Residual land values: measuring performance and investigating viability

Data on land values is important for market analysis and policy making. This research paper reviews sources of land prices and land value estimates in the UK, as well as recent attempts to create land price series in the US. It finds that there is little data available on land prices or values, particularly for commercial land uses. A residual valuation model is used to estimate land values for hypothetical schemes in selected cities and regions. The residual land values are not market prices and do not capture the option value associated with real sites, but they give an indication of value for immediate development before planning obligations. Residual land values are analysed to determine whether changes in the viability of different land uses are driven primarily by costs, rents or pricing. Land uses that have been modelled include residential apartments, offices, high street shops, industrial units and retail warehouses. Rents and yields were sourced from CBRE, apartment prices from the Office for National Statistics and construction costs from the Building Cost Information Service, with other inputs detailed in the report. Quarterly estimates of residual land values were produced from 1995 to 2016 for apartments and from 1997 to mid-2017 for the commercial land uses. As expected, there is a major North/South divide across the country for some land uses analysed and, in some parts of the country for some uses, development would not be viable without intervention. Industrial schemes in the Midlands and North are a good example, but negative values also occur in some locations for apartments at the beginning and end of the analysis period. Movements in residual land values through time are mainly driven by the largest input into the valuation model, development value. One reason for this is the lack of relative volatility in the construction costs estimates used for this analysis. As a proportion of development value, residual land values have remained fairly stable across the different property types over the time period studied. The exception is during the 2007/2008 Financial Crisis when land values dropped to lower proportions across all the sectors. This indicates greater falls in land values than in the value of the associated developed asset, reinforcing the gearing effect and greater volatility of land values. Land value forms the highest proportion of development value for high street retail and retail warehouses in relation to other uses. For most land uses, land values are also a higher share of total value in London relative to other regions and locations. Where possible, the residual land values were benchmarked against existing land value data and indices. The results are variable across the sectors. For example, office residual land values in London increased at a greater rate than the Savills London Office Development Land Value Index in the aftermath of the Financial Crisis. This research adds to existing knowledge of land values. It also increases the transparency of land markets and could assist policy-making in relation to land value capture. It establishes a framework for continued recording of land value trends into the future, setting out the limitations of the approach. Finally, it invites discussion on the suitability of this framework for the creation of a development land value series for the UK