In simple terms, the value of a site is determined by establishing the terminal value of the site’s best use and then subtracting the costs of realising that value. For example, if a site has planning permission for a 4-bed detached property, the estate agent will estimate the value of the finished property and then subtract costs such as construction, legal, development contributions, estate agency fees (on the onward sale) and the developer’s profit. The difference between the terminal value and the costs to realise it, is the value of the site. If costs go up (e.g. construction cost inflation), the value of the site goes down and if the terminal value goes up (rising property market), then so does the value of the underlying site.
Another issue for consideration is whether the site is being purchased by a developer / builder with a view to making a profit or by a homeowner who intends to live in the finished property. The developer will be able to recoup VAT paid on input costs but equally would need to charge VAT on the property at 13.5% when selling it. Accordingly VAT on input costs is not a cost for a developer / builder. However, a homeowner on the other hand will not be able to recoup such VAT and as such it is very much a cost in that scenario.
Of course, while a developer will require a profit, a homeowner will not. The homeowner may require a discount to the open market value of the finished property in order to take on the work associated with building the property so the lack of a need for profit may be netted against the need for a discount for having to build the property. Ultimately the site’s value is determined on the open market through competitive bidding. Below is our simple tool for estimating the value of a site. Note this is a basic tool and if you are planning on bringing a site to market, be sure to contact us to speak to one of our experienced estate agents for a professional valuation.