What is your land worth? Residual land value explained

Land doesn't have a price in the way a house does. There's no row of comparable sales on the next street for a paddock with permission for four houses. What a developer will pay for it is worked out backwards, starting from the finished homes, and the method has a name: residual land value.

If you own land and you're thinking about selling it, developing it or entering a joint venture, this is the sum behind every offer you'll receive. Understanding it puts you in a much better position to judge them.

The sum

At its simplest:

• Gross development value (GDV), which is what the finished homes would sell for
• minus the development costs, meaning the build, professional fees, planning obligations and levies, the structural warranty, service connections, abnormals, finance, and sales and legal costs, plus a contingency
• minus the developer's profit, which is the return for taking the risk
• equals the residual land value, which is what's left to pay for the land

Two of those lines deserve a word. Abnormals are the costs specific to the site: poor ground, a long drainage run, a sloping plot, trees, contamination or difficult access. They're why two plots of the same size can be worth very different amounts. Planning obligations and levies cover any Section 106 contributions, the Community Infrastructure Levy where the council charges it and, on larger schemes, affordable housing. All of them come off the land value.

Out of the residual, the buyer also has to pay their own costs of buying the land, such as stamp duty and legal fees, so the price they can offer is lower again.

An illustration, not a valuation

The figures below are hypothetical round numbers, chosen only to show how the sum works. They are an illustration, not a valuation, and they don't describe any real site.

Say a site has planning permission for four detached houses, each expected to sell for £750,000.

• GDV: £3,000,000
• Build costs: £1,600,000
• Fees, planning, warranty, connections and contingency: £300,000
• Finance, sales and legal costs: £200,000
• Developer's profit: £450,000
• Residual land value: £450,000

Why the residual moves so much

The land value is what's left over at the bottom, so it moves much further than any of the numbers above it.

Keep everything else in the illustration the same and drop the sale price of each house by £50,000, to £700,000. The GDV falls by £200,000, and so does the land value, to £250,000. A fall of less than 7 per cent in sale prices has taken more than 40 per cent off what the land is worth.

The same happens with costs. Find £100,000 of extra foundations and drainage, and it comes straight off the land too. In practice the profit figure would move as well, because developers and lenders usually relate it to the value or cost of the scheme, but the principle holds.

The residual is the last line in the sum, so every optimistic or pessimistic assumption above it lands on the land.

That's also why planning status matters so much. Land with a sound permission can be valued on what's actually approved. Land without one is valued on what might be approved, discounted for the risk and the time it takes to find out.

Why offers for the same site differ

If you get several offers for the same land, they will rarely agree. Each buyer has assumed different sale prices, build costs, timescales and profit, and some will have allowed for the abnormals while others haven't looked yet.

An offer that's high because it ignores the ground conditions isn't really high. It tends to come down later, once the surveys are done, and that's a common source of frustration for landowners. When you compare offers, ask what each one has assumed and what conditions it's subject to, such as planning, surveys or finance. A slightly lower figure that has been properly worked through can be worth more than a higher one that hasn't.

A number for your site

We buy sites, enter joint ventures with landowners or build out, and our housing developments run from 2 to 30 plots across Cheshire and Greater Manchester. Send us the location and the title plan, and within five working days you'll get a free site appraisal setting out the residual land value and the build cost.

If you're weighing up whether to sell or keep a share of the development, our post on joint ventures for landowners sets out the options. More on the schemes we build is on our housing developments page, and the build rates we use are on our cost guide.