Establishing the value of a site without planning consent can be complex, especially if there is no pre-application advice or planning history. The two main approaches to valuing such sites are the comparable and residual methods of valuation. We will look at both methods and discuss the pitfalls in more detail.
This method involves analysis of sale prices of comparable land without planning that has recently sold in the area. Unfortunately, in most cases, up-to-date and relevant comparable data may not be available. Another point to consider is that each site is unique and, adjustments need to be made when analysing your evidence. For instance, your comparable site may have positive pre-application advice at the date of sale, is capable of accommodating higher unit density or has contamination issues that need remediation. These factors will have a significant impact on the £/per acre figure and thus, without knowing all the details of such transactions, may prove to be irrelevant or misleading when arriving at a site value.
When using a residual method of valuation, two main components are required to ascertain the value:
- Potential Gross Development Value (GDV) of a scheme, less
- Development costs
Gross Development Value
This figure is crucial as it is the foundations of the residual valuation and is based on a special assumption of development completion and planning. The GDV of a scheme usually is relatively straightforward to estimate using sales comparables. However, when valuing a site without planning with no proposed scheme in place, this can become much more complex. As such, it is vital to establish what scheme the subject site can accommodate. To do so, the developer must seek professional advice from suitably qualified planners and architects.
The second step of a residual valuation is to calculate the development costs. Briefly, this figure will include the construction costs, professional fees, contingency, demolition, clearance, vacant possession costs, insurance, CIL & S106 liability and finance costs. These assumed costs will be similar to the once you apply when valuing a site with planning. Additional costs that need to be taken into account, given lack of planning consent, are:
- costs associated with obtaining planning
- increased holding costs
- site purchase finance costs (may be higher than for a site with planning considering increased risk from lenders perspective)
- increased required developer's profit
Naturally, every developer would work with different profit margins, but the rule of thumb is a 20% developer's profit on costs for sites with planning. This profit represents the risk associated with development. When acquiring a site without planning, the risk exponentially increases and this needs to be reflected in your required profit margins. Vincent Goldstein, the CEO of VFund, offered his insights on how his company sets the appropriate profit margins where they "look at all deals on their merits, and the expected profits will vary on factors such as location, risk, length of the deal, downside and holding costs". As a developer, you might consider increasing your required profit (perhaps by 10%+) to compensate for the additional risk.
The main shortcoming of the residual method of valuation is that it is susceptible to the assumptions you make. Relatively small changes in the costs or revenue can have a disproportionately large impact on the value of the site. For instance, one of the assumptions is that the GDV value of the asset will remain the same at the end of the project, which historically proven to be incorrect especially during the period of high market volatility.
Getting it right
Acquiring land without planning is risky, but it may deliver increased profit if done correctly. Thorough due diligence is crucial when purchasing land as you might end up with a scheme of a lower than anticipated density or, the worst-case scenario, unsuitable for development. Russell Tomkins, a Director at RCT Construction, with decades of experience in development sector emphasised the importance good professional advice saying that the key three steps are to "get a VERY good architect with planning experience, a good planning consultant and know who to go to for all the required reports".
Paying the right amount for the land is essential for delivering a profitable scheme. Thus, a developer should not rely on a single valuation method but utilise both comparable and residual valuation to arrive at an accurate figure. In addition, it is appropriate and strongly recommended that a developer undertakes a robust sensitivity analysis to ascertain how changes in GDV and development costs may impact the profitability of the scheme.
Please speak to our Development Team to find out more.