TelferYoung Limited

Current | 2008 | 2007 | 2006

TelferYoung Lecture to University Property Students

17 October 2008

The following is a copy of a Powerpoint presentation by Jerome McKeefry of TelferYoung (Wellington) Ltd on the topic of Valuation of Block Land Subdivisions

WHY ARE WE HERE

• To help give something back in terms of knowledge & experience
• Saw a great opportunity to put the Telfer Young name out to future property professionals
• We are well known and highly regarded in the property industry....... BUT,
• Desire for the Telfer Young Brand to become more widely recognised.
• We hope some of you see Telfer Young as a real career  prospect.

Valuation of Block (subdividable) Land

• First, there must be a block of land capable of, or has the potential for subdivision.
• Small site
• Moderate size
• Extremely large
• The valuer must have an excellent knowledge of the local District Plan as to what is allowed.
• Such factors include:
• Zoning
• Minimum allotment size
• Minimum site coverage
• Rules on access
• Car parking
• This list is by no means exhaustive!
• LEARN YOUR LOCAL DISTRICT PLAN
• ASK QUESTIONS

• If possible under the rules of the District Plan,

• Where do you start?
• Case Law suggests:-
• Determination of value by direct comparison with sales, followed by;
• Hypothetical methodology as being traditionally the hypothetical subdivisional budget formula (hyposub). 
• The Parties?

  The Valuer

• Traditionally uses comparable land sales methodology where possible as main approach
• Traditionally uses hyposub, as a secondary approach. Hyposub is a static exercise that does not allow for the timing of cash flows
• Sometimes utilises  DCF methodology
• Relies on predetermined often unproven profit and risk allowance and/or discount rates
• Performs the valuation on a Total Capital basis

The Developer / Investor

• Determines price based on expected return, both Total Capital and Equity.
• Usually carries out an initial simplistic exercise based on raw land asking/purchase price
• Undertakes more detailed analysis allowing for gearing, utilising own or hired expertise
• Acknowledges the uncertainty of subdivision develop/sell timing is a major concern
• Expects high returns for risk
• Must meet the market price for land or not invest 

Direct Sales Comparison

• The Problem?
• Can be extremely difficult to find sales evidence of large blocks of land
• Sales may be very different to the subject
• Therefore may have wide differences in possible development costs
• Difficult to adjust for  
• This is the best:-
• If there is good sales evidence of similar properties:
• Makes the task easier
• Less adjustments to make
• Greater accuracy
• Valuation is supported by comparable block sales

Hypothetical Subdivision

• Most valuers have a tendency to utilise the Hypo sub method!
• Benefits!
• Easier to find sales of smaller (standard) section sizes as a starting point.
• BUT, there are problems associated with this method also!
• Hyposub - potentially greater variations in results for:
• Multi stage developments
• Extended develop/sell time frames
• An inability to deal with cash flow timing
• An historic perspective
• So, for large subdivisions, a DCF version of the Hypo sub can cater for multi staged developments, timing of cash flows etc.
• Best if a subdivisional plan is made available to you.
• These are not always available.
• Poses difficulties for very large blocks of land if not available.
• Valuer could be required to make many assumptions - roading - No. sites etc.
• Subjective!

Subdivisional Costs

• Will vary greatly between different sites!
• Size - Contour etc
• Can change significantly over short periods of time
• The valuer needs to investigate up to date costings
• Valuer must find out what type of land those costs were associated with - so adjustments can be made
• Surveyors (big firms do big subdivisions
• Geotech professionals
• Councils (roading)
• Sewage, drainage, services etc
• Legal
• Agents -  (Fees can change with the market)
• Other valuers

• Use any industry contacts & publications

Methodology

• Direct sales comparison-
• Analyse to a rate per hectare / sqm
• Make adjustments as required
• Apply adjusted rate to the subject.
• Assess the value.
• Hyposub
• Sales evidence of standard sized lots
• Assess total number of lots
• (Remember reserves contrib- if applicable)
• Calculate Gross realisation.
• Account for GST
• Legal & Agents fees
• Net Realisation (Ex GST)
• Less Profit & Risk allowance
• Calculates to "Outlay"
• From the Outlay - All expected subdivisional expenses are to be deducted!
• Return on capital (opportunity cost)

Subdivisional Costs

• Direct subdivisional expenses -
• survey, roads/access, services, (phone, power, gas), excavation, retaining, fencing, landscape architect, parking etc etc
• Indirect subdivisional expenses
• Council consents, Rates, Insurance, Return on Capital, etc
• Also allow for - Cost of purchase and contingency

Result

• Hopefully results in -
• BLOCK VALUE
• As a check:
• Assess the estimated subdivisional expenses on a per lot basis.
• (Remember size) - 10 lots Vs 50 lots!
• Economies of scale
• Does this compare with what the surveyors or industry experts or sales evidence is telling you?
• Then compare the resulting "Block Value"
• What is it's rate per square metre / hectare?
• Does this support the assessed value based on the "Direct Comparison" approach?
• If not - Why not?

Case Law

Extremely important

• A number of cases relating to the valuation of Subdivisional property
• You must know them!!
• Very briefly ...... here are some cases,
• NOT exhaustive!! 

Neil Construction Vs Manukau City Council

• Involved the correct method of assessing the value of a block of subdividable land
• Compulsorily acquired by Council
• Held:-
• Best evidence is comparable block sales close to the valuation date
• Sales not directly comparable may still be useful in determining Profit & Risk for other methods.  
• Second method is Hypothetical Subdivision
• Many variables which make this difficult
• Including:-
• Gross Realisation
• Profit and Risk
• Development period
• Interest rate
• Must look to the market when using Hyposub
• i.e. Profit & Risk = Net realisation - expenditure
• The DCF was said to be a more sophisticated way of setting out a hyposub

Boat Park Ltd & Licaka Hldgs Ltd Vs Hutchinson and DC Findlay

• Boat Park Ltd = purchaser & developer
• Involved subdivisible land
• Contract entered to sell
• Involved vendor finance - which was to be
• Based on a valuation
• To be supplied by Boat Park Ltd
• A number of valuations provided
• All rejected by Hutchinson on basis they were not market value.
• All assessed using Hyposub
• Claimed there was no comparable sales evidence.
• All were significantly in excess of the agreed purchase price.
• HELD:
• When valuing land prior to sub division, necessary to calculate the value of that land reflecting it's potential for sub division.
• I.E. What would a potential developer pay for the raw land.
• Valuer to use most reliable method, and "check" with other methods.
• Sales comparison is preferred approach

Ministry Of Works Vs Green & McCahill (1965)

• Hypothetical Subdivision - Compulsory Acquisition.
• Profit & Risk - Soil as a Land Value
• Land was acquired, and used for extraction and sale of top soil and clay
• Intended for eventual subdivision.
• Dispute over the level of compensation for soil and clay, and the value of the subdivisible land.
• Just because valuers are asked to consider hypothetical subdivision, doesn't mean we should disregard other "use" values.
• Held:
• 30% was suitable for P& R.  (Not accepted as usual or normal, but assess on case basis)
• Should be no additional compensation for the soil and clay as this should be included in the value of the land.
• BUT, it should form part of the added value to the land.

  Carlton Heights Vs Ministry of Works

• This case included:
• Hypothetical subdivision -
• Compulsory acquisition -
• Willing buyer / Willing seller
• Profit & Risk
• Details:
• Involves compensation for land taken for a school.
• Case revolved around issue of P & R
• Evidence given that a number of building companies were purchasing land at full realisable value 
• And then making profit from the building work
• Held:
• Valuation needs to allow for P & R unless there is evidence there are purchasers prepared to pay cash for full amount expected to be realised from sale of sections.
• Willing buyer / seller principle!!
• Profit & Risk of 25% and steps of Hyposub valuation were set out including:
• Valuation must reflect a number of buyers
• Developers can be less bona fide purchasers / sellers.

Whareroa 2E block Vs Min Works

• Hypothetical Subdivision
• Compulsory Acquisition
• Privy Council
• Facts:
• 91 Acre subdividable block - compulsorily acquired.
• By proclamation for "better utilisation"
• ... so Crown could subdivide and sell to Industrial applicants.
• THE QUESTION?
• Should the property be valued
• A)  Using Hypothetical Subdivision method, or
• B)  Sale as a block to a hypothetical purchaser intending to subdivide.
• HELD:
• The value is the amount a willing buyer/seller might be able to realise on a specified date.
• The value must be of the land in the state it was in on that date (taking account of potential of the land).
• Value must be that of the "block" unless steps for subdivision have been undertaken, and the property is immediately available for sale in separate parts.
• The value of the land as a whole must take account of the suitability of:-
• The land for subdivision
• Prospective yield from the subdivision
• Subdivision costs
• Margin for contingencies
• Profit and risk  

• Many cases relating to subdivision of Land
• Refer to the various texts.
•  http://www.prres.net/
• (Pacific Rim Real Estate Society) - 
• Under "Proceedings"  - 2004, Thailand       
• Evan Gamby and Paul Bendall prepared a paper on the Valuation of Subdivision Land.
• A number of cases are listed at the rear of that paper. - GO AND HAVE A LOOK!!

Case Study - Subdivision

• Property Overview
• The subject site comprises of buildings originally constructed in the 19XX's with an addition in the 19XX's and a sealed carpark.
• The buildings are in poor condition, requiring exterior maintenance and upgrading.
• The land area is 3985m2 and the site may be able to be utilised for an intensive housing development.
• Resource Management
• The land has an existing zoning of Residential 6a under the Auckland City Operative District Plan which provides for residential development of one dwelling per 375m2.  Based on the permitted density of 1:375m2 the land would have a potential maximum development density of 10 dwellings as of right.
• The Innovative Housing Development provisions of the plan provide for sites greater than 2000m2, to enable a higher density.  The minimum area under these provisions is 300m2 per site and this would provide for 13 sites on the subject land. This would be a Discretionary Activity under the Resource Management Act and would require Resource Consent. 
• Our assessment herein is completed on the basis of a potential 10 unit development site which is permitted under the current zoning.
• Other uses allowable under this zoning include Care Centres, Ancillary Activities and Home Occupation.
• Permitted Activity:
• One residential unit per 375m2
• Maximum intensity of 1 person/child per 45m2
• Maximum site coverage of 30%
• Minimum landscaped is not less than 40%
• Car parking per unit 2
• Valuation Methodology
• To establish the current market value we have utilised the following recognised valuation approaches:
• Sales comparison approach (as land for development and as a sports facility)
• Residual Approach (as development land)
• Summation Approach
• Correlation of Valuation Approaches
• The sales comparison approach is considered to be the best method of determining the market value, with the summation and residual approach providing a useful check method only.
• We have attached a schedule of block land sales that are most relevant to the subject property.
• These show that sites in a similar outer suburban area as the subject range from $367/m2 to $635/m2
• Majority of sites in the range of $400 to $500/m2.
• The property compares well to the block sales in W, X, Y & Z Roads.
• The sales range from $429 to $510/m2 and the midpoint of the sales is $470/m2.
• Overall, we have adopted $475/m2 for the land area.
• Residual method - I refer you to the schedule sales of small vacant residential sites.
• These were used to determine potential sales values in the hypothetical sub-division.
• Show that sites around the subject area range from $663 to $828/m2.
• Added the two sales in the fringe areas of Mt Eden to show how that rate can increase with location.
• The most relevant is XXXXX Ave, as it is close to the subject, but is larger
• Therefore, the subject rate would be higher than XXXX Ave, but no higher than ZZZZ Road. We have adopted $1000/m2 for each of the approximately 350m2 sites

• Valuation Summary
• Conclusion - the block value approach offers the most realistic value, at approximately $2,000,000 for land.
• This is supported by the hypothetical subdivision approach - $1,900,000.
• In our opinion the market value of this property effective as at 19 March 2008 is TWO MILLION DOLLARS ($2,000,000) plus GST (if any).

This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.