How to run a development appraisal, step by step

What a development appraisal is

A development appraisal is a feasibility calculation. Before you buy a piece of land or commit to a building project, you need to know whether the numbers work. Will the completed development generate enough revenue to cover all the costs -- construction, finance, planning obligations, professional fees -- and still leave a profit that justifies the risk?

The appraisal answers a deceptively simple question: what is the maximum I can afford to pay for this site and still make the returns I need? That answer is the residual land value.

The residual method

The core formula is straightforward: Residual Land Value = GDV - Total Development Costs - Target Profit. You start with what the completed scheme will be worth, subtract everything it will cost to build and sell, subtract the profit you need, and whatever is left over is what you can afford to pay for the land.

Step by step

Step 1: Estimate the GDV. This is the total revenue from selling all completed units. You derive it from comparable transaction evidence -- recent sales of similar properties in the same area, adjusted for your scheme's specification.

Step 2: Calculate construction costs. The standard reference is BCIS (Building Cost Information Service). A new-build block of flats in Outer London might come in at £2,000 to £2,400 per square metre at average specification. Regional adjustment matters -- building in Central London costs materially more than the Midlands.

Step 3: Add professional fees. Architects, structural engineers, project managers, building control. Typically 10-15% on top of construction costs.

Step 4: Add finance costs. Development finance interest rates typically run at 6-8% per annum on a balance that increases as construction progresses.

Step 5: Add planning obligations. Community Infrastructure Levy (CIL) varies from under £50/sqm in some northern authorities to over £400/sqm in prime London. Section 106 agreements cover affordable housing (typically 35% for schemes of 10+ units), education, healthcare, and transport contributions.

Step 6: Add marketing and sales costs. Budget around 2% of GDV for marketing and 1.5% for estate agency and legal fees.

Step 7: Add contingency. 5% of construction costs is standard. Complex refurbishments warrant higher.

Step 8: Calculate the residual. Subtract all costs from GDV, then subtract your target profit (15-20% on GDV). What remains is the residual land value.

Key metrics to watch

Profit on GDV: 15-20% is the industry benchmark. Below 15% and most lenders will not fund the scheme.

Profit on cost: Profit divided by total project costs including land. 20-25% is the typical target.

IRR (Internal Rate of Return): Accounts for the timing of cash flows. A three-year scheme needs higher total profit than an eighteen-month one.

The spreadsheet problem

Most developers run appraisals in Excel. The spreadsheet itself is not the problem -- the problem is everything that feeds into it. GDV figures are manually researched and typed in. Build cost rates may be months out of date. CIL rates require navigating to the local authority website. Each input is a potential source of error, and assumptions are rarely revisited once entered.

MarketCode's deal-analysis skill runs this sequence with the tools: site position, planning constraints, market evidence, a GDV from comparable sales or income capitalisation, a cost stack from your assumptions, then residual land value and sensitivities.