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What is the current value of the property?
Calculate IRR.
Example 4 Development residual method
Estimate the value of the land by applying the residual method for the following projections for this development:
• Office building scenario of 5000 sq.m. let-able (IPMS 3 – Office), 5,500 GIA (IPMS 1 – Office)
• Offices will be rented monthly for £16 per sq.m.
• YP perp 8%
• The construction cost is estimated at £700 per sq.m.
• The project developer requires a profit of 20% of the GDC
• Total project period 12 months
• Fees 15% of the building cost (for example for planning, tax duty … etc.)
• Letting fee 10% of the EVR
• Sale fees 6% of the GDV
• Site finance (holding charge) 5% for 1 year
• Site acquisition fees 5%
Calculate the bid value of the land using the residual approach and conduct some sensitivity analysis by Excel.