Final Economic Viability Report September 2009 - pdf

Study Approach
1.5 It has been important for the study to test viability of different site types in different locations, in order
to understand how viability varies with site size, values, tenures and locations. It has, therefore, been
necessary to develop a typology of the different types of sites that are likely to come forward for
housing development in Selby and to test the viability of these hypothetical sites under a set of
different development scenarios.
1.6 The typology of sites to be assessed was developed in conjunction with SDC and stakeholders to
reflect the authority’s current policies and their experience of the range, size, type and locations of
sites which they would envisage would come forward through the planning system for the future
provision of housing.
1.7 This approach allows different policy options to be tested in a consistent manner across the range of
likely development scenarios. This would not be possible in the same way had the study focused on
actual real life sites where the particular features of those sites would inevitably have made it difficult
to generalise about viability and compare scheme results.
1.8 Central to the assessment of the viability of housing development is the concept of residual land
value. 1 Residual land value is the value that can be attributed to land, when the total cost of
development, including an allowance for profit, is deducted from the sales values of housing built on
site. If there is a residual land value that is higher than the existing use value then the development
can be deemed viable; if it is below, then the development will not be considered viable.
1.9 The majority of developers assess the viability of a prospective development by calculating residual
land value. Having calculated its residual project value, developers use discounted cash flow 2
analysis to calculate the Internal Rate of Return (IRR) 3 for the project (see Appendix 1). The IRR
calculation allows different investment options to be compared on a like for like basis. The higher a
project’s IRR, the more desirable it is to undertake.
1 To read this valuation approach is applied for property with development or redevelopment potential. This
equation is: Completed Development Value less Planning and Construction cost less on cost and finance
costs less Developers Profit = Residual Land Value.
2 A Discounted Cash Flow (DCF) valuation approach is used to value a project using the concept of time
value of money. All estimated future cash flows are discounted by a percentage value usually representing
interest on finance to return the future cash flows to a present value.
3 IRR – rate of interest at which future outflows and inflows of money are discounted to return a 0 net
present value.
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