Development Appraisal & Valuation Part 1

Developers of any size are faced with numerous challenges during the development cycle. These include preparing feasibility studies, tracking costs whilst maintaining a budget, as well as staying on top of ongoing projects and additionally searching for new sites and opportunities. A development valuation or appraisal may be required for a number of reasons; sale or acquisition, options review as part of an asset management strategy, planning viability and for securing debt finance or private equity.

This short article, split into three parts, will outline the valuation approach for a mid-sized residential development scheme on a greenfield or brownfield site, where all the existing structures are to be removed.

There are a variety of methods used in the valuation of development land. I will discuss one of the most common methods, the residual method. In essence, the schemes completed value (gross development value) is assessed and all costs associated with the development (build), site purchase and developers profits are deducted, sounds simple enough… However, development valuations can be extremely complex and require a high level of expertise to asses not only the end value of the development but the entire project cost, including; internal and external structural build cost, demolition & services. Then you have professional and statutory fees to consider; architects and consultants fees, mayoral and local CIL charges, s106 payments, the list goes on.

Development appraisals & valuations involve gathering a range of diverse information involving the costs and values of a development project. There are several steps to follow in order to appraise accurately. 1, To assess the schemes completed value. 2, To assess the costs to develop the site. 3, To assess the costs to purchase the site. 4, To determine how long the process will take. 5, Account for the effect of time by calculating interest charged. This information is gathered from many sources within the property and construction sectors. The information in then incorporated into a framework to enable the valuer to determine the profit or loss the scheme will make and calculate the residual land value.

The level of detail and information required for a valuation is determined firstly by the client’s requirements but also by the stage at which the valuation is being prepared. Early stage viability assessments will require less information than post acquisition, pre-planning valuations.

Depending on the stage of valuation, a site visit may or may not be required. For early stage, initial viability, the valuer is most likely able to complete a desktop valuation to determine if the development could be a profitable opportunity. For later stage or detailed valuations, a site visit is obviously required to determine some important factors; extent of existing structures, developable areas, potential contamination, flood risk, topography, access and party wall issues.

Part two, coming soon, will look at assessing development potential.