The Residual Method.
First, why do we need development ?
Maybe creating a new building or replacing the existing one! or even modernizing existing buildings (Refurbishment).
Development valuation is markedly different from other areas of valuation, mainly because of the properties being valued do not exist yet.
So, The first question that comes into developers' mind, is how much should be paid for the development site. What is the expected profit & Cost?
Therefore, in order for the developer to proceed it has to be economically viable.
What is Residual Valuation Method?
The residual method is employed in the realm of real estate and project valuation to estimate the value of undeveloped land. This method becomes particularly relevant when there is no comparable market prices availble. The application of the residual approach commences with the establishment of a hypothetical value, denoted as the gross development value (GDV). This value is subsequently diminished by the aggregation of expenses encompassing land acquisition, construction, and profit. The resultant figure, referred to as the residual value or residuum.
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MRICS Chartered Surveyor & RICS Registered Valuer || RICS APC Mentor || TEFL teacher || Published poet || Occasional karaoke singer || Irish (Gaeilge) speaker || Supporter of Croatia national team & Wrexham AFC ||
1 年it sorts out the wannabee valuers from the professional ones!
Valuations Manager @ Continental Real Estate | Chartered Valuation Surveyor
1 年Actually the #residualmethod is one of the so-called hybrid valuation methods, which incorporates 2 or more valuation techniques
MRICS | Dubai Islamic Bank | Property Valuation & Investment Advisory | Corporate Real Estate Professional | Chartered Commercial Property Surveyor
1 年In a residual method of valuation, there are multiple inputs that need to be considered. In deriving GDV, based on the development potential of the plot, product mix determination plays an important role. Valuer has to determine the highest and best use of the plot. Plus depending upon the title of the land, units can either be rented or sold. In terms of cost, it is not limited to construction cost, there are cost associated with approvals, soft cost, project management and contingency. Not to forget the interest cost for construction. If a residual valuation is carried out using DCF method, an appropriate discount rate has to be adopted. It is also imperative to check the residual value of the land, as change in the revenue and cost inputs may substantially increase/decrease the value. It is an interesting method of valuation where much caution is required.