For instance, where comparables (transacted or available for trade) are not available in the market to arrive at the land value through the market approach, the “Residual Method” can be used as an alternative approach to arrive at the underlying land value.
The Residual Method is used to assess the underlying land value of property by deducting development costs and developer profits or margins, from the gross development value.
Where:
- Gross Development Value (GDV) is the current market value of the property. The market value of the subject development is assessed on the special assumption that the development is completed as of the valuation date.
- Development Costs: construction costs (including hard cost and soft cost), finance cost, and other costs that are related to the development of the property
- Development Margins: Developers expected margins from the project. It will be calculated as a percentage of “GDV – Development Costs”
Points to be Noted:
- The residual value is highly sensitive, considering a small change in the assumptions will have a significant impact.
- The valuer has to evaluate the source of information, including development type, approvals, construction timelines, construction, and other costs as of the valuation date
- In addition to the above, the valuer should assess the demand and supply in the market and the highest and best use of the land parcel
