RICS draft guidance note - Valuation of development land, 1st edition

Valuation of development land, 1st edition

5 Valuation: the market approach

5.1 Valuation using the market approach based on comparables is normally the preferred method of estimating market value. Indeed, it is used as the primary approach in many valuations. But the forthcoming RICS guidance note Comparable evidence in property valuation (1st edition) identifies development property as one where direct comparison on a price per unit basis is rarely valid and that normally a more detailed analysis will be needed.

5.2 This guidance note recommends that reliance on one method applied to the valuation of development property is rarely advisable and that the valuation should be an iterative process, with checks where possible using other methods. This is due to the individuality of many development properties and the potential difficulties in finding good quality comparable transactions where all of the details of the transaction are known. This iterative valuation process is set out in section 2 of this guidance note.

In the context of development property, this guidance note recommends that reliance on one method applied to the valuation of development property is rarely advisable and that the valuation should be an iterative process, with checks where possible using other methods.

5.3 Valuation of development property by comparison requires a depth of information of similar assets normally in a similar type of location or geographical area. RICS guidance sets out a hierarchy of different types of evidence with direct transactional data at the top of the hierarchy. This includes all types of relevant transactional comparable evidence including:

  • recently completed transactions of identical property for which full and accurate information is available; occasionally, this may include the subject property itself (see following)
  • recently completed transactions of other, similar property for which full and accurate information is available and
  • recently completed transactions of similar property for which full data may not be available, but for which sufficient reliable data can be obtained.

5.4 A transaction in the property being valued can provide some of the best evidence available for a valuation provided it is a recent transaction. Where the subject property, or one very similar to it, has been marketed and, although offers may have been made, a binding contract has not yet been entered into, that can also provide valuable evidence. This assumes that full and accurate information is available concerning the offers received.

5.5 Other evidence lower in the hierarchy includes data, which can provide guidance rather than a direct indication of value, including:

  • information from published sources or commercial databases; its importance will depend on its relevance, authority and verifiability and
  • other indirect evidence, for example, indices.

5.6 There can also be a wide range of data sources that might provide broad indications to the valuer rather than evidence that directly relates to the property itself. Such sources can include:

  • transactional evidence from other property types and geographical locations
  • other background data (for example, interest rates, stock market movements and returns, which can give an indication for real estate yields) and
  • asking prices (though the weighting will be higher where markets are active and transparent).

5.7 Depending upon the individual circumstances, the weight attached to the different sources and information can vary significantly.

5.8 In the case of development property, valuation by comparison is potentially reliable if evidence of sales can be found and analysed on a common unit basis. Units of comparison normally revolve around the relationship between value and size, but other units can be utilised, such as site value per unit or habitable room and the relationship between site value and the value of the completed development.

5.9 Analysis in simple unit terms can sometimes risk overlooking the many other factors that may determine the value in individual cases. Even where reliable information is not available, the market approach may provide an essential check, or inform a valuation prepared using the residual method. The valuer will have to exercise skill and judgement concerning justification of inputs and analysis of outputs.

5.10 Modern methods of comparative analysis using different units of comparison, together with knowledge of the transactional market for development property deals, provide a useful basis to apply the comparative method to development property.

5.11 Typically, comparison may be most appropriate where there is an active market and/or a relatively straightforward low-density form of development is proposed. Examples might include greenfield land in rural areas, where infrastructure costs are consistent and not excessive, small residential developments, or small industrial/warehouse/retail warehouse estates. It is likely that the density, form and unit cost of the development will be similar. Less frequently, it may be possible to compare larger sites for housing or other developments on this basis.

5.12 In comparing sites, the following factors, which are not exclusive, may be relevant and require adjustments to be made when applying to the subject property:

  • values may differ considerably within a small geographical area, particularly in established urban areas
  • the condition of the site and associated remediation costs are very site specific and could differ significantly between greenfield and brownfield, and between brownfield, sites
  • site and construction costs, for example, in terms of infrastructure and service requirements, may differ between sites
  • the type of the development may well vary between sites. In the case of both commercial and residential developments, the density achieved will also affect the price
  • the price may be affected by specific factors relating to the site or purchaser, such as adjoining ownership and synergies with adjoining sites
  • the price may be affected by developer contributions and conditions of the permission to develop and
  • the price may be affected by the date of the comparable transaction.

 

Modern methods of comparative analysis using different units of comparison, with knowledge of the transactional market for development property deals, provide a useful basis to apply the comparative method to development property.