Download What is Gross Development Value?

It is vital when developing property, that you have a reasonably accurate idea of what the
property will be worth (both capital and rental value) when work is completed.
The term for this is ‘Gross Development Value’ (GDV). It could be defined as:
‘The expected property value, all circumstances being ‘normal’, when sold to a willing
purchaser on the open market’
The actual value placed upon the property will be based upon current and recent similar
transactions. Note this is different to a ‘forecast price’ where the developer would attempt to
predict a future value of the property. This would obviously become inaccurate should any
aspect of the property market change.
It is not only capital value that would form the GDV. If the property is to be developed for
investment, then the purchaser might use recent lettings to find comparable rents. He can
then attempt to establish a likely annual rent, multiply this by the amount of years he feels
would be appropriate to recoup his initial capital outlay for the purchase; that figure would
then form a rental value GDV. Or a suitable yield figure (which reflects the risk involved) is
applied to the annual rent figure to establish the capital value.
The GDV forms the very basis of any financial appraisal carried out on the project. It is the
figure that permits all the other considerations such as required profit, building costs, legal
costs and site purchase cost to be weighed against, enabling analysis of the financial viability
of the project.
The particular method of appraisal that incorporates the GDV figure is the residual method.
There are two approaches to using this:

The basic formula to calculate land value using this technique is:
This illustrates how the Residual Appraisal method allows the appropriate land purchase
value to be established using the GDV figure minus all expected costs, including profit.
It is however, an excellent consideration for the novice developer as it places the emphasis on
expected property value using current and recent comparisons. This is in contrast to hoping
for an exceptional property sale price that exceeds most or any that are typical at the time of
appraisal.

Another residual appraisal formula that the GDV is incorporated into is the one to
calculate Developer’s profit:
This is a more conventional way of appraising a property development, as many novice
developers might feel that profit is more of a bonus than an expectation (especially in the
current financial climate).
The level of profit a developer will seek is usually dependent on the amount of risk he feels
he is taking. Profit is the reward for the risk involved in developing a property. If the
property is pre-let or even-pre-sold, then the risk would be regarded as low and a profit of
15% (for example) might suffice. However, a higher risk development might require a profit
of up to around 35%.