RICS draft guidance note - Valuation of development land, 1st edition

Valuation of development land, 1st edition

4 Assessing development potential

4.1 Development can take a number of different forms and this creates a variety of options concerning what is developed and when it is developed. It may be appropriate to fully explore these various options and the value of each of these may vary in relation to the different scenarios.

4.2 Within these different regimes, development property may be included in a zone earmarked for future development of a particular type; the property may have detailed or outline permissions for development; or the particular planned scheme of development may be uncertain. When assessing development potential, it is important to specify the assumed development or developments, making the basis of those assumptions clear in the valuation report.

Development can take a number of different forms and this creates a variety of options concerning what is developed and when it is developed. It may be appropriate to fully explore these various options and the value of each of these may vary in relation to the different scenarios.

4.3 It may be appropriate to form a view as to what permission is likely to be obtained and the associated planning agreements that would be required to obtain that consent. These may be very different for urban and rural development property where there could be significant potential to develop alternative uses, including the development of new uses.

4.4 Emerging consultative planning and development policies may also be relevant and the impact of any policy differences between different governmental structures - state, local and so on - should be recognised.

4.5 An accurate assessment of the form and extent of physical development that can be accommodated on the site is essential. This assessment should consider site characteristics, characteristics of the surrounding area, supply and demand constraints and the likelihood of obtaining permission. In more complex cases, it is recommended that this assessment be undertaken in consultation with appointed project advisors, such as architects, quantity surveyors and environmental, planning and energy consultants.

4.6 Matters that should be considered in detail include:

  • density of development, establishing the bulk, scale and massing particularly in urbanised areas subject to different property types
  • topography and site development factors, including availability of services and infrastructure, ground conditions and development restraints
  • building related issues, such as the period estimated to complete the new buildings, achieving optimum occupational efficiency ratios, car parking standards and/or restrictions, regulations concerning energy efficiency and the extent to which the development control system is being used to help deliver climate change obligations
  • development consent issues, such as requirements as to the provision of developer contributions or planning obligation attached to the permission to develop
  • although a valuation is required of the actual subject property, there may be a possibility of increasing the development potential by acquisition of, or merger with, adjacent land. Conversely it may be necessary to acquire adjacent land, or rights over adjacent land, including oversailing rights, before the proposed development could take place
  • accessibility and developability of the subject property and
  • environmental issues that may have a material bearing on the success of the project. Sufficient enquiries should be made to establish whether the presence of on-site or neighbouring environmental features influence the development process, the density or even the viability of the scheme. For more information, see Environmental risks and global real estate (1st edition), RICS guidance note.

4.7 Whether and how these factors should be reflected in the valuation may involve close liaison with other stakeholders in the development process, including clients and the development control authority, in order to ensure that the appraisal fully reflects the various aspects of the proposed development or possible developments.

4.8 Many of these issues can be characterised as risks attached to the development control process. Where uncertainties exist surrounding the details of the actual development that can be delivered on any site, they should be factored into any valuation of the site. This can be done by making a specific adjustment to the valuation together with an explanation of the assumptions underpinning any adjustments.

4.9 When using the market approach, how these same factors may have impacted on comparable properties should be taken into account in any valuation. These risks may have played a similar role in the comparable transaction price and no adjustment may be necessary.

4.10 With larger sites that will take longer to develop, options within the development process become more likely and ought to be considered in more detail. Four key options are apparent in most development property:

  1. develop
  2. develop in phases
  3. sell or dispose and
  4. defer or wait.

4.11 The exercise of these options can significantly affect the valuation of a development property. These options have been the subject of a number of studies using option pricing techniques developed from financial markets to quantify them. Valuers should be aware of these options and their impact on value should be taken into account in the valuation.

Four key options are apparent in most development property: develop, develop in phases, sell or dispose and defer or wait.