View All News
Best property developers in London 2024
Real Estate
6 min read
Oct 23, 2024
This blog article explains how to conduct a quick, high-level appraisal of development projects using key metrics like Gross Development Value (GDV), build cost, developer profit, and residual value. It helps investors and developers filter potential deals efficiently before investing time in deeper due diligence.
In this week’s edition of the blog, we look at what variables are required when analysing development projects with the intention of selling on. Investors & developers come across countless sites on a weekly basis, therefore undertaking a high level of due diligence on all of them is simply not possible. You would need to filter through the deals that have potential for a significant profit & the deals that do not quite quickly on to avoid wasting yours’ & the agent’s time.
The best way to do this is to carry out a high-level or ‘fag packet’ appraisal. The term ‘fag packet’ stems from the old school developers writing up their analysis, while driving around on the hunt for sites, on the back of cigarette packets in order to quickly decipher whether a site had development potential or not.
The Key Concepts
GDV
GDV stands for the Gross Development Value of the site. This in simple terms means how much the site is worth once all the planning is consented & the building works complete.
For example, if there is a large bungalow on the corner plot of a street, how much would this plot be worth with a 3 storey 6 unit flat scheme. During the high level stage, you would need to compute to figures to determine the GDV; your £SQFT & your GIA. £SQFT is effectively how much your completed site is worth per average square feet and the GIA is your Gross Internal Area, i.e the total internal size of your completed site. £SQFT * GIA = GDV.
Build Cost
Your build cost is how much it would cost you to build out the site in order to maximise the land potential. Typically for new build schemes (region may vary), this is at £200 per SQFT. £SQFT * GIA = Build Cost.
Developer Profit
This is typically 20% of the GDV at a minimum.
Residual Value
How much you should pay for the site in order for it to be site of potential.
Existing Use Value
How much is the site worth currently at this time.
Now, in order to determine whether a site has profitable development potential, quite simply the Residual Value (RV) must be greater than the Existing Use Value (EUV).
Residual Value (RV) = GDV – BC – DP
RV > EUV
Using these rough yet simple equations would allow you to quickly navigate from deal to deal and filter through all the non-starters and ultimately allow you to effectively pursue the sites that truly require heavy due diligence.
