Development Site Valuations

Development Site Valuation Insights

Development site valuations require a property valuer to consider the property’s ‘highest and best use’. International Valuation Standards Council (IVSC) define ‘highest and best use’ as “the most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued.”

Whilst a property valuer can often use professional judgment when assessing the highest and best use of a site, for large, complex or risky matters, it is common for a property valuer to be provided with a highest and best use scheme undertaken by a suitably qualified town planner. Other consultants that may be required to provide input for a development site valuation can include engineers, architects and quantity surveyors. Existing planning permits can also provide a strong indication of a property’s highest and best use and will often be relied upon. If a property valuer has a comprehensive understanding of the highest and best use of a site as well as the cost and timing of undertaking the hypothetical development, the valuer may be able to provide more accurate valuation advice than would be otherwise possible.

Methods of Valuing a Development Site

The Comparable Transactions Method includes the analysis of comparable sales evidence on a rate per square metre (or other metric), and the adoption of a rate for the subject lot being valued after making relevant adjustments for all pertinent factors including exposure, zoning, highest and best use, topography, size, dimensions, sale date and location. In applying a rate to the subject property, the property valuer may consider both a rate per square metre of site area as well as a rate per square metre of potential net saleable area (NSA) or potential gross floor area (GFA).

The Residual Land Value assessment is an approach whereby the value of property for development purposes is determined by deducting from an assessment of achievable revenues all associated costs in delivery and sale of the developed product. The deductions include an allowance for developers profit and risk margin. The residual amount is the land value, based on the assumptions, that if paid by a purchaser would achieve the assumed required rate of return. 

Typically, there are two alternate techniques to incorporate a developer’s required margin for Profit and Risk in employing the Residual Land Value Approach:

Discounted Cashflow Approach: whereby all revenues and expenses are escalated to completion and plotted through the life of the project to arrive at monthly net cashflows. These are discounted at a developer’s required rate of return having regard to the time frame, risk of the project and returns available on other investments. The resultant net present value is an amount which if paid for the land will deliver the developer their required annual return. In this approach, consistent with the basis upon which required rates of return are quoted in the market, rates of return are often analysed on an unlevered basis assuming no debt finance associated interest costs.

For clarity, while developers may partially debt fund a project, improving returns on equity, required rates of return for projects with debt finance vary according to the level of debt used. To make comparisons on a consistent basis it is common practice to assess, quote and discuss discount rates for development projects on an unlevered basis. Depending on the developer’s risk appetite and their access to debt, the impacts of debt financing and return on equity can also be considered.

Note, there are varying techniques employed by the valuation industry when undertaking a Discounted Cashflow Approach, with the method described being one of many variations.

Traditional Approach: Lump Sum Profit and Risk Margin: In this approach projected costs and revenues are netted with no discounting. An allowance for developers profit and risk margin is deducted based on a selected percentage profit margin applied to all development costs including land. To account for the time horizon and for consistency in comparing with other projects, an assumption of 100% debt finance is often made with an assumed annual interest charge levied on cumulative net capital outlays.

Engaging a property valuation firm to value your development site

Engaging a property valuation firm that has a thorough understanding of development site valuations is an important step to ensuring an accurate valuation is achieved. Sovereign Valuations is experienced in undertaking development site valuations, advising on projects ranging from low and medium density developments through to high density CBD projects with gross realisable values in excess of $1 billion.

Contact Us

To discuss your valuation requirements, contact us on 1300 710 000 for an obligation free discussion, or e-mail admin@sovereignvaluations.com.au and we will respond to you as soon as possible.