RESIDUAL METHOD

A DEVELOPMENT APPRAISAL
 Purpose

Identify the value of sites which have development potential

Consideration
What is the acceptable land price based on GDV?
What is the expected profit margin?
What would be the selling price/rental and construction cost?

Concept
Modification/adjustment of the variables are made in the residual method
before the development start; but the precise monetary variables can only
be revealed after the completion of the development.
 Gross
Development Challenge in adding
Values detail to the appraisal
model!!
Finance on Construction
construction Why, how, and what?
& other costs costs
What about profit?
Variables in
residual method Whether a site is
for housing
development identified & looking for a
scheme suitable development
Finance on
scheme; or looking for a
land cost Land cost site that is suitable for
one of several
development proposal?
Other
costs/fees
GROSS DEVELOPMENT VALUES (GDV):

• GDV
• The value of completed development
• Sales income-comparable sales from similar properties
• Rental income
• Compared to rents obtained from similar properties
• Net rental value is capitalised by multiplying by appropriate years purchase
GROSS DEVELOPMENT VALUES (GDV):
• E.g. The rental value of an office block is estimated to be $30 per m2. The
total floor area is 10,000m2 and the non-lettable area represents 20%.
What is the GDV if YP is 6%?
• YP = year of purchase (YP) in perpetuity
10,000 m2 x 80% x $30 = 240,000
YP at 6% = 100/6 = 16.67
GDV = $4,000,800
(Ashworth.A 1999)
FINANCE COST:
Finance on construction
Payment to contractor are usually make at interval during progress of work (Progress payment).
What is the schedule of payment?

So the full cost the financing this part of work will not incurred at the beginning of the period of
construction work

The building cost finance may be calculated as half of the building cost at the rate of interest for full
term (using compound interest where the period are long one)
Or full building cost for half the term (also use compound interest for a long building period)
FINANCE COST:
Finance on land
A land is usually purchased through a financing scheme in which interest will have
to be paid on the period stating the actual purchase until developed property is
either let or sold.

It is often a year or more of the date of purchase of the site until building work start,
during this period, bank are prepared, planning approval obtained and BQ and
tender prepared and agreed.

Is there waiting/void period from the first day the land is purchased until it is fully paid
and developed? If YES, what would be the impact to the overall development cost?
 Simple interest Compound
interest
Interest is periodically
Interest earned/charged added into the principal
on only the original & carried to new balance
principal, not on the (i.e. principal + interest
accrued interest. to be charged/earned in
the following interval)

The amount Interest is calculated

earned/charged within a based on annually,
period is place in a quarterly, monthly, etc.
separate account

Simple Interest = P x r x d Compound Interest = P [(1 + r)n -1]

P = the principal loan amount P = the principal loan amount
r = the annual interest rate (decimal) r = the annual interest rate (decimal)
d = duration (years) n = the number of times that interest is compounded
ITEMS TO BE CONSIDERED
IN DEVELOPER’S BUDGET:

The yardstick was developed before year 2011.

Thus, adjustment is necessary to improve the accuracy
of the developer’s budget.
TQ