Valuation of Block (Subdivisible)Land
• Highest and – Most probable
• Physically possible
• Appropriately justified • Legally permissible
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• Financially feasible
• Does land have potential for subdivision? – How will you determine this?
– What will you look for?
Development Risk
• Market risk
– Localmarketsupplyanddemand – Takeup
– Affordability
– Demographics
– Consumerconfidence
• Asset risk – Location
– Resourcemanagementplanning – Asset liquidity
– Capitalexpenditurerequirements
• Development risk – Projecttiming
– Delivery
– Constructioncostsandcontractors
Development Risk
• Financial risk
– Capitalfundingandsourceoffunds
– Interestrateincreases
– Lendersarenotrequiredtofundanymorethanthecommitted
amount (gap lender, equity partner or Bankrupt?)
• Operational risk
– Developers internal management
• Environmental risk
– Community/political
• Economic risk
– Economicchange
Cash flow characteristics
• Long period of cash outflow – Land acquisition
– Development cost
– Consultant fees
– Government charges
• Short period of cash inflow – Large cash inflow at the end
• Timing is essential to the success
Analysis of Comparable Block Sales
Best approach to use if there is good sales evidence
• Comparable sales evidence – Lot yield
– Development costs – Section prices
– Location
Direct Sales Comparison
• Analyse sales on per sq metre or per hectare rate
• Make adjustments as required • Apply adjusted rate to subject
Hypothetical Subdivision Analysis Residual Method
“Value”=land + development cost + finance cost + profit
Gross realisation
Less development costs
Less developers profit and risk Less allowance for return on capital
• Estimating the lot yield
– Comply with relevant regulations
– “Relevant” market demand
– Topography
– Ask for a subdivision plan if possible
• District Plan – Zoning
– Minimum lot size
– Minimum site coverage – Rules on access
– Car parking
• Selling expenses
– Advertising
– Commission (calculated on GST inclusive sale price of sections)
– Legal fees
• Profit and risk
– Function of the total outlay
– Set by the ease of development and market demand for sections
• Developmentcosts – Obvious costs
• Roads, services, excavation, landscaping, fencing – Professional fees
• Survey, engineering, legal, landscape architect – Abnormal costs
• Rockexcavation
• Major earthworks
• Othercosts – Overhead
• Rates,insurance,returnoncapital
– Development levy or council’s financial contribution – Contingency allowance
• Interest allowance (return on capital) – On development costs
• an average of half the period during which the estate is being developed and sold
• Interest rates charged – On land
• Duration of the project • Interest rates charged
– Before and after individual CTs
• Acquisition costs – Legal fees
Whareroa 2E Block v Ministry of Works (1957)
– The land has to be valued as a whole
– Potentialities
– Suitability for subdivision
– Prospective yield from subdivision
– Unforeseen costs
– Contingencies
– Profit for himself/herself
• v Ministry of Works (1963) – Profit and risk at 25% outlay
• Green & McCahill v Ministry of Works (1965) – Profit and risk not restricted to 25%
– Case by case basis
• Ltd v Manukau City Council (1977)
• Boat Park Ltd & Licaka Holdings v Hutchinson and DC Findlay (1998)
Cash Flow Analysis
• Cash Receipts – Lot sales
• Deposits
• Settlements
– Rates adjustment on settlement – Rental if possible
• Gross receipts
– Less selling costs
• Net receipts
• Use of cash
– Acquisition
– Development
– Administration and overhead
• Total use of cash • Net cash flow
• Evaluating cash flow (profitability) – IRRs
• Monthly IRR
• Effective annual yield (EAY) – Cumulative cash flow
• Scenario analysis
• The task is to image the project proceeding to track all cash inflows and outflows as they occur and record them in the appropriate cells of the table
• Timing factor is of paramount importance in the DCF analysis
• Land value
– NPV of net cash flows excluding land at investor’s
required return
– Less land acquisition costs
– Land value
– Check the result with comparable sales and hypothetical methods
Comparisons
• Hypotheticalmethod(staticmodel)
– Does not incorporate time value of money
• Not comparable unless the real rate of return is zero – Profit and risk factor
• Does not measure profitability
• Does not measure risk either
• Kind of “mark up”
• Difficult to calculate from sales data
– Double counting • Contingencies
• Interestcosts
– Suitable for a short time period development
• DCF approach
– Simulate reality
– Scenario analysis to derive a range of likely values – Source of risk
– Suitable for medium time period development
Valuation of Development Works in Progress
• Set out the prospective cash flows as from the date of valuation
• Choose the appropriate discount rates
• Taking on a partly completed project is a very complicated matter and requires a very high return
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