RICS draft guidance note - Valuation of development land, 1st edition

Valuation of development land, 1st edition

8 Land in course of development

8.1 For assets where work on the development has commenced but is not completed, the market comparison approach is unlikely to be the most appropriate approach to the valuation. Partially complete developments may come to the market for a number of reasons and where market evidence does exist it should be used, subject to all the caveats concerning full information and adjustments for the individuality of development property set out in section 5 of this guidance note.

8.2 A residual method is more likely to take account of the individuality that will exist. There are two basic approaches to valuing land in the course of development:

  • the value of the land plus the costs expended (improvements) at the valuation date and
  • the completed development value minus the costs remaining to be expended at the valuation date.

8.3 In some cases, both approaches could be employed as a check against the other. However, note that costs expended or to be expended do not necessarily equate to value and therefore the valuer ought to adjust accordingly.

8.4 The valuation approach is the responsibility of the valuer. The approach should be clearly stated in the valuation report. This will probably require a number of assumptions and special assumptions that should be agreed with the client in advance. Assuming a residual method is used as the primary method, the advice set out in this guidance note should be adopted, subject to the following:

  • In the case of land where development has commenced, it would be expected that the assumption of optimum development holds. Where the actual development taking place is not the optimum development, the cost of removing the existing works should be allowed unless improving them forms part of the optimum development.
  • Where the continuing actual development is the optimum development, the value of the development property is the gross development value minus the costs of completing the development. When valuing a partly completed development property, it is not appropriate to rely solely on projected costs and income contained in any project plan or feasibility study produced at the commencement of the project (IVS 400). The costs of completing the development must be assessed at the valuation date.
  • All other inputs should be assessed at the date of valuation. The valuation should reflect the risks remaining at the valuation date that may be different from the commencement of the scheme and a re-assessment of the rate of return is required.This may be affected by the stage the project has reached, whether building contracts remain in place or whether any agreements to purchase/let the whole or part of the completed development are in place. A project that is nearing completion will normally be viewed as being less risky than one at an early stage.
  • If necessary, an additional risk discount should be added reflecting the complexity of the project, the stage of construction and state of the market.
  • Valuers may also be asked for a so-called 'low point' projected valuation - this can be lower than the acquisition plus cumulative sums expended, depending on the stage of construction.
  • The valuer may need to assume that:
    • the construction contract and sub-contracts are active and that the work on-site has not stopped
    • that a lender has full step-in rights in all construction agreements, including planning agreements and conditions relating to the permission to develop and
    • that any claims in terms of extra work, suppliers' materials, increased costs or delays have been settled in full prior to the valuation date.
  • The valuation may need to assume that all collateral warranties and builder (main contractor and sub-contractors) and professional team (architect, engineers, and sub-consultants) contracts are issued and transferable.

 

There are two basic approaches to valuing land in the course of development: the value of the land plus the costs expended at the valuation date; and the completed development value minus the costs remaining to be expended at the valuation date. In some cases both approaches could be employed as a check against the other.