One of the difficulties with strategic land is deciding what a site is worth once planning permission is granted. The long-term nature of the projects - they can sometimes run for ten years or even more - makes it almost impossible to forecast exactly what the eventual planning permission will be for, and what house prices will be.
That uncertainty is usually dealt with by setting out a transparent mechanism for assessing the site’s value once planning permission has been granted. The two most common ways of doing that are by reference to either “market value” or “selling price.”
How is market value calculated?
“Market value” is what developers will usually look to use as the basis for determining what to pay. On the face of it, that sounds extremely reasonable - what can be a fairer price than “market value”? However, it isn’t as straightforward as it might first seem.
Calculating market value is a theoretical exercise. In producing an assessment of market value, a developer will first estimate how much they can sell the completed homes for, giving them a figure for the total amount of income they will generate from the site. As anyone who has ever sold a home will know, however, valuing houses isn’t an exact science. Ask three estate agents what your home is worth, and they will give you three different answers - often tens of thousands of pounds apart.
Next a housebuilder will estimate what it will cost to build the homes. While they will be able to do that pretty accurately, build cost is closely linked to the engineering designs. For example, if they tell you a house needs foundations which are two metres deep, it is difficult for you to argue they actually only need to be 1.5 metres deep even if you employ your own engineering consultant - the answer is, to an extent, subjective. Yet it can change the apparent value of a site by hundreds of thousands of pounds.
The market value is then calculated by deducting the cost estimate (and the developer’s profit) from the estimated selling prices - everything left over is land value. This is often described as a “residual valuation.”
Even from that simple explanation, it is apparent how subjective an exercise it can be. If a developer makes pessimistic assumptions about selling price and costs, the resulting land value can be very low.
The table below shows how that might play out in reality with just a single house. On an optimistic assessment, the market value could be as much as 40% higher than on a pessimistic assessment. If a developer already has an agreement in place to buy your site, it is in their interests to try to make the estimate of market value as low as possible. It won’t change what the actually sell the homes for, so the less they pay for the land, the more profit they will make.
What is selling price?
In contrast, “selling price” is the actual price a developer is prepared to pay for a site after it has been marketed for sale. Just like with market value, those bids will be calculated using a residual valuation, but the incentives for the developer are much different.
By setting up a competitive bidding process where the highest bidder will win the site, developers are encouraged to make more optimistic assumptions. They’ll work harder to make sure their engineering designs are as efficient as possible - keeping build costs low. They will be more inclined to be bullish about what the finished homes will sell for. The result is a valuation for the land that should be nearer the optimistic assessment in the table above than the pessimistic one - all to the landowner’s benefit.
While, on the face of it, selling price and market value might sound like much the same thing, in reality selling price is normally higher - often by a significant margin.
As a specialist land promoter, The Strategic Land Group works to maximise the selling price for landowners.
SLG secures planning permission and compiles a detailed package of technical information, allowing us to deliver “shovel ready” sites to the market - something which developers are prepared to pay a premium for.
By setting up a competitive bidding exercise, SLG ensures the landowner’s return is linked to selling price, not market value. We do all this at our own cost and risk - our fee is based on the selling price achieved so if we don’t succeed, it won’t cost you anything.
If you have a site that you think might be suitable for residential development, please get in touch today for a free, no obligation consultation.
