Land valuation: a highly leveraged asset
Land is a highly leveraged asset and is estimated on a case-by-case basis. A land’s value is in fact a residual value: the resale price of the built building, less all the costs of the real estate project. Valorising land therefore requires very detailed analysis, based on an important track record and a very good knowledge of property development costs.
The prices being complex to evaluate and the level of risk more important, land will interest investors seeking a short / medium term added value. But they also represent interesting assets as part of an asset strategy (asset’s rental or use).
Land valuation: our expert’s point of view
HADRIEN DEMANCHE
Real estate expert, land adviser
What are land assets’s distinctive features?
Each plot has particular characteristics that lead the experts to work on a case by case basis. Whether it is bare or built land, the price is in fact a residual value calculated according to the land developer's balance sheet: the resale price of the constructed building is subtracted from the total costs of the real estate project (including demolition costs in the case of built land). Depending on the capital gain anticipated and actually realised at the end of the project, investing in land can have significant leverage effects. This is why many investors use land as assets of diversification, hoping for rapid capital gains on resale.
What do investors expect from this asset?
Property taxes are characterised by a certain uncertainty which depends on the possible operation on the land and its actual costs once carried out. The level of risk is therefore higher and the land will interest investors seeking short- to medium-term added value by wanting to develop value creation within their assets. This will involve either identifying bare land with good potential or acquiring built land.
In the case of built land, investors seek to determine whether a transaction is possible and attractive. It will then be a question of developing a project by modifying the use of the land, for example by passing from a warehouse in an urban environment to a residential complex in R+6. The objective is to characterise the added value after demolition and reconstruction. This added value represents the land’s price.
But land is also an interesting asset in the context of asset strategies that will lead either to leasing or to the use of the asset. Users can also search for adjoining plots to expand their business.
What are the main criteria when evaluating a property?
Location of the land and related regulations (PLU) are essential in estimating its value. They determine the use of the land and the type of buildings that will be built on it, and therefore the exit price per m² once the project is completed. However, the land’s value depends on this exit price.
Location
Downtown, easy access by individual or public transport.
Urban planning constraints
PLU, flood or seismic zones, technological risks, regulated activities, polluted land…
Usage
Possibility to build a warehouse, housing, high tertiary buildings…
Area and configuration
Surface, access quality, width/depth ratio, relief, slope, soil quality.
In the majority of cases, the land’s valuation is done through a land developer's balance sheet: the sale price of the built project is calculated and all property development costs are deducted, including any demolition and decontamination of the existing. The result gives the value of the land. Other methods can be used but more rarely: the comparison method is possible for allotments because the land’s characteristics are often very similar. This method can also be used for projects in activity zones or logistics warehouses, adding the capitalisation method.
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