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What is a valuation?

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Hello and welcome to our simple valuation tool. I think it is important to confirm from the outset that this tool does not perform a formal valuation and the result should not be used for any formal or decision making purpose other than as a guide as to what your land could be worth following a residential planning consent.

So with that in mind please feel free to explore the tool and should you be interested in obtaining further advice in relation to obtaining a formal Royal Institute of Chartered Surveyors (RICS) Valuation, planning strategy and the time scales and probability in obtaining a planning permission then please feel free to contact us and we would be happy to have an informal conversation with you.

What is a Valuation?

The term ‘valuation’ is often used and it is worth bearing in mind the formal definition of valuation as defined by the Royal Institute of Chartered Surveyors (RICS) which is “An opinion of the value of an asset or liability on a stated basis, at a specified date. Unless limitations are agreed in the terms of engagement this will be provided after an inspection and any further investigations and enquiries that are appropriate, having regard to the nature of the asset and the purpose of the valuation.”

In the case of this tool we have not of course inspected the property nor agreed terms of engagement nor made any investigations into the impact of its value.

The understanding of ‘value’ is also important.  In simple terms the market value of a property is defined as the amount that a willing buyer and a willing seller is prepared to agree, in an arm’s length transaction where the parties are knowledgeable and act without compulsion.

The Valuation Tool

To arrive at a property value (and we are talking here about the value of development land following a planning consent) there are many complex variables that need to be considered by a valuer.  Our tool is based on what is described as the ‘residual’ method of valuation.  It is my view that the residual method of valuation is the most appropriate when trying to identify the value of development land.

In simple terms the residual valuation method makes an opinion of future value taking account the total value of properties that are sold as a result of them having been developed for sale.  This figure is known as the Gross Development Value (GDV) and can be thought of as the income that is achieved by the project.  The GDV is the predicted or actual value of properties sold on a development and this value can vary.  Matters that can influence this value is the predicted value and size of units, whether units to be sold are to be sold privately on the open market or some are required to be ‘affordable homes’ and sold to a registered social landlord.

The valuation tool uses an aggregated value of actual sold prices in the property area, the average pound per square foot (£/sqft) resale and the average optimum size of units being developed.  We then automatically apply an assumption that a percentage of these properties will be sold as affordable units.

The next step in the residual process is to discount costs from the GDV.  Examples of these costs are land costs (this is the predicted sale price of the land) building costs, professional fees any abnormal costs such as ecology, highway works, ground works that are abnormal and so on to arrive at a total project cost figure.  The profit of the project is then determined as a percentage of ‘profit on costs’ which is the figure used to establish the viability of the project.  Most commercial housebuilders will expect a return on their costs of around 20%-25%.  So, to arrive at a viable figure costs can be adjusted, primarily the land cost to allow a developer to make their expected return.  At the end of the process, the land value can be deduced. 

So in a residential development scenario the price of the land is what a party is willing to sell and buy for and a residual valuation exercise is the practice of determining that figure bases on the above described variables.

RICS always suggest that valuations are based on more than one method.  In a development valuation the comparison method is often cited as another alternative method.  However, in my experience because there are so many variables that can affect land value, even between neighbouring or nearby examples, it is a very unreliable conclusion to rely upon but can be taken into account as long as any variables or differences are accounted for.

So, in conclusion this tool is not a formal valuation tool nor should it be relied upon to make any final decisions, but it can be used as a guide.  As with any method of valuation the conclusion is only as a reliable as the information that was used along the process.  So, if you know for example that your land cannot be developed without access being achieved, via third party land then it is incorrect to not make allowances for that fact or part of it is in a flood plane or in the grounds of a listed building and so on.  The important fact to note here is that any valuer would need to complete a thorough inspection of the property and be abreast of all the facts to be able to conclude a reliable valuation figure.

We hope that you enjoy and find the tool useful and please do get in touch if you would like a no obligation but more detailed informal conversation about your land.

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