Residual Method

Question 1

When is the residual method used?

Answer 1

Typically used for a property or land with development potential. Output is market value of the land. This method requires valuers to make a variety of assumptions around input.

Question 2

What is the difference between a residual land valuation and a development appraisal?

Answer 2

Residual: market value of land. Development appraisal: profitability or viability.

Question 3

Summarise the residual method.

Answer 3

Assess development potential of land, i.e. highest value use. Calculate value of the finished scheme: Gross Development Value (GDV). Deduct development costs including developer’s profit, build costs, professional fees, contingencies, finance. Valuation should be cross-checked using comparable method based on land sales.

Question 4

What are the types of development costs?

Answer 4

Building costs, Professional fees, Contingencies, Finance (including S-curve finance calculations and rates of finance), Marketing, Planning gain, Developer’s profit, End values established via residential valuation.

Question 5

What developer’s profits would be expected in Scotland?

Answer 5

Typically around 15–20% of Gross Development Value (GDV) for residential schemes. May vary depending on scheme complexity, risk, and market conditions. Used as a benchmark in residual valuations to assess viability.

Question 6

What does sensitivity analysis mean?

Answer 6

Market value can be very sensitive to the inputs used. Sensitivity analysis is a form of stress testing. Involves changing one variable to see its impact on the outcome.

Question 7

What are the disadvantages of the residual method?

Answer 7

Figures can be difficult to obtain and verify. Highly sensitive to input assumptions. Susceptible to manipulation. Development process timing and cashflow are tricky to measure. Requires extensive information gathering and legal inquiries.

Question 8

What is an S-curve in development finance?

Answer 8

A model showing how costs are incurred over time. Reflects slower initial spend, rapid mid-phase, and tapering finish. Used to calculate interest and cashflow timing.

Question 9

What is planning gain?

Answer 9

A financial contribution or obligation required by planning authorities. May include affordable housing, infrastructure, or community benefits. Impacts development viability and residual value.