The land residual method is used in development appraisals to assess the market value of land or land and buildings, where there is potential for the land to be put to a higher value use. Examples include:
- land being sold for residential, commercial or industrial development
- existing buildings that could be cleared and the land redeveloped for another use
- existing buildings that can be converted to another more valuable use
There are usually 4 stages in the land residual method:
- Establish the development potential within the market for that parcel of land in that location. The method is used to assess value on a ‘what if’ basis. This means that the resultant figure depends on all necessary permissions, licenses and other authorisations being obtained to undertake the scheme.
- Assess the value of the completed scheme. The Gross Development Value (GDV) is calculated using the comparative or income approach. The comparative method would be used for developments of apartments and houses. If the scheme is of a commercial nature where the space created is likely to be leased, GDV will be estimated using the income approach. An understanding of values through local knowledge and experience is an important factor in assessing the projected values.
- Assess all the development costs, including an amount for normal profit and for the finance costs and interest charges on the capital (money) needed to fund the whole of the scheme.
- The costs are added together and deducted from NDV to arrive at a Gross Residual Value (GRV).