Residual land value as applied to social housing
Take all of your costs – every single one of them from marketing, agents, solicitors, works – all of them – and add them all up.
LOAN + (SOCIAL HOUSING GRANT + SALES) = AFFORDABLE TOTAL SCHEME COST
AFFORDABLE TOTAL SCHEME COST = GROSS DEVELOPMENT VALUE
GROSS DEVELOPMENT VALUE – (GROSS MARGIN + WORKS + PROFESSIONAL FEES + INTEREST) = RESIDUAL LAND VALUE
Sales price is your Gross Development Value minus works costs, professional fees, selling costs, Gross Margin.
Whatever is left is your residual value.
Your gross margin is a risk factor you are putting into the scheme. You are forcing your profit factor into the scheme to make it work. It goes in as a percentage of Gross Development Value.
20% is the standard however some of the big schemes can go into 16-18%. Securing these more comfortable gross development values is usually only possible if you are involved earlier on into the scheme they will be a lot higher. When you get into a scheme late they tend to go down to 10%.
How can you know the loan without knowing the Total Scheme Cost?
A key viability test is as follows:
NET PRESENT VALUE NET INCOME – LOAN ≥ 0
LOAN = NPV NET INCOME
Of course none of this is useful without knowing how to optimise Social Housing so it would be appropriate to give you a run down of the basics.
Optimising social housing
Now we know the loan, we can derive the Affordable Total Scheme Cost next and deduct a % for Fees/Interest to arrive at Residual Acquisition and Works. This is the Sales Price we need for the Land Appraisal.
Unlike normal appraisals where we start with the Fees, Works and Acquisition in Social Housing we begin with the Grant/Subnsidy, Sales Tranche and Loan.
2-bed unit = £320,000 per acre land value
3-bed unit = £336,000 per acre land value
4-bed unit = £330,000 per acre land value
Therefore 3-bed units will deliver a better result than a 2-bed or 4 bed units, either in terms of a more competitive land value, or for a fixed land cost which gives a better viability result.
Use this information to influence the total scheme so you can calculate the residual land value to a greater degree of accuracy.
To optimise mix, flexibility to change unit sizes/tenures is essential.
Always determine “best mix” before getting a sketch layout.
Use the results to demonstrate why certain tenure types don’t work, therefore why a LA grant is necessary.
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