21 Aug A valuers perspective
What factors should developers consider in order to set their expectations within realistic parameters in the current market?
There are a variety of factors that developers should consider in order to set their expectations within realistic parameters in the current market. First of all, Developers should seek sales advice from local agents (in my opinion 3-4 of the most reputable larger agents who are the most active), additionally, they should ask to see actual sales evidence and not just rely upon opinions. Secondly, I think developers should make sure that the proposed dwellings of the consented site that they are purchasing conform to the surrounding dwellings, and not to worry about increasing the values on surrounding sales. The developer should bear in mind that it could take longer to sell the units when complete, however they should always aim to achieve a minimum 20% profit on outlay. Therefore, the developer will need to be realistic with build costs and make sure that all other fees are considered including a contingency. Something else is it important to note is, examining potential rents rates in case sales aren’t achieved as this can bridge the gap until a suitable sale can be achieved.
What is the most common cause of a mismatch between the actual valuation and developer’s expectation?
Some of the most common causes of a mismatch between the actual valuation and the developer’s expectation include:
- The GDV not being calculated properly
- Build and construction costs are not calculated properly, so they are higher than expected
- Profit is lower than expected
- There is a lower or no contingency to make up for cash flow
- The purchase price is too much, leading to a lower profit.
How are valuers managing the increased uncertainty which lies ahead considering that there is a greater possibility of a hard Brexit?
This is a very difficult question from a valuers perspective because, like everyone else, we just don’t know what is going to happen, and when we produce a valuation, it is based on the date of the valuation not what may happen in the future be it positive or negative. We must go on actual factual based evidence to complete our valuations. At the moment we may look at increasing the marketing period and discounting 90 day or 180 day values, in addition to comparing units to second-hand values and not allowing any new build premium.
What is the greatest challenge which developers face in the current market?
There are several challenges that developer’s face in the current market. The first challenge is the lack of good quality sites, especially for small private developments, and without this, it is difficult for them to actually produce the schemes they want to. The second issue is the seller’s perception of the land value is generally higher than the actual value. This is often due to the estate agents not understanding the costs that go into a development, and not being able to complete a residual appraisal, therefore, advising their client incorrectly. The third problem is a mismatch between the cost at which the developer thinks it can complete the build for and what a third party may estimate the build cost at; to mitigate this, at valuation we generally see our costs as higher than the developer. The final challenge a developer faces is finding a site with the right product in the right location at the right price, without these 3 components, development projects are very difficult to profit from.
What is your top tip for developers to prepare against down valuations in the current market?
My top tips for developers to prepare against down valuations in the current market are:
- Do your research and make this as detailed as possible. Speak to leading local agents and get comparable transactions. Check costs against industry norms and make sure their appraisal includes a detailed breakdown of costs, professional fees and a suitable contingency.
- The best thing any developer can do before going down the route of a full valuation is to approach us to undertake a desktop valuation to ascertain if the figures are in the right ballpark prior to putting an offer in or prior to seeking finance.