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Land Value and Development Appraisal

23^rd February 2024

Professor Stephen Walker

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Professor Stephen Walker

E: swalker@brookes.ac.uk

E: Stephen9.walker@yahoo.com

Tel: 07983383544

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Class Session:

An Introduction to Viability.
How do we arrive at a value for Land?

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WHAT IS VIABILITY?

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There are 2 types...

Strategic Viability Appraisal Assessments

Site-based Viability Appraisals

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Strategic Viability Appraisal Assessments: Purposes/Uses of VA…

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VA

Planning process: SHLAA, Land Supply & Housing Delivery

Strengthens LPA approach to development

Tests validity of SHMA

S106 & Appeals

An approach to achieve more appropriate housing outputs in accordance with Community, Corporate Strategies and Plans…
Whole Plan appraisals...
Ensures planning policies are deliverable [i.e. not unviable]...

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Site-based Viability Appraisal: purposes/uses of VA

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VA

Confirms AH targets/tenure mix

Facilitates modelling & sensitivity testing

Provides a basis for negotiation with developers & landowners

Understand the role of profit & cash flow

S106 & Appeals

Informs negotiations on a site-by-site basis...
Helps LPAs deliver affordable housing more effectively…
Justifying bids for public subsidies when available…
Can be used to inform on-site mix and housing capacity...

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SUMMARY: Purposes/Uses of VA…

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VA

Planning process: SHLAA, Land Supply & Housing Delivery

Strengthens LPA approach to development

Confirms AH targets/tenure mix

Facilitates modelling & sensitivity testing

Provides a basis for negotiation with developers & landowners

Tests validity of SHMA

Understand the role of profit & cash flow

S106 & Appeals

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Development Appraisal…� for Site-based viability appraisal.

It’s a SNAPSHOT…

A guess???? Hopefully a good one…
Need to be up-to-date and include ALL likely costs relating to development...
Need up-to-date Market knowledge covering:

Value: Prices, rents, yields…
Build Costs, preliminaries, abnormal costs, externals…
Fees, tax…
Finance – interest rates and time…

Need to understand Planning policies and other requirements:

Permitted development…
Density, open space…
Needs arising from development [on & off-site].. highways; education; health centre…[CIL]
Affordable housing requirements…

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Barton Hill
Provisions of the S106 Requirements
Plan Application Number [Outline]
Number of Dwellings	885
Other Development
Individual S106 Requirements
Highways A Contribution	£15,727
Highways B Contribution	£709,772
Primary Education Start Up	£6,500,000
Primary Education Temporary	£100,000
Primary Education re-location	£10,000
School Transport	£228,000
Secondary Education	£3,104,596
Social and Health Care [Day Care Fit out]	£20,000
Linear Park	£10,000
Strategic Transport	£1,250,000
Strategic Waste	£38,672
Employment/Training	£40,000
Public Open Space Maintenance	£344,768
Allotment Space and Provision	£6,000
Monitoring Fees City Council	£56,400
Monitoring Fees County Council	£6,800
Sub-Total	£12,440,735
Sub-Total S106 Developer Contributions [£/unit]	£14,057

Land Contributions	hectares

Affordable Housing [at 40% of residential content] equivalent as a financial sum	£18,054,000
AH Contribution [£/unit]	£20,400

Overall Total	£30,494,735
Total S106 Developer Contributions [£/unit]	£34,457.33

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Fern Hill Gardens, Faringdon
Provisions of the S106 Requirements
Planning Application Number [Outline]	P15/V1934/O
Number of Dwellings	200
Individual S106 Requirements
Provision of a new Bus Shelter	£12,287
County Council Monitoring Fee	£10,181
Primary Education [New School]	£1,160,000
Secondary Education [towards expansion]	£478,839
Traffic Regulation [with CC]	£5,116
Travel Monitoring Fee to CC	£1,269
Sub-Total	£1,667,692
Sub-Total S106 Developer Contributions [£/unit]	£8,338

Affordable Housing [at 35% of 200 dwellings] equivalent as a financial sum	£3,900,000
AH Contribution [£/unit]	£19,500

Overall Total	£5,567,692
Total S106 Developer Contributions [£/unit]	£27,838

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Fern Hill Gardens, Faringdon
Financial Summary		% of GDV
Gross Development Value [GDV]	£75,000,000	100.0%
All Build Costs [including fees & finance]	£45,000,000	60.0%
Affordable Housing plus Developer Contributions [S106 + CIL]	£6,087,692	8.1%
Developer’s Profits	£13,125,000	17.5%
Residual Land Value [RLV]	£10,787,308	14.4%

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Development Context..

All our knowledge is about the past…

All our decisions are about the future…

In respect of LAND: decisions need to be taken NOW for implementation [development] LATER…

This is where APPRAISAL comes into its own…. in answering the following questions.

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Key Questions….??

HOW MUCH SHOULD A DEVELOPER PAY FOR LAND?
HOW DO WE ARRIVE AT A FIGURE FOR A SITE’S DEVELOPMENT VALUE?
TO WHAT EXTENT DO LOCAL PLANNING POLICIES RENDER A SITE UNVIABLE?
HOW DO YOU DETERMINE THE OPTIMUM DEVELOPMENT CONTENT & MIX?
AND MORE…..

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2009

2012

2015

2018

2006

Say 30% Affordable Housing Policy Target

Viability Cycle

Stalled Developments

Housing Viability: Market Cycle Dynamics

Stephen Walker, 2023 ©

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The Development Appraisal Formulae…

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GDV* = Land Price + Build Costs + Profit

Identifies the “COST” Items of development

PROFIT = GDV* – (Land Price + Build Costs)

Developer has Bought the Land

LAND VALUE = GDV* – (Build Costs + Profit)

Developer Wants to know the maximum it could pay for Land.

* = Gross Development Value

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HOW DO WE ARRIVE AT A VALUE FOR LAND?��[NEED FOR SOME MATHS AND A BIT OF ECONOMIC THEORY...!!]�

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A SIMPLIFIED EXAMPLE....

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1 Hectare of Agricultural Land [10,000m²]

The capital value of the land in its current/existing use is £25,000.

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Proposed House

The farmer has obtained planning permission to build a house [i.e. 140m²].

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A reminder of the Key Questions…

QU1: HOW MUCH SHOULD THE DEVELOPER PAY FOR THE LAND?

QU2: WHAT PROPORTION OF AFFORDABLE HOUSING [AND OTHER PLANNING REQUIREMENTS] CAN STILL BE DELIVERED WHILE RETAINING VIABILITY?

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HOW MUCH SHOULD A DEVELOPER PAY FOR LAND?
HOW DO WE ARRIVE AT A FIGURE FOR A SITE’S DEVELOPMENT VALUE?
TO WHAT EXTENT DO LOCAL PLANNING POLICIES RENDER A SITE UNVIABLE?
HOW DO YOU DETERMINE THE OPTIMUM DEVELOPMENT CONTENT & MIX?
AND MORE…..

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Relevant Market Information

This can be calculated or estimated on the basis that the planning permission stipulates the maximum density, massing, size & materials (i.e. 140m²).

The estimated cost building the new house is £170,000 (including all fees and contingencies).

Estate Agents advise that the new house will be worth about £540,000.

The Developer’s target rate of profit is 25% on Building Costs and 25% of Land costs.

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	A Developer's Costs, Market Value and Land Bid Budget
	Items	£	Remarks
1	BUILDING COSTS [including All Fees & Finance]	£170,000	Extracted from BCIS or Spon's
2	PROFITS on BUILDING COSTS [say 25% on Build Costs]	£42,500	Developer's Normal Profit [=1*0.25]
3	TOTAL MINIMUM COSTS [that need to be covered]	£212,500	Opportunity Costs [=1 + 2]
4	MARKET VALUE of the NEW HOUSE	£540,000	Comparable Value [from Estate Agents]
5	ANTICIPATED SURPLUS	£370,000	[ = 4 minus 1 ]
6	GROSS LAND BUDGET	£327,500	[ = 5 minus 2 ]
7	PROFIT of the LAND [25% of Gross Land Budget]	£65,500	Developer's Normal Profit [ = (6 - (6/(1+0.25))) ]
8	NET LAND BID BUDGET	£262,000	Maximum Land Bid Price [ = (6 minus 7) ]

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THE BASIC EQUATION…….

GDV – [BC¹ + P] = RLV

£540,000 – [£170,000 + £108,000] = £262,000

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¹BC + Fees + Finance

The RLV identifies the DEVELOPER’S LAND BID BUDGET

GDV = Gross Development Value

BC = Building Costs

P = Profit

RLV = Residual Land Value

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Gross Development Value

Build

Costs

Fees

Interest Charges

Profit

Gross

Residual Land Value

“Cost” Elements of the Gross Development Value

Net Land Budget

S106/CIL

AH

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Gross Development Value [100]

Build Costs, Preliminaries, External Works [50]

Professional Fees [4]

Finance [3]

Profit [20]

Gross Land Bid Budget [23]

Finance + Fees

SDL Tax

AH

S106

CIL

Net Land Bid Budget [15]

RLV Appraisal Methodology:

Stripping out “costs” to reveal the land bid budget

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Gross

Development

Value

Gross Land Bid Budget

Finance and Fees

Profit

Build Costs

Net Land Bid Budget

Land Service Costs

Other S106 Costs & CIL

Affordable Housing

BMLV

Development Appraisal Summary: Key Components

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Question: What should the Farmer [i.e. the landowner] do?

Options: There are several options for the Farmer – the obvious ones include:

Keep the land in its current use [i.e. for agriculture]
Sell the land to the builder who will proceed to develop the land for housing.
Keep the land and build the house for sale, for rent or for own use.

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To Help us Inform a Decision we should Compare Gains to Values

The farmer is sure to sell for housing development if he/she is concerned only with increasing wealth and wanting cash.

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Future/Exchange Value: Value of Land for Housing	£262,000
Current Use Value: Value of Agricultural Land	£25,000
New Capital Gains to the Farmer: Derived through Planning	£237,000

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Is there a Tax Liability?

Currently, there is no specific tax on the net gains on land values in the UK, unlike in other countries.
In theory, however, a 100% tax rate would erase all incentives.
In this example, so long as the tax rate is less than 100%, the farmer would still materially benefit from selling the land for housing.

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The Tax Burden Ultimately Depends on the Tax Rate & Rules

Under current Capital Gain Tax (CGT) rules, the farmer may become liable, but this will depend upon tax thresholds and other relevant fiscal subventions.
In 2024, in England & Wales, there is NO Land Tax Levy [unlike so many other countries].
The Barker Report [2004] raised the spectre of a Planning Gain Supplement [..but this was abandoned in July 2007].
The Treasury announced its intention to introduce a “Statutory Planning Charge” [October 2007].
A Community Infrastructure Levy appeared in April 2010!
An alternative IL has been proposed.. but not confirmed by DLUHC!

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New Development Land Value	£262,000	Future Use Value	[Expected Value]
Agricultural Land Value	£25,000	Existing Use Value	[Actual Value]
Tax Rate on Gains	0%	100%	50%
Farmer’s Net Development Gains	£237,000	£0	£118,500
HM Treasury’s Tax Revenue	£0	£237,000	£118,500

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£262,000

FUV

£25,000

CUV

Supply of Land

Demand for Housing Land

Demand for Agricultural Land

1 hectare

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£262,000

FUV

£25,000

CUV

Supply of Land

Demand for Housing Land

Demand for Agricultural Land

1 hectare

Economic Rent [i.e. £237,000]

INCREASE IN LAND VALUE DUE TO THE GRANTING OF PLANNING PERMISSION

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£262,000

FUV

£25,000

CUV

Supply of Land

Demand for Housing Land

Demand for Agricultural Land

1 hectare

Maximum “Tax” take [i.e. £237,000]

INCREASE IN LAND VALUE DUE TO THE GRANTING OF PLANNING PERMISSION

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20 years on…….�Proposed Retail Development..

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��An alternative scheme and planning for the same land [20 years later]..

Six shops could be erected to produce an income of £90,000 per annum.
Assuming an initial yield of 7%, the value of the development is approximately:

GDV = [£90,000 x 100/7] = £1,285,715.

Building costs, including fees, finance and the developer’s desired profits, equals c.£750,000.

Thus, the land budget available to the developer is now no more than £535,715.

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Capitalising a rental income flow: the Maths..

Annual Net Rental Income Flow

x Year’s Purchase in Perpetuity

(i.e. reciprocal of initial yield)

= Capitalised Value of the Property.

Higher the yield, lower the Year’s Purchase (and vice versa).
At 5% yield: £100,000 x 100/5 (or 1/0.05) =

£100,000 x 20 = £2,000,000

At 10% yield: £100,000 x 100/10 (or 1/0.10) =

£100,000 x 10 = £1,000,000

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What are the effective gains to the landowner?1

New Development Gains =

= Future Exchange Value - Existing Use Value

(Shopping) - (Housing)

= £535,715(Max.) - £262,000(Max.)

OPPORTUNITY COSTS of retaining the land in its current use (£262,000).

ECONOMIC RENT that would accrue to the landowner in a future use

= (£535,715 - £262,000) = £273,715.

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What are the effective gains to the landowner?2

In reality, the recurrent costs of maintaining the land in its current use (i.e. as housing land) would ordinarily be calculated and the resultant capitalised sum would then be added to the original £92,000.

[Say, 3% of £262,000 for 20years =c.£473,201].

Equation = £92,000 *(1+0.05)^20 = c.£244,100

This additional opportunity “holding” cost must be subtracted from the initial net gain of £535,715 - £473,201

= £62,514 [Net Capital Gains].

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D Ag [2024]

D Ho [2024]

D Re [2044]

Quantities, Demanded & Supplied, per period of time

Prices & Costs [£]

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TO SUM UP: A Diagrammatic Representation

Land Plot of one hectare [Supply]

£25,000

£262,000

£535,715

£473,201

D Ho [2044]

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��What messages or inferences can we derive?

The derived demand for land determines the maximum bid value for land.
Land use or property use determines land value or property value.
“Hope” value is a significant influence and incentive to hold, hoard or develop land.
Spatial planning is a critical factor in creating, holding and distributing value.
Local betterment triggered by local planning decisions can generate substantial windfall gains.
The need to provide AH on the back of private development materially affects value of land.
Under certain circumstances AH provision can render a development unviable.
In addition to its contestability role, appraising development options is an essential tool in generating ideas and providing solutions at the design and inception stage too.

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Using Excel Spreadsheets..

Static RLV Estimate

Assumes we build and develop at the same time.
Time is not an explicit variable.
Need to apply financial weights.
Sensitivity or stress testing is useful and normal.
However, it is viewed as a “coarse” valuation: i.e. it is as good as the assumptions used.

Cash Flow RLV Estimate

Time is an explicit variable.
The “maths” and data requirements more onerous.
No need to apply financial weights.
Cash flow rather than profit the critical focus of the analyst.
Sensitivity or stress testing is useful and normal.
It mimics the developer’s approach.

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Inputs and assumptions are critical to the appraisal methodology

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New House Build Prices...

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Source: ONS, House Price Index [accessed February 2023]

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Source: ONS, House Price Index [accessed February 2023]

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Source: ONS, March 2020

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Source: ONS, March 2020

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Brighton & Hove	New Build Sales Volume	Existing Property Sales Volume
Total Sales	469	20983	2.24%
Monthly Max	49	860
Monthly Min	0	242

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BUILD COSTS...��SOURCE: BUILDING COST INFORMATION SERVICES [BCIS]

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			Contractors' Overheads & Profit			6.00%
			Preliminaries			10.00%
OXFORD CITY COUNCIL: NEW BUILD PRICES	MEAN PRICES [£/m2]	MEDIAN PRICES [£/m2]	LOWER QUARTILE PRICES [£/m2]	UPPER QUARTILE PRICES [£/m2]	Difference between LQ and MEDIAN PRICES [£/m2]	% Difference between LQ and MEDIAN PRICES [£/m2]	MEDIAN BUILD PRICES with OHP & Preliminaries Extracted [£/m2]
Housing, mixed developments	£1,461	£1,418	£1,280	£1,591	£138	10.78%	£1,222
Estate Housing [EH]: Generally	£1,457	£1,404	£1,242	£1,592	£162	13.04%	£1,210
EH 3-storey	£1,505	£1,439	£1,209	£1,688	£230	19.02%	£1,241
Estate Housing Detached	£1,875	£1,622	£1,448	£1,887	£174	12.02%	£1,398
Estate Housing Semi Detached [EHSD]: Generally	£1,453	£1,418	£1,251	£1,595	£167	13.35%	£1,222
Estate Housing Terraced [EHT}: Generally	£1,502	£1,423	£1,225	£1,651	£198	16.16%	£1,227
Flats (apartments) [F}: Generally	£1,718	£1,632	£1,429	£1,934	£203	14.21%	£1,407
F 6 storey or above	£2,039	£1,912	£1,682	£2,176	£230	13.67%	£1,648
One-off' housing detached (3 units or less) [OOD <3] Generally	£2,640	£2,313	£1,782	£3,235	£531	29.80%	£1,994
One-off' housing semi-detached (3 units or less) [OOSD<3]	£1,833	£1,694	£1,533	£2,040	£161	10.50%	£1,460
One-off' housing terraced (3 units or less) [OOT<3]	£1,881	£1,620	£1,387	£1,899	£233	16.80%	£1,397

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PROFITS….

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Capital Profit..

It is an input to the Appraisal
Market Rate = typically 20% of GDV.
AH Rate – typically 5.66% of GDV.
Blended Rate of Profit = c.17.5% of GDV.

De-risking schemes rarely changes the profit assumptions; such costs are simply amortised in a lower land budget estimate! But why?
This outcome is perverse. The LPA needs to question this presumption!

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Source: FAME, 2022

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Source: FAME, 2023

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Source: Land Value Estimates for Policy Appraisal, MHCLG, Feb 2015, Dec 2015, May 2018, August 2020

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Existing Use Values

Benchmark Land Values [BmLV]:

EUV + Premium

BmLV =

EUV + (EUV*Multiplier)

NPPGV [2019] states: to incentivise sale “minimum requirement for a reasonable landowner”.

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Brighton & Hove
Land Uses	£/ha
Office – Edge of Centre	£2.29m
Office – Out of Town	£1.8m
Agriculture	£22,500

Source: MHCLG, August 2020

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Existing Use Values

Site 99: EUV = Agricultural Land
EUV = £22,500/hectare.
However, the land is not actively used; it simply exists! Thus, its EUV can be discounted by at least 50%; probably much more!
The BmLV= EUV +[EUV*Premium]...
BmLV = £11,250 + [£11,250*10] = £123,750/ha.
BmLV = £11,250 + [£11,250*7] = £90,000/ha.
BmLV = £11,250 + [£11,250*5] = £67,500/ha
This is a maximum assessment of its worth [i.e. EUV]!!

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