Step by Step Residual Valuation

Question 1

Step 1

Answer 1

Calculate potential future income from the development - say £1,340,000

Question 2

Step 2

Answer 2

Adjust for the time value of money. The market yield currently at 6%, so YP perp at 6% = 16.666

£1,340,000 x 16.666 = £22,332,440 (Gross Development Value)

Question 3

Step 3

Answer 3

Deduct disposal fees. Agents & legal fees.

• £647,649

GDV = £21,684,791

Question 4

Step 4

Answer 4

Deduct development costs.

• BCIS shows construction costs at £6,000,000
• Professional fees (15% of build costs)
• Finance on build costs and fees (say 1 year on S curve as a rule of thumb, half the building period)
• Interest rate 7%
• Contingencies, say 5%
• Developers profit - 20% of build costs finances & fees

Gross residual is £12,356,041

Question 5

Step 5

Answer 5

Adjust for acquisition costs and finance

• Developer cannot get their hands on the value until the end of the development, so this needs to be reflected using present value of £1.
• Acquisition costs made up of stamp duty, agent fees 1% and legal fees 0.5%

The result is the amount available for the land.