
Once planning permission is granted, we work with you to help sell your site too. Drawing on our extensive experience in the development industry, we make sure that house builders are being realistic in their assessment of what the completed houses will sell for, and what they will cost to build. That helps to increase what a developer will pay for a site.
If you own a site where you think we might be able to help, get in touch today. We will be happy to discuss it with you.