It has been said that property possesses development potential whenever an element of latent value can be released by the expenditure of capital upon it (Baum & Mackmin 1989). Generally, this may arise through the development of a bare site where planning permission has been, or is likely to be, obtained; by redevelopment through the demolition and replacement of existing buildings following the grant of planning consent; by renovation through the upgrading of existing building, with or without planning approval for a change of use; or by a combination of new development, redevelopment or renovation.There is nothing especially complex about the basic theory of development valuation, or indeed the traditional techniques employed. In fact, its very simplicity often attracts the disfavour of those seeking the mystical qualities of more advanced techniques of financial appraisal. In essence, development valuation merely involves the calculation of what can be achieved for a development once completed and let, less what it costs to create. It is, therefore, the most explicit and straightforward of valuation tasks, but can, at the same time, be the most prone to error and most responsive to individual supposition. Consequently, it depends above all upon sound professional judgement and a thorough investigation of all the circumstances prevailing in individual cases.One fundamental factor, however, is that the reliability of any development valuation depends entirely upon the quality of the appraisal information described in the previous chapter.
A development valuation or viability study can basically be undertaken for various different purposes, which include:
|• calculating the likely value of land for development or redevelopment where acceptable profit margins and development costs can be estimated|
|• assessing the probable level of profit that may result from development where the costs of land and construction are known|
|• estimating the required level of rental income needed to justify the development decision|
|• establishing a cost ceiling for construction where minimum acceptable profit and land value are known.|