1. Gross Development Value (GDV) is the forecast revenue or sale that is anticipated from the completed development scheme.
2. This calculation is effectively whether a development has, or will, turn a profit at completion.
3. Profit on Gross Development Value is calculated by assessing the cost of development versus the sale of the completed properties to create a total profit value which is then calculated into percentage terms.
EXAMPLE
1. The development is 5 houses which sell at £200,000 each. The overall cost in funding, land acquisition, construction and sales are £750,000. Gross Development Value is therefore calculated as below:
GDV: £1,000,000
Costs: £750,000
Profit: £250,000
Profit on GDV: 25%
2. It’s best to calculate Gross Development Value by first running a detailed analysis of both the forecast cost and sale.
3. Creating an analysis of the recent property transactions in the area of the development versus the overall cost of delivery, including funding, planning and construction.
4. The value of the recent property transactions is critical in the calculation.
5. It can be based on both capital and rental value, as well as including some form of forecast because construction works will mean the scheme is delivered some time in the future.
FINANCIAL APPRAISAL
1. Gross Development Value forms the foundation of any financial appraisal on a project. It’s the figure that allows the required profit to be counterbalanced against the building costs, legal costs, land acquisition and funding expenses.
2. The possibilities available to Property Development companies to increase their Gross Development Value during the 5 stages of a project as noted below:
-Development Appraisal and Budgeting
-Land Acquisition
-Funding
-Pre-Commencement Stage
-Construction
INCREASING GROSS DEVELOPMENT VALUE BY DEVELOPERS
1. A Development Appraisal is an objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer in delivering the project.
2. Development Appraisals come in different shapes and sizes, but the UK Government does provide a template for Developers that includes all the essentials. A good Development Appraisal should include Gross Development Value calculations, budgets, cash flows and much more.
3. When it comes to Land Acquisition there are three types of sites that are referred to:
- Brownfield: Sites previously built on that are currently vacant or in need of redevelopment. Re-development of this type of land is actively encouraged by the UK Government
- Greenfield: Land that has not been developed before (agricultural/ grassland).
- Green Belt: Highly protected land with tight restrictions on development. The Green Belt was created to control urban expansion and is basically a ‘no build’ zone. Green Belt land is generally cheaper to buy because of the major planning restrictions applied to it; however, in locations where councils aren’t on track to fulfil their housing targets, arguments can be made to develop on Green Belt land. In these cases, major opportunities exist for Developers to deliver schemes with large, better protected Gross Development Values.
4. Key Strategies:
- Locations in desperate need of housing will be much easier to get planning on regardless of whether the site is Brownfield, Greenfield or Green Belt
- Locations with quality transport infrastructure and proximity to stations will typically be more attractive to prospective buyers and therefore, yield a large Gross Development Value.
- Schemes which can have a positive environmental impact and reduce the reliance on cars will often be considered favourably.
- Developments in proximity to existing economic infrastructure i.e. areas of employment and close to shops will be more attractive to prospective buyers and therefore, yield a large Gross Development Value.
- Social infrastructure is also important with quality hospitals and schools sought after by buyers
5. The next stage of the development is project funding. It’s a challenge for SME developers to secure funding. Even if a loan is agreed, difficulties with lending policies can arise or timings for the release of crucial funds are delayed – a housebuilder’s number one enemy.
6. It is always recommended that any Developer produces three separate exit pricing models for their scheme; optimum, normal and ‘haircut’. If the site is profitable on the ‘haircut’ model, e.g. in a downturn, should unit values rise due to a more positive environment, then clearly the resulting upside is that margins are increased.
7. Pre-Commencement Stage - Identifying the target market - First time buyers are a ‘golden customer’ for many SME housebuilders and developers. They’re the fastest growing home-buying demographic and with no chain.
- Identify competitive sites – either under construction or currently in planning
- Review the current local housing stock and identify a shortage of particular property type
- Understand price sensitivity in relation to the income of the target demographic
8. The skill of a property developer and the overall success of a Property Development is ensuring their Development Appraisal is accurate. The effectiveness of any appraisal is based solely on the quality of inputs used. One area where value can be extracted is by having a greater understanding of construction. Budgeting will allow for better definition on the overall costs on therefore your overall Profit on Gross Development Value calculations – potentially allowing you to operate differently and make different decisions.
EVALUATING GDR FOR BUYERS
1. If you’re looking to achieve as accurate a property valuation as possible, the current economic climate needs to be taken into account. More specifically, consider the more immediate region your property lies in, with current asking prices of properties and data from recently completed transactions of comparable commercial properties an essential reference for the assessment.
2. Once you’ve got gathered references for similar properties in the area, you’ll need to delve into the detail of each property, uncovering what elements command premiums and what shortfalls are holding back the least expensive properties.
3. It might seem relatively simple, but gross development value is an incredibly useful metric that has been specially selected for its association with all manner of other development areas.
4. This cornerstone component of a development project accrues all manner of added costs, including the purchasing of buildings or land plots themselves, not to mention the hiring of construction teams to carry out any advanced building and expansion on site.
5. You can also see how much a developer can look to enjoy as a fee for their work after essential costs have been removed from the overall financial outcome.
6. Residual Method of Appraisal -When it comes to GDV metric, the residual method of development appraisal is used. There are two key approaches here.
7. The first approach sees you subtract the combined cost of construction and building, fees and transactions, plus the overall developer profit needed from the gross development value. The resulting value corresponds with the purchase price of land or property acquisition.
8. An alternative approach assesses the profit of the property. Here, you subtract construction and building costs, fees and transaction amounts, plus land costs from the GDV. The resulting number then corresponds to the required property developer profit. For property developers, this is the go-to formula. Not only does it demonstrate a clear oversight of viability of a project, it offers them a personal projection on what kind of income they can look forward to after a development project has been completed successfully.
Source:
https://c-link.com/gross-development-value-and-profitshttps://www.prideviewgroup.com/what-is-gdv-gross-development-value-and-how-it-works/
