How Development Sites Are Valued
The residual method, direct comparison and why small changes in assumptions move land value so much.
Published 7 min read
In this guide
A development site is valued on what can realistically be built on it. Valuers compare sales of similar sites where that evidence exists, and use the residual method, which takes the value of the finished project and deducts every cost and a profit allowance, to test or replace the comparison. Because the land is what is left over, a small change in sale prices or building costs moves the land value a lot.
What makes a property a development site?
A property is valued as a development site when its highest and best use is to build something new or more intensive on it: the most valuable use that is physically possible, legally permissible and financially feasible. That might be an old house on a block zoned for townhouses, a factory in an area being rezoned for apartments, or englobo land: a large parcel that is suitable for subdivision but has not yet been subdivided.
The International Valuation Standards deal with this kind of property in IVS 410, Development Property. Whatever the site, the valuer is looking for the price a typical developer in the market would pay, not what one particular owner hopes to make. The same idea sits behind market value for every kind of property.
How does direct comparison work for development land?
The valuer analyses sales of similar sites on a common unit:
- Per square metre of site area.
- Per approved or potential dwelling or lot.
- Per square metre of gross floor area the planning controls allow.
Each sale is then adjusted for the differences that matter: whether the site has a planning approval, its size and shape, slope, access, services, contamination or flood risk, and how the market has moved since the sale. Direct comparison is usually the preferred method where there is plenty of evidence. For unusual or large sites there often is not, which is where the residual method comes in.
How does the residual method work?
The residual method, also called a hypothetical development, asks what a developer could afford to pay for the land and still make a reasonable return. Here is a simplified example for a site with approval for six townhouses. Every figure is illustrative, chosen to show the arithmetic, not current market evidence.
| Step | Amount |
|---|---|
| End value: six townhouses at $1,000,000 each | $6,000,000 |
| Less GST and selling costs | $600,000 |
| Less construction | $2,700,000 |
| Less professional fees, approvals and infrastructure contributions | $400,000 |
| Less finance and holding costs, such as interest, rates and land tax | $300,000 |
| Less the allowance for profit and risk | $900,000 |
| Residual: what a developer could pay for the land, including purchase costs | $1,100,000 |
The valuer then deducts the buyer’s stamp duty and other purchase costs to reach the land value. In a real report each line is supported: end values by sales of comparable new dwellings, building costs by a quantity surveyor’s estimate or cost data, finance by current lending terms, and the profit allowance by what developers require for that type and size of project. Larger or staged projects are often modelled as a cash flow over time instead, so that the timing of costs and sales is reflected.
Why do small changes move the land value so much?
Because the land absorbs every change. Here is the same example with one or two inputs moved. GST, selling costs and the profit allowance move with end values; the other costs are held steady to keep it simple.
| Change | Residual for the land | Change in land value |
|---|---|---|
| Base case | $1,100,000 | None |
| End values 5% higher | $1,325,000 | Up about 20% |
| End values 5% lower | $875,000 | Down about 20% |
| Construction costs 10% higher | $830,000 | Down about 25% |
| End values 5% lower and construction 10% higher | $605,000 | Down 45% |
A 5 per cent move in sale prices moves the land value by about 20 per cent. That is why a good residual report sets out every input, tests the sensitive ones and is checked against direct comparison wherever there is evidence. It is also why a developer’s own feasibility, built on their own costs and targets, can show a different figure from a valuation.
Does a planning approval increase land value?
Generally, yes. An approval removes time, cost and the risk of refusal, and buyers pay for that. But an approval only adds value if the approved project is viable, and its conditions, such as contributions, design changes and required works, are costs the residual has to include.
Without an approval, the valuer considers what could reasonably be approved under the planning controls and reflects the time and risk of getting there. Land with a realistic prospect of rezoning can sell for more than its value under the current zoning, but only by the part of the uplift a buyer would pay for given the risk. A report can also value a site on a stated assumption, such as “as if approved” for a particular scheme. That figure is only as good as the assumption, and the report has to say so plainly.
What changes from state to state?
Planning rules and development charges are set by each state and territory, and they flow straight into the residual. Here are the main ones in New South Wales, Victoria, the ACT and the Northern Territory.
| Where | Planning controls | Charges that affect land value |
|---|---|---|
| NSW | The council’s local environmental plan: zoning, height and floor space ratio | Local infrastructure contributions (sections 7.11 and 7.12 of the Environmental Planning and Assessment Act 1979) and, in Greater Sydney, the Central Coast, Illawarra Shoalhaven, the Lower Hunter and Greater Newcastle, the Housing and Productivity Contribution, introduced from 1 October 2023 and indexed each quarter |
| Victoria | The council’s planning scheme: zones and overlays | Public open space contributions (set in the planning scheme, or up to 5% under section 18 of the Subdivision Act 1988 where the scheme sets no requirement), development contributions where the planning scheme includes a development contributions plan, and windfall gains tax on government rezonings since 1 July 2023 that lift a property’s value by more than $100,000 |
| ACT | The Territory Plan and the purpose clause of the Crown lease, because land in the ACT is generally held under Crown lease | The lease variation charge when a lease is changed to allow more development, generally 75% of the increase in value |
| Northern Territory | The NT Planning Scheme, which covers the Territory except where another planning scheme applies (section 7 of the Planning Act 1999) | Developer contributions under a council or service authority contribution plan, where one applies (Part 6 of the Planning Act 1999) |
What else can reduce a site’s value?
- Contamination from past uses. A valuer does not test soil, so the report states its assumption and may recommend specialist advice.
- Flooding, bushfire and other hazards, which can limit what can be built or add to building costs.
- Easements, covenants and other restrictions on title.
- Heritage controls on the existing building or the area.
- Existing leases that delay vacant possession, although the rent can help cover holding costs. How leased property is valued explains how a valuer reads them.
- Slope, rock, access and the cost of bringing services to the site.
When would you get a development site valued?
- Buying or selling a site, or testing an agent’s price.
- Bringing in a partner or joint venture, or buying one out.
- Family law settlements and estates.
- Capital gains tax and transfers between related people or entities.
- GST: where land was held before 1 July 2000, the ATO allows the margin to be worked out using an approved valuation, usually at 1 July 2000. Your accountant decides whether that may be useful.
- Finance: valuations for lending are ordered by the lender, and we do not provide them.
How much does a development site valuation cost?
Development site valuations start from $2,750 including GST and are quoted on scope, which depends on the site, the stage of the project and the purpose. Planning approvals, plans, any feasibility or cost estimates, and survey, title, geotechnical or contamination reports all help. A standard vacant residential lot is a land valuation instead: $339 inspected, or from $159 as a desktop assessment where an inspection is not needed.
You see the quoted fee before anything is booked or charged. Property Valuations Australia takes requests for property in New South Wales, Victoria, the ACT and the Northern Territory. Request a development site quote or read about development site valuations.
Sources
Last checked . The facts on this page were checked against these primary sources.
- ATO, Market valuation for tax purposes (guide, ATO Legal Database)
- Environmental Planning and Assessment Act 1979 (NSW), sections 7.11 and 7.12
- NSW Department of Planning, Housing and productivity contribution
- Subdivision Act 1988 (Vic)
- State Revenue Office Victoria, Windfall gains tax
- ACT Government Planning, Lease variation charge
- ATO, GST and the margin scheme: valuations
