RES 551 (B)

CONVENTIONAL TECHNIQUE
INTRODUCTION
Residual Method

Underlying principle = Development Value > Existing Use OR

= Value of vacant site > current use

Basic Formula;
Gross development value (GDV) - total development costs (including profit) =
residual land value

Profit/Return;
Profit = Gross Development Value less Development Costs
Conventional Technique Measurement
• Profit on Cost (%) =
Profit (surplus) x 100
Development Cost

• Profit on Value (Investment) (%) =

Profit (surplus) x 100
Gross Development Value
Gross Development Value;

Gross Development Value;

‘The estimated value of the completed development’

Highest and Best Use Principle (MVS)

‘Highest and Best Use is a Premise of Value which assumes that the
asset is put to a use that maximises its potential in continuation of its
existing use or for some other alternative use assuming that the use is
physically possible, legally permissible and financially feasible’
• Establishing whether the use is physically possible, having regard to
what would be considered reasonable by market participants.
• Reflecting as to whether the use is legally permissible, and if there are
any legal restrictions on the use of the asset, e.g. planning/zoning
designations, and considering the possibility that these may be
subject to change.
• Determining that the use is financially feasible
The Physical/Site
(Isaac, 1996) • stability
• ownership • access
• acquisition • layout
• boundaries • buildings
• area • services
• topography • archaeological remains
• landscape • contamination
• physical factors which may affect
development value
Planning Planning permission
• to grant permission
It is necessary to obtain unconditionally
planning permission for • to grant permission subject to one
most development
or more conditions, or
• to refuse permission.
• Planning constraints
• Development plans
• Development Control
Feasibility • by taking into account whether
the use that is physically possible
and legally permissible will
generate sufficient return to a
typical market participant, after
taking into account the costs of
conversion to that use, over and
above the return on the existing
use over the period to fully realise
that use, and considering that
market conditions are likely to be
subject to change.
Development Cost

The main elements of cost ;

a. Land costs include
- the land price which is either the price already negotiated with the
landowner or the price being sought by the landowner
- land acquisition cost, 2% - 5% of land cost (legal, duty etc)
b. Preliminary/Site investigation fees These include fees for ground investigation
and land surveys
c. Building cost
- The building costs consist of materials, labour, establishment charges and
profit.
- Building costs are estimated by the developer’s quantity surveyor and are
usually expressed as an overall rate per square foot (or square metre),
which is then multiplied by the gross area of the proposed building. The
building costs are estimated at the time of the proposed implementation of
the development project.
d. Professional fees
- These are normally calculated as a percentage of the building costs,
and include the architect, the quantity surveyor, the structural engineer, the
mechanical and electrical engineer, and the project manager, if applicable.
They are normally 10–13% of the building cost and are based on the
scale charges of each profession, a negotiated percentage or a fixed fee
e. Statutory fee/contribution
- Developers will have to make contribution to essential services
such electricity and water supply, drainage, etc.

f. Finance costs/interest
- Interest costs are a critical element of the appraisal and reflect
either the actual cost to the developer of borrowing money or
the implied or notional opportunity cost
• In order to calculate the interest costs the developer has to estimate
the length of the development period up until the building is either
let (and income producing) or sold, depending on whether the
developer wishes to retain the scheme or not
E.g (Cadman, 2002)
• Site acquisition, preparation and pre-contract 6 months
• Building contract 12 months
• Letting period 6 months from completion
• Investment sale period 6 months from letting
• Total development period 30 months
• Promotion/Advertising costs
-The developer has to make an assessment of the likely sum of
money that needs to be spent on promoting the project in order
to let the property
• Other development costs
-The inclusion of other costs within the evaluation will depend
on the nature of the development and will be specific to the
project e.g contingencies, project management etc.
• Timing of profit measurement
- The residual method measures the profit at the end of the
development period or upon completion of the project as
determined by the developer

Project start Project end

Profit
THANK YOU