How developers value land

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"Price is what you pay. Value is what you get."

~ Warren Buffet

As developers not blinded by the exclusive pursuit of profit, we want to make sure we can add value in non-monetary ways when you decide to sell a piece of land, whether that's in terms of how simple we make the process, how quickly we can transact, or just how we treat you as an individual and the relationship that we build together.

Putting these non-monetary benefits aside though, a primary consideration for a land owner disposing of land is of course the price that they'll be able to achieve when selling. Most developers use the same process, which is called the 'residual valuation method', meaning the basic process is the same no matter which developer you decide to deal with, though the outcome can differ due to underlying practices that contribute to this residual value method.

The first consideration to be made is whether the land is being sold with or without planning consent, with the former attracting higher prices. We purchase land without planning permission, but pay the higher 'with planning permission' price on the assumption that our team of established architects and planning consultants work to achieve the granting of permission for a scheme that is most suitable for any given project. We're able to agree this higher price at the outset through the use of a 'conditional sale' (also known as an 'option agreement' or 'subject to planning' offer). Such offers are standard industry practice, but will not always yield the same offer price.

It's not rocket science

While there may be very specific and sometimes complex considerations to be made when assessing a project, the basic components of valuation reman the same. These are:

Gross Development Value (GDV). The total price that properties are sold for once built, which entails an element of prediction. This is where developers are most exposed to risk, since there will always be uncertainty about the state in which the property market will be in when the scheme is complete. A keen eye for what the market wants and needs is of primary importance when considering GDV, since any given area will differ from the next in terms of what size and specification of property is most appropriate. In turn, this effects how in demand a project will be and therefore how quickly it will sell once built. Realising the GDV itself comes with separate, but associated costs, such as marketing, estate agents and solicitors.

Construction costs. Apart from the obvious labour and material costs, which differ depending on location and build specification, construction costs can also include demolition of any existing structures, site setup, ecological and highway works and other 'abnormal' costs such as excavation of hazardous ground or the removal of other contaminants. Developers will inevitably have to deal with unforeseen costs at some stage and will aim to build in contingencies to mitigate such effects. 

Professional fees. For a project that does not have planning permission in place, the core team of professionals in the early stages are the architects and planning consultants. 'You get what you pay for' is highly appropriate when considering these members of the team, and while some developers might be able to drive higher profit margins for themselves by using lower cost professionals, they run the risk of delivering a project that could have provided greater value if the best professionals had been involved. Other professional fees can include Quantity Surveyors, a number of different engineers, interior designers and health and safety consultants.

Funding costs. The majority of developers use bank funding and other sources of finance to help deliver a project, meaning interest and financing fees will play a role in the calculation of costs. There are a multitude of different ways that a financing package can be structured and therefore varying levels of the cost of borrowing.

A bit of algebra

Once these components have been calculated as accurately as possible, developers then essentially use a bit of simple mathematics to arrive at the land value by assuming an industry standard targeted profit margin of 20-25%.

Total revenue (GDV)

minus total costs

minus land value

= 20-25% profit on costs

The outcome of the above analysis delivers a residual value of the land. Different developers may offer different prices for your land due to the different ways in which they can control the variables discussed above. For instance one developer may wish to achieve a higher profit margin, meaning a lower price will be offered for your land, while another may have ways of controlling construction costs, lowering risk and potentially allowing a higher price to be offered for your land.

Perhaps just as important as the price offered for your land, is the feeling you get when interacting, communicating and building a relationship with the developer. This is what we refer to when talking about the 'value' of a transaction and it's where we believe just as much time and energy should be spent when land owners and developers discuss, and perhaps move forward with a transaction.