The value of land is significantly different from the value of a completed property. In the UK, the value of land is not based on what already exists, but rather what could be achieved through planning and development.

This forward-thinking value of land potential is a combination of elements like planning policy, demand, costs, and limitations of the site.

The Basics of Land Valuation

The most commonly used method of valuing development land is the Residual Valuation Method. This method of valuing land is backward thinking where it starts with the value of the completed development.

The formula is used to follow:

• Value of completed development (houses, office space)
• Less development costs (construction costs, fees, finance costs)
• Less the profit of the developer
• The resulting value is the Residual land value

Developers assess whether a site is financially capable before acquiring land, by using this formula.

Why Planning Permission Affects Value

Planning status is one of the most important factors in the value of land. Land without planning permission is much less valuable than land with permission for residential or commercial development.

This difference in value is known as planning uplift, where the value of land rises as the level of planning certainty improves. However, valuation is not a case of planning permission.

It takes other factors into account such as:

• No planning history
• Early-stage planning potential
• Resolution to grant permission
• Full planning approval

Each of these options have a different levels of certainty and value.

Key Market Signals

Beyond formal valuation approaches, there are a number of market signals that the developer will take into account. These include:

• Demand for housing within the local area
• Sales that have been made in the local area
• Investment in infrastructure, for example, the development of a new transport route
• Allocations within the Local Plan, indicating where growth is encouraged
• Decisions made on appeal, giving an indication of the interpretation of local planning policy

This often helps to determine whether a site can be delivered realistically and over what timescale.

Costs and Constraints

Accurate valuation results are based on realistic cost estimates, including construction and professional costs, provision of infrastructures, as well as other possible problems.

Underestimating costs can lead to overvaluation of the land, impacting the capability of the project. As a result, it is important to have a technical understanding at the early stages of valuation.

Why Valuation Is Not Exact

While valuation models are based on formulas, it is important to note that land valuation is not always exact. This is because small changes in assumptions, including sales value, cost of construction, or planning time, can result in considerable changes in valuation results.

Results are based on a combination of:

• Financial models
• Planning analysis
• Market experience

This is why different developers value the same land differently based on their approach, risk and expertise.

Conclusion

In the UK, the value of land is based on future development potential, not just its usage. This can be done via the systematic approach residual valuation.

This is an essential process when realistically evaluating land; over the long term, the process is less about the figures and more about the interpretation of the situations.

Future articles will cover the process where developers evaluate a site. including risk profiling and development timelines.