A pertinent question in the current property market, given the rise in construction costs over the last 5 years, is, where is the break-even point on residential development. This could of course be applied also to commercial development.
Taking London as the prime focus.
If one considers a reverse, but simple, residual appraisal working from the ground upwards, as opposed to the standard Gross Development Value (GDV) downwards, this will help provide an answer.
It matters because as build cost appreciation outgrows capital value growth this brings more areas of London, let alone the wider UK, below a threshold of profitability, effectively meaning there are areas of London where at present residential development is simply not viable.
Take say a plot of land with planning for say a two-storey infill development of 2 flats with Net Saleable Area (NSA) of 1,400 sq ft.
- Base Build Cost – £300 per sq ft on the Gross Internal Area (GIA, gross at 15.00%);
- Professional Fees at 12.00% (including VAT);
- Planning and Building Regulation Costs at £24,000; including S.106/ CIL contributions.
- Finance at 6.50% for 12 months, no entry or exit costs and applied to total costs;
- Profit at 20.00% o cost.
This produces a hurdle rate of £527 per sq ft.
This deliberately excludes land value or land acquisition for the purposes of the illustration as this is a product, and maybe a negative value product, of the above example.
This is measured without cost increases across the build horizon and does not include unforeseen costs, contingencies and acquisition, sales and legal costs, build warranty provision or stamp duty.
The effective rate may well be in excess of £600 per sq ft taking these elements into account.
Economies of scale would bring some of the build cost elements lower.
However, in a market with much uncertainty both on the build side risks and the sales risks, it is likely that the market would want in excess of 20.00% profit on cost or 15.00% on GDV and thus even if costs were to stabilise profit margins are likely to be constrained further.
The same would be true of Build to Rent (BTR) schemes, albeit the outlook for rental, and therefore ultimately capital growth, in this sector is more positive, notwithstanding the Righters Rent Bill.
Thus, where does the effective hurdle rate position areas of London in terms of threshold using the example above and the effective £600 per sq ft rate.
Borough £ per Square Foot Table (Highest to Lowest)
| Borough | £ per sq ft (avg range) |
| Kensington & Chelsea | £1,700 – £1,750 |
| Westminster | £1,400 – £1,550 |
| Camden | £1,100 – £1,250 |
| City of London | £1,200 – £1,300 |
| Hammersmith & Fulham | £900 – £1,000 |
| Islington | £850 – £950 |
| Hackney | £750 – £820 |
| Wandsworth | £750 – £800 |
| Richmond upon Thames | £750 – £800 |
| Lambeth | £700 – £850 |
| Southwark | £700 – £850 |
| Tower Hamlets | £700 – £850 |
| Greenwich | £600 – £750 |
| Ealing | £600 – £750 |
| Barnet | £600 – £700 |
| Kingston upon Thames | £600 – £700 |
| Haringey | £600 – £700 |
| Merton | £600 – £700 |
| Brent | £600 – £700 |
| Lewisham | £550 – £700 |
| Bromley | £500 – £650 |
| Redbridge | £500 – £650 |
| Sutton | £500 – £650 |
| Harrow | £500 – £650 |
| Croydon | £450 – £600 |
| Enfield | £450 – £600 |
| Hillingdon | £450 – £600 |
| Waltham Forest | £550 – £700 |
| Newham | £550 – £700 |
| Bexley | £450 – £600 |
| Havering | £450 – £600 |
| Barking & Dagenham | £400 – £500 |
Therefore any residual market valuations in the areas of Croydon, Enfield, Hillingdon, Waltham Forest, Newham, Bexley, Havering and Dagenham are likely to produce a negative land value or close to a negative land value.
It is always importnat to seek professional surveying advcve from an RICS Registered Valuer when seeking development advice, however this is especially importnat in current market conditions.
Residential development valuations are subject to a number of key inputs but given volitility in the market those valuation inputs are changing in a dynamtic fashion and at speed.
Recent Comments