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Development Finance

How Are Development Projects Valued?

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Quick answer

Valuers commonly assess

3 core ways

Current land value, as if complete value, and feasibility based residual analysis

  • Main end value metric GRV
  • Common lender overlay QS review
  • Key valuation basis As if complete
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Development projects are usually valued on more than one basis. A lender may want to know the current value of the site, the end value once the project is complete, and whether the numbers still work after allowing for build costs, fees, interest and selling costs.

That is why development valuations often combine comparable sales evidence, an as if complete assessment, and a feasibility based residual valuation rather than relying on a single number.

In practice, lenders want a valuation that shows what the site is worth now, what the finished project should be worth, and whether there is enough margin to absorb risk.

What drives a development valuation?

A valuer does not simply guess what a development site is worth. The assessment is usually built from market evidence, the proposed scheme, planning position, build costs and the likely end values of the completed product.

Typical factors considered include:

  • iconComparable land and end sales
  • iconPlanning approval and zoning
  • iconProject scale and product mix
  • iconConstruction and civil costs
  • iconSelling timeframes and absorption rates
  • iconRequired developer profit and risk margin

How Development Valuation Works

Most development valuations move through a sequence rather than relying on one simple figure.

A lender may start with the site as it stands, then assess the end value on an as if complete basis, then test whether the project still makes sense after allowing for all costs and an appropriate developer margin.

Typical valuation flow may include:

  • 01 Analyse land and planning position
  • →
  • 02 Review plans and approvals
  • →
  • 03 Estimate GRV or end value
  • →
  • 04 Allow for build and soft costs
  • →
  • 05 Apply residual land analysis
  • →
  • 06 Stress test lender security

Where construction is involved, lenders also commonly rely on a quantity surveyor to review cost to complete and drawdown risk alongside the valuer's report.

Main Valuation Methods

Development projects are commonly assessed using these valuation approaches:

Method 01

As if complete value

This estimates what the completed project should be worth once construction and any required works are finished, using relevant market evidence and the approved or proposed scheme.

Method 02

Residual land value

This works backwards from the projected end value, then deducts construction costs, professional fees, finance costs, GST where relevant, selling costs and developer profit to estimate what the site can support.

Common lender end value basis GRV
  • GRV means gross realisation value of the completed stock
  • Lenders compare GRV against total development cost and required margin

On many development loans, the headline number a lender focuses on is the projected end value or gross realisation value. That figure is then tested against costs, timing, pre sales, and exit risk before a lending ratio is applied.

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What is included in the valuation?

A proper development valuation is usually tied closely to project feasibility.

That means the valuer and lender will often review not only the property itself, but also the assumptions that drive the end value and development margin.

A valuation review commonly includes:

  • iconCurrent site value
  • iconAs if complete end value
  • iconGross realisation value by unit or lot
  • iconConstruction and soft cost assumptions
  • iconSelling costs, GST and holding costs
  • iconDeveloper profit allowance and risk margin
  • iconAbsorption rate and time to sell
  • iconAny one line or bulk sale discount where relevant
15 - 20 %
Many lenders still want the feasibility and valuation outcome to show an appropriate developer margin, often around 15 percent to 20 percent or more, so that there is enough room for market and construction risk.

Common valuation outputs

Depending on the project and lender, the report may refer to several different values

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Current market value

The value of the site in its present condition, reflecting its existing improvements, planning status and market evidence at the valuation date.

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As if complete value

The value of the finished project once construction and required works are completed. This is commonly used where titles are not issued or the improvements are not yet built.

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In one line value

For some projects, lenders also want the value assuming the completed development had to be sold in one transaction to a single buyer rather than sold down individually.

Common valuation issues

Development values can move materially if the supporting assumptions are weak, outdated or too optimistic.

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End values are too optimistic

If comparable sales are stretched or the product is priced above the local market, the GRV may be reduced.

Ways to strengthen this include:
  • icon Use recent like for like sales evidence
  • icon Match pricing to location and product quality
  • icon Stress test slower sell down assumptions
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Construction costs are understated

If costs are light, the residual land value and project margin can look stronger than they really are.

This is why lenders often rely on:
  • icon Fixed price building contracts where possible
  • icon QS reviews and cost to complete checks
  • icon Conservative contingencies
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Planning risk is not resolved

A project with only conceptual plans can be valued differently from one with firm approvals and a clear permitted yield.

Values are generally stronger where there is:
  • icon Development approval in place
  • icon Clear zoning and servicing
  • icon A buildable and marketable scheme
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The one line value is much lower

Bulk sale assumptions can produce a materially lower figure than the retail sell down GRV, especially on larger projects.

This matters because:
  • icon Some lenders want a downside sale scenario
  • icon Larger projects can be harder to exit quickly
  • icon Lower one line values can reduce leverage
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Steps In A Development Valuation

Step

01

Inspect the site and review title, zoning, approvals and plans

Step

02

Analyse comparable land sales and end sales in the local market

Step

03

Estimate the as if complete value and gross realisation value

Step

04

Deduct construction, soft costs, finance and selling costs to test feasibility

Step

05

Apply developer profit and risk allowances to derive supportable land value

Step

06

The lender then uses that report to set leverage, conditions and drawdown structure

Step

01

Identify a development site and prepare the project concept

Step

02

Obtain planning approval or prepare development plans

Step

03

Estimate construction costs and complete a development feasibility study

Step

04

Determine how much equity or deposit you can contribute

Step

05

Submit the development proposal to lenders that specialise in development finance

Step

06

Once approved, funds are released progressively during construction until the project is completed

shape

Speak with a Development Finance Specialist

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Development valuations can vary significantly depending on the location, approvals, end product, construction budget, timing and the evidence available in the market.

A specialist can review the valuation issues in your project and help determine how lenders are likely to assess the site and completed end value.

Speak with a finance specialist about your project valuation.

Submit the short form below and a specialist will review your project and discuss how lenders may assess value, leverage and feasibility.

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Additional Questions

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