How Much is My Land Worth?
If you have a plot of land that you think might be suitable for development (if you are unsure click on the link of our blog what makes a plot of land suitable for development).
The next question you undoubtedly are going to want to know is, how much is my land worth?
Well obviously, the answer is that depends!
The value of land can vary depending on:
planning status
abnormal costs
market conditions
terms of the sale etc
This means each site is going to be valued very differently and why land cant just be valued based on the price of another piece of land in the area which is a similar size/number of units as there could be a number of different factors affecting the site value.
The only way to properly understand the true value of a piece of land or development site is using a site-specific valuation method called a residual appraisal. This method of working out a land value works backways to end up with a ‘residual land value’ i.e. what is left over is what the land is worth after considering all of the key costs of delivering that development and making a sustainable profit to the developer for undertaking the project which reflects the risk in doing so.
The Residual Method
There are some key elements to working out the residual value of a piece of land which we have set out below:
1. What will all the completed units sell for?
For example, if you sell ten houses and each house is worth £250,000 each, then the value of the development is £2.5m. This is the total income the developer receives for selling the units. These proposed values are best worked out from similar size, type, and spec of properties in the area that have sold withing the last 6-12 months. This combined figure is known as the ‘Gross Development Value’. This will also vary depending on the number of units on the development and if there is affordable housing required then there will be discounted units which will bring the GDV down.
2. What will it cost to deliver the development?
The cost of delivering the development is made up of many factors which will vary depending on the specific site. The key areas are:
Pre-Construction Costs
These will vary depending if the site has planning permission or not but typically these costs would include Stamp Duty Land Tax (SDLT), Insurance, purchase legal fees for acquiring the land, as well as any surveys and consultant reports required such as Topographical, Flood, Noise etc as well as local authority fees if the site requires planning.
Professional fees will also be required to help deliver the development such as architects, planning consultants, surveyors, engineers etc which all need to be considered.
Construction Costs
How much the actual units will cost to build? This will vary from site to site depending on the complexity as well as other factors such as site preparation / demolition costs, utility connections, road and highway construction, green space etc.
Any abnormal costs also need to be considered such as the cost of cleaning up a site with contamination or complex build costs due to the ground relief.
A big cost here that is often left out is a contingency for things going wrong which inevitably will be required at some point throughout the development.
Most local authorities will require Community Infrastructure levy (CIL) to be paid as part of building new houses or flats and might also require developer contributions such a payment towards a new school etc.
Post Construction Costs
There are several costs after the unit have been built which are rarely taken into account such as new build warranties, sales legal costs, sales agent costs, marketing costs, interior design costs, EPCs, airtightness tests etc.
There is also a cost to borrowing the money from the bank to deliver the development (known as senior debt) which needs to be accounted for. This will vary on how long the units take to build i.e the construction period and then how long to sell and complete on the units known as the sales period. Combined they make up the total project finance cost.
3. How much profit does the developer need to make?
You then need to work out how much profit needs to be made to make the risk/reward worth it to the developer. Typically, this is 20% on the Gross Development Value and will reflect the risk of undertaking the development and the selling units.
4. Work out what’s left over?
The value of the land is simply worth the Gross Development Value minus the total costs of delivering the development, less the profit to the developer for taking it on. This is what the developer can afford to pay for the site and known as the residual value for the land.
These costs naturally can be very subjective and different people will value the same piece of land very different however hopefully this will give a good understanding on how to work out the value of a parcel of land or development site.
If you would like to know more about the costs involved or would like to chat to us about how we can help, please don’t hesitate to get in touch with our land director Miles who would be delighted to offer you a free no obligation valuation on what Marches Homes think your land might be worth.
Miles Pattison-Appleton
Land Director
miles@marchehomes.co.uk
07772814468