RICS draft guidance note - Valuation of development land, 1st edition

Valuation of development land, 1st edition


Acquisition/disposal costs

The cost associated with the acquisition or disposal of property, usually including legal and agent fees, as well as any purchase or sales taxes.

Alternative use value

See Value in alternative use.

Building costs indices

An index relating to the cost of building work. It is normally based on cost models of the 'average building', which measure the changes in costs of labour, materials and plant that collectively cover the basic cost to a contractor.

Cash flow

The movement of money by way of income, expenditure and capital receipts and payments during the development.

Comparable property transaction

A property used in the valuation process as evidence to support the valuation of another property.

Discounted cash flow (DCF)

A method of valuation explicitly setting out the inflows and outflows of an investment/development. See also Internal rate of return and Net present value.

Development appraisal

A financial appraisal of a development. It is normally used to calculate either the residual site value or the residual development profit, but it can be used to calculate other outputs.

Development profit

The amount by which, on completion or partial completion of a development, the estimated income of a development exceeds the total outlay. This can be expressed in various forms.

Development risk

The risk associated with the implementation and completion of a development, including post-construction letting and sales.

Development yield

The rental income divided by the actual cost incurred in realising the development.

Discount rate

The rate, or rates, of interest selected when calculating the present value of some future cost or benefit.

Existing use value

See Value in existing use.

Gross development value (GDV)

The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date. Where an income capitalisation approach is used to estimate the GDV, normal assumptions should be made within the particular market sector concerning the treatment of purchaser's costs. The GDV should represent the expected contract price.

Gross development cost (GDC)

The total cost of undertaking a development.

Gross external area (GEA)

The aggregate external area of a building or footprint, taking each floor into account, measured with reference to the appropriate code of measuring practice. For more information, see the International Property Measurement Standards.

Gross internal area (GIA)

Measurement of a building on the same basis as gross external area - but excluding external wall thicknesses. For more information, see the International Property Measurement Standards.

Highest and best use

The use of the property that would produce the highest value of the asset. It must be physically possible, financially feasible and legal. For more information, see the International Valuation Standards, section 140.

Holding cost

The cost involved in owning a site or property, which may include such items as interest on finance used to acquire the asset, maintenance costs, any taxes payable by the owner and so on.

Hope value

An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.

Note that this term is not recognised by IVS or Red Book.

Interest rate

The rate of finance applied in a development appraisal.

Internal rate of return (IRR)

The rate of interest (expressed as a percentage) at which all future cash flows (positive and negative) will be discounted in order that the net present value of those cash flows, including the initial investment, be equal to zero.

Market rent

Defined in IVS 104 as 'the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion'.

Market risk

The uncertainty resulting from the movement of the property market, irrespective of the property being developed.

Market risk adjusted return

The discount rate as varied to reflect the perceived risk of the development in the market.

Market value (MV)

Defined in IVS 104 as 'the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion'.

Net development value (NDV)

The gross development value minus assumed sale costs.

Net cash flows

The cash flows generated by the scheme. These can be assessed both gross and net of taxes and both gross and net of finance costs.

Net internal area (NIA)

The usable space within a building measured to the internal finish of structural, external or party walls, but excluding toilets, lift and plant rooms, stairs and lift wells, common entrance halls, lobbies and corridors and car parking areas. For more information, see the International Property Measurement Standards.

Net present value (NPV)

The sum of the discounted values of a net cash flow including all inflows and outflows, where each receipt/payment is discounted to its present value at a specified discount rate.

Net present value method

A method used in discounted cash flow analysis to find the sum of money representing the difference between the present value of all inflows and all outflows of cash associated with the project by discounting each at a specified discount rate.

Opportunity cost

The return or benefit foregone by pursuing an alternative action.

Outturn (growth) model

A development appraisal that has been adapted to forecast various inputs, usually both in respect of values and costs.

Oversailing licences

An oversailing licence allows a structure - a crane, for example - to overhang public or privately-owned property.

Planning obligations

Obligations often tied to the grant of development permissions providing a benefit to the community, either generally or in a particular locality.

Pre-lets and pre-sales

Where a developer of a scheme, usually prior to implementation, has agreed lettings with occupiers or sales of part or the whole of the development prior to the commencement or during the development.

Profit on cost

The profit of the scheme expressed as a percentage of total costs of development.

Profit on value

The profit of the scheme expressed as a percentage of the scheme's net development value.

Property-specific risk

The uncertainty attached to the intrinsic development of a site or property in addition to the general market risk.

Red Book

RICS Valuation - Global Standards 2017.

Residual appraisal

See Development appraisal.

Residual site value/Residual land value

The amount remaining once the gross development cost of a scheme is deducted from its gross development value and an appropriate return has been deducted.

Residual valuation

A valuation/appraisal of land using a development appraisal.

Return (on capital)

The ratio of annual net income to capital derived from analysis of a transaction and expressed as a percentage.

Sensitivity analysis

A series of calculations resulting from the residual appraisal involving one or more variables - rent, sales values, build costs and so on - that are varied to show the differing results.


A simulation considers the probability of outcomes given certain variances applied to key inputs within the financial appraisal through a stochastic process. It can quantify the level of variation in the valuation of the development based on input variation.

Speculative developments

Developments that are generally commenced prior to any agreed sales or lettings.

Standing investments

Properties that are income-producing, usually with a tenant in occupation.

Target profit

The level of acceptable profit considering the risk of the particular scheme normally expressed as an individual sum.

Target return/Required return

The level of acceptable return considering the risk of the particular scheme expressed as a periodic rate of return.

Tender price indices

Index relating to the level of prices likely to be quoted at a given time by contractors tendering for building work.

Turnkey development

A type of development in which the property is constructed and fitted out by the landlord/owner to a fully operational standard whereby an operator can commence trading with immediate effect. It also assumes all necessary licenses or registrations have been obtained.

Vacant possession

The attribute of an empty property, which can legally be exclusively occupied and used by the owner or, on a sale or letting, by the new owner or tenant.

Value change

The amount of growth or decline in the capital or rental value of elements of the scheme, normally forecasted for the purposes of the valuation/appraisal.

Value in alternative use

The market value, or any other appropriate basis, with the special assumption of an alternative use to the existing use or permitted highest and best use.

Value in existing use

The market value, or any other appropriate basis, assuming the property continues in its existing use with no expectation of that use changing in the foreseeable future.

Viability/financial viability assessment

A financial appraisal to establish the profit or loss arising from a proposed development.

Weighted average cost of capital (WACC)

The minimum return a company should earn in respect of an asset by reference to relative weight of equity and debt within its capital structure.


As applied to different commercial elements of a scheme, office, retail and so on. Yield is usually calculated as a year's rental income as a percentage of the value of the property. In a variety of countries it can also be called the capitalisation or cap rate, the all-risks yield, equivalent yield, income yield or the initial yield.