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The Application of Residual Method of Valuation
By Song Mui Kie
JPPH Kuching
1.0 Introduction
For a property where there are no, or limited transactions to use the comparison
method of valuation, the residual method could be an alternative valuation approach. This
method is use to assess the residual value of a property with development potential.
The residual method of valuation could be expressed in the form of a simple
equation where the value of a property is the residue (a sum left over) after deducting the
cost of development from the value of development. The reliability of this method can be
maximized by using current costs and incomes with no estimation of changes during the
development period. The assumption is that incomes and costs would change at similar
rates so that effects would offset themselves out.
2.0 Problem Statements
A residual method of valuation requires a large amount of data, which is rarely
precise or accurate. The valuer often makes an educated guess as to the true magnitude of
the particular variable. Some of this data input can be assess with reasonable analysis, but
some might encounters great difficulties. For example, the profit margin, the risks
associated with the development and the changes of the cost of material. The magnitudes
of these variables are not certain due to a lot of assumptions that have been made.
Other criticisms of the method is its inflexible with respect to the timing of its
cash flow to produce a single figure outcome. It presupposes that construction costs are
incurred on a straight line basis instead of following an S-curve (Darlow, 1990). As the
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result of this inflexibility, the interest charges due are calculated in a very basic way.
Bannerman (1992) states “development appraisals were almost certainly wrong, at least
to some extent.” So, how accurate the residual value derived from the residual method of
valuation can conclude the value of property with development potential?
Although the residual method is very frequently used for development appraisal,
it’s undeniable that it has many underlying problems. It is a feature of residual valuation
that comparatively minor adjustment to the constituent figures can have a major effect on
the results (William, 1996). Some elements of the residual method of valuation might be
very sensitive to adjustments. Small changes in any of the elements can contribute to a
large amount of the changes in the residual value. The question here is, to what extend
the effects of the changes of the building material costs towards the residual value?
3.0 Objective Of The Study
There are two objectives to be achieved in this study:
i) To compare the residual value derived from the residual method of valuation
with the actual transaction sale value at the same area.
ii) To determine the effect of the changes of the building material costs towards
the residual value.
4.0 Importance of the Study
The residual method of valuation always serves as the alternative method for
development land valuation with limited transactions. The basic concept of residual
method is the amount of value that a developer is willing to pay after considering its
development potential. However, this method requires a huge amount of data. Some of
the data is not certain due to a lot of assumption need to be made. An error in judgment
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will lead to a substantial error in the land value. Therefore, this research is important in
order to determine whether residual value is comparative with the market value of the
surrounding area.
5.0 Scope of the Study
The study case of this research will be focusing on the valuation of development
lands in Kuching Area. A few sets of residual value will be determined for lands that had
been approved for housing development of small to medium scale. Besides that, the
development of the lands will be based on the type of houses which are most preferred by
the local developers, namely the terrace and semi detached houses.
6.0 The Residual Method of Valuation
The residual method of valuation is the most commonly used valuation method to
determine the properties value with development potential. A property is identified as
potential when the current usage is no longer its highest and best uses. In order to develop
a property to its highest and best uses, it involved a lot of costs such as to carry out the
site clearing, infrastructure work, construction work and etc. After the development, the
property can be transacted with a higher value. Therefore, the different between the value
of the developed property and the development cost would be the residual value. In
residual method of valuation, the residual value can be defined as the value of the
property on its current state after considering its development potential.
The Appraisal lists the following analytical steps that are required in the execution
of the residual method (The Appraisal of Real Estate, 2001):
• Accurately determine the highest and best use of the land
• Create or affirm a supportable subdivision development plan
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• Determine the timing and cost for approval and development (including
mitigation needs and costs of obtaining development entitlements)
• Forecast a realistic pricing schedule over time
• Forecast accurately the lot absorption rate and price mix (including properly
supported projections of community or market growth over the absorption
period)
• Estimate accurately the staging or phasing of land development and related
expenses
• Forecast marketing and related holding expenses over the absorption period
• Estimate the annual real estate taxes
• Include overhead and an entrepreneurial [developer’s] profit allowance in the
discount
• rate and/or line item allocation for entrepreneurial [developer’s] profit
• Estimate the appropriate discount rate consistent with the selection of the line
item allocation for entrepreneurial [developer’s] profit
6.1 Development Potential
The usage of every property is not permanently static. Sometimes the usage can
be upgraded when the current usage of the property is not considered to be the optimum
usage. However, not likely all developments or refurbishments will be done. Each of the
developments involved cost and it should be compensated by reasonable profit. If the
involved cost is too high or the profit is not worthwhile, the development will not be
proposed even the development potential does exist.
There may be a possibility of increasing the development potential of a property
by acquisition with adjacent land. It may be necessary to acquire adjacent land or rights
over adjacent land, before the proposed development could take place. The likelihood of
resolving such matters and whether such acquisitions should be reflected in the valuation.
The valuer will need to liaise closely with both the appropriate planning authorities and
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the owner to ensure that the appraisal reflects fully the various aspects of the proposed
development.
6.2 Highest & Best Uses
The value of a parcel of raw land depends on determining its highest and best use.
Unfortunately, when looking at a piece of raw land, highest and best use often is a matter
of perspective. For example, the highest and best use of a raw land for a developer might
be a shopping center, for an environmentalist might be a forest reserve area, for a housing
association might be a low-income apartment project, and for a businessman might be a
high-end single-family subdivision.
Both the highest and best uses deliver different definition. It can be defined more
visibly by the two examples of development scheme as below:
(a) Highest Usages
For highest usages, a developer will develop the land with condominiums,
high-ended bungalow house and semi detached in order to get the highest
yield
(b) Best Usages
For best usages, the land would be development into low or medium cost
houses to fulfill the social need by providing more houses with affordable
price. In that circumstance, relatively the yield will be lower compare to
highest usages.
The highest and best use generally is the use that is reasonably probable,
physically possible, supported by the market, and returns the highest value to the land.
The final estimate of highest and best use should be defensible, the logic internally
consistent, and the conclusions well supported and documented by facts as well as
opinions. Therefore, the highest and best uses should be a compromise between the two
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usages as mentioned as above, which taken into the consideration the higher yield and the
same time, fulfill the social need.
6.3 The Basic Concept and Equation
The basic concept of residual method of valuation can be illustrated by the
following flowchart:
The Concept of Residual Value (Azhari, 1996)
The concept of this method is based on the principle of surplus productivity,
indicates the price a prudent developer will pay for land in its present undeveloped
condition by subtracting the total development costs from the projected sales prices of the
lots as if developed .A residual valuation can be expressed as a simple equation:
(Gross Development Cost) - (development costs) = residual value
Property Value Discounted to
Present
Gross
Development
Value
Development
Cost
Residual value
Development Duration
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The residual value has to be discounted to present according to the development
duration in order to reflect the value on current stage. Difficulties arise not in the method
itself but in estimating the values of the many variables that go into the valuation (Darlow,
1982). This is where the skill and experience of the valuer is so important.
6.4 Elements of the Residual Method of Valuation
From the equation to derive with the residual value, we can identify there are
three main elements in the residual method of valuation, namely the value of completed
development, development cost and residual value.
6.4.1 Value of completed development
The value to be adopted is the Market Value of the proposed development
assessed on the special assumption that the development is complete. In some
instances another special assumption may be that the completed development is
let and income producing rather than available for sale or letting. After making
allowances for transaction costs this is widely referred to as the Gross
development value (GDV).
6.4.2 Development costs
The development cost can be categorized into 3 categories:
i) Preliminary Cost
ii) Construction Cost
iii) Post Construction Cost
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Preliminary Cost
Preliminary cost is the cost involved before the site clearing. The following are
the preliminary cost:
i) Acquisition costs
ii) Subdivision plan and building plan preparation
iii) Statutory Costs
iv) Survey and subdivision fee
Construction cost
Construction cost is the cost involved by the developer during the construction
period. The construction period begins with site clearing and ends with the
issuance of Occupation Permits. The following are the construction cost:
i) Site Clearing Cost
ii) Cost of Infrastructure
iii) Building Cost
iv) Fees
v) Interest and financing cost
vi) Contingencies
vii) Developer profit
Among all the construction cost, it is most complicated for the value to identify
the developer profit. When subdivision represents the highest and best use of land,
most valuers rely on either informal or formal surveys of developers to estimate
developer's profit. According to William & Marthan (2001), the developer profit
is estimated to be 10% at gross lot sale.
Allison and James in their landmark 1955 study of developers in the Greater
Houston Area noted that expectations of developer's profit were as follows:
Many of them expressed the expected profit as a total dollar amount or on a "per
lot" basis, which was converted into percentages [of total investment in the raw
land and off-site infrastructure improvements] ... Two of the developers
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questioned indicated a range of from 20% to 25%, but the great majority indicated
from 25% to 30%.
Post Construction Cost
When the developments have been completed, the properties will be put in
the market for selling or letting. However, the condition in our country is slightly
different because most of the housing schemes are practicing the Sale and Build
concept. In that case, these costs are occurred before or during the construction.
The following are the costs involve in selling and letting the developed property:
i) Advertisement fee
ii) Legal fee
iii) Agency fee
6.4.3 Residual/ Land Value
After a residual approach has been followed, the valuer can determine the
residual land value by deduction of the various costs from the gross development
value. However, the residual value shall be discounted to present according to the
construction period in order to retrieve the current value of the land. The discount
rate must be sufficient to account for the time value of money, the opportunity for
financial loss (risk) and for an outcome that is not certain and developer’s profit
(entrepreneurial incentive) if not included as a separate line item in pro forma
(Tony Sevelka, 2005).
7.0 Residual Method Versus Comparison Method
The comparison method can only be used where there are comparative evidences.
As a valuation method, the comparison method is no more than a rule of thumb used by
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the valuer to estimate the likely open market value of a site. It is largely based on
comparative evidence of the highest price necessary to secure other sites, therefore it
provides an objective view of worth, an indication of the price if the site were to be put
on the market immediately. As such, It take into account of all the valuation factors,
requirements, and estimates each potential buyer may apply in arriving at an offer price.
Therefore, it anticipates the effect of supply and demand for land on valuation price.
The residual value method, however, is highly subjective, derivative, and entirely
personal to the potential buyer of what he can afford to pay and still generate adequate
profit. Compare to the comparison method, residual method valuation often looks
unsupported. However, the residual method can be defended more strongly today for the
following reason (Robison, 1996):
• While the standard direct comparison approach makes adjustments for
aspects such as view, location, time, etc., it generally quantifies this in a
single adjustment. The residual approach, by contrast, forces the appraiser to
make individual, explicit adjustments for each component part of the
calculation and to justify them. Furthermore, it is less open to the abuse that
the miscalculation of financing assumptions can produce. In the simplest
terms, a residual is, in fact, nothing more than a detailed comparable analysis,
in which the specific circumstances of the property are specifically adjusted
for. It might thus be very preferable to a less well adjusted direct comparison
approach. Some appraisers speculate that where courts have not accepted
residuals, they might arguably have done so if the residuals had been
thoroughly supported by comparable evidence or supportive proof for every
item; given such evidence, a competing comparable analysis could easily be
challenged as being inadequately adjusted.
• A direct comparison approach to value will not address the profit which the
developer might make, whether he will make one at all, or whether there is
excessive optimism in his projections because the direct comparison approach
is concerned with value, not profit. The residual approach will thus address
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the fundamental underlying viability, which is of critical importance to a
lending institution, and if properly implemented, will assess loan security,
underlying asset risk and cash flow projections. In strong markets which are
starting to overheat, the residual approach can identify how much hope value
there is in land purchase price. Comparables can only indicate that there is
change over time, and not identify underlying trends, i.e. they cannot by
themselves predict future sales.
• Conversely the residual technique can be applied to assess the risk of what
would happen if things change. For example, if values or absorption rates
drop. This ability to assess risk cannot be achieved by other methods,
although the capitalism rate is often stated to include all of these elements. In
other words, the residual approach lends itself to sensitivity analyses where
there are many inputs and many variables, e.g. in a phased development.
Since developers are in the market to buy land and competing against other
developers, a comparative price must be offered in order to acquire a land. However,
using comparison method as the benchmark of the market value might offer a price that is
unaffordable. In that case, residual method can be used to indicate the value of the land to
the prospective purchaser. For instant, the comparison method answers the question,
“what is this piece of land worth and therefore likely to sell in a comparative market”
whereas the residual method will answer the question “what am I prepared to pay for a
piece of land for its development potential?”
8.0 The Criticism on the Residual Method of Valuation
The residual method of valuation normally serves as a backup method to
substantiate the comparison method. This method falls under criticism primarily because
of its hypothetical nature. There are also a number of variables which need to be
considered where even if minor estimation errors occur, it can affect the end value greatly.
As we do not have perfect knowledge about the future, we should be looking to provide a
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range of possible outcomes reflecting the likelihood of their occurrence, instead of a
single and realistic value (Rodney, 1996).
Other criticisms of the method have been its inflexible with respect to the timing
of its cash flows to produce a single figure outcome. It presupposes that construction
costs are incurred on a straight line basis instead of following an S-curve (Darlow 1990).
As a result of this inflexibility, the interest charges due are calculated in a very crude way.
As Bannerman (1992) states ‘development appraisals were almost certainly
wrong, at least to some extent.’. The method therefore has no concept of a cash flow and
that is why Sykes (1990) felt that it should rather be called ‘a profit and loss account’.
Many reasons have been advanced as to why the residual method fails to qualify
as an acceptable valuation model in estimating the market value of raw land (Tony
Sevelka, 2005):
• There is no consensus within the appraisal or development community as to how
the valuation model should be executed, or whether the model has any application
in the valuation of raw land.
• There is no consensus between the appraisal and development communities as to
how developer’s (entrepreneurial) profit should be computed.
• The numerous steps, including absorption estimates, in the valuation model are
susceptible to an unacceptable margin of error that can lead to an unreliable
indication of value.
• The appraisal of raw land as if subdivided into finished lots is a hypothetical
exercise that considers the contributory value of non-existent improvements and
the disposition of non-existent lots at retail prices.
• The estimate of value generated by the residual method, when applied as the only
approach to value, is not susceptible to verification, as it cannot be measured for
its reasonableness by way of comparison to transactional data.
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In a major residential development, cash-flow constraints may prevent the
theoretical value being realized. The present value of the residual value is not necessarily
the same as the value of the land. In some circumstances, the site remediation costs are
very high, the residual appraisal may produce a negative figure. The valuer should not
reliable completely with the result from this method alone. Therefore, an attempt should
be made to compare the result with the surrounding market evidence because the residual
method sometimes produces theoretical results that are out of line with prices being
achieved in the market
In order to defend the land values generated from this method, the appraiser must
perform a study of the market, and solicit the necessary technical assistance to develop a
reliable percentage of projected sale price. This method serves as a substitute only when
the subject market area lacks sufficient land sales to employ the comparison method.
9.0 Methodology
The purpose of this research is to fulfill two objectives as mentioned above. First,
is to compare the residual value derived from the residual method of valuation with the
actual transaction sale value at the same area. All of the elements/variables involved in
residual method of valuation can be identified theoretically by literature review After
that, a questionnaire will the constructed in order to retrieve all the information needed to
derive with the residual value. The questionnaires will be distributed among the
developers of an identified area. The Identified area is Jalan Batu Kawa – Matang which
connected both the Jalan Batu Kawa and Matang. That area is currently being very
actively develops with mixed housing schemes.
At the same time, the transaction price of the surrounding area will be collected
from the Valuation Information System (VIS) and this included the transaction price of
some of the parent lot of the housing schemes. The residual value retrieve from the
survey will be then compared with the actual transaction price of the same area.
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The second objective of this study is to determine the effect of the changes of
building material cost in residual method of valuation towards the land value. In this case,
the increment of the building material cost will be identified by referring to the building
material Index from the Statistic Department. At the same time, the changes of gross
development were identified by studying the changes of selling price of the houses at the
surrounding area. Double storey intermediate terrace house was chosen because it is one
of the most favourite and common building in each of the new development scheme at
the study area.
Both the percentage of the increment of building cost and gross development
value were applied into the residual valuation to calculate the new building cost and gross
development value from year 2003 – 2007. The land valuations for each of the projects
from year 2003 – 2007 were retrieved. The residual value will be compared with the
actual transaction price trend from 2003 – 2007.
10.0 Data Collection
Eight set of questionnaire had been distributed to the identified developers of the
study area. However, out of the eight questionnaires, only five of them were answered
and returned. The following are the details of five housing schemes:
Housing Schemes Parent Lot Land Size
(Hectare)
Development
1. Hoi Lee Garden Lot 999 Blok 10
Matang Land District
3.346 D/S Terrace (Inte) – 44 units
D/S Terrace (Cor) – 14 units
D/S Semi-Detached – 6 units
Total 64 units
2. Moyan Height Lot 1001 Blok 10
Matang Land District
3.474 S/S Terrace (Inte) – 2 units
S/S Terrace (Cor) – 2 units
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D/S Terrace (Inte) – 26 units
D/S Terrace (Cor) – 10 units
D/S Semi-Detached – 26 units
Total 66 units
3. Kim Pang Garden Lot 493 Blok 9
Matang Land District
5.313 Low cost S/S Terrace (Inte) – 11 units
Low cost S/S Terrace (Cor) – 6 units
1.5/S Terrace (Inte) – 37 units
1.5/S Terrace (Cor) – 16 units
D/S Terrace (Inte) – 28 units
D/S Terrace (Cor) – 14 units
D/S Semi-Detached – 2 units
Total 114 units
4. Moyan Jaya Lot 998 Blok 10
Matang Land District
3.346 D/S Terrace (Inte) – 37 units
D/S Terrace (Cor) – 14 units
D/S Semi-Detached – 14 units
DS Detached – 1 units
Total 66 units
5. Synergy Garden Lot 3999 & 527 Blok 9
Matang Land District
3.294
Double Storey Terrace (Inte) – 39 units
Double Storey Terrace (Cor) – 26 units
Total 65 units
At the same time, the transacted value for the above subject lots and the
development lands of the surrounding area were collected. Only sale data with NQ-fair
(the valuation fall within 10% higher or lower than the declared value) categories were
collected. The location and the transaction details of the subject lots and surrounding lots
can be referred to Appendix A & B. The following table showed the value range and the
average of actual sale value for development lands from year 2003 – 2007.
Year Range of Actual Sale Value (per Sq Meter) Average Actual Sale Value
2003 RM39.54 - RM79.04 48.78
2004 RM57.57 - RM63.60 58.74
2005 RM54.66 - RM88.95 70.67
2006 RM61.55 - RM118.84 86.77
2007 RM79.06 - RM90.19 82.83
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11.0 Research Finding
11.1 First Objective : To Compare the residual value derived from the
residual method of valuation with the actual transaction sale value at
the same area.
The data collected from the developers was used to value the subject lots.
However, the profit margin given by the developers of Hoi Lee Garden, Moyan
Height and Kim Pang Garden seem to be unreasonable for a housing development
according to the literature finding. Therefore, an adjusted profit margin was used
for these three housing scheme, which is 15% out of the development cost,
following the profit margin given by the developer of Synergy Garden.
Housing Scheme
Profit Margin
(out of the development Cost)
Adjusted Profit Margin
(out of the development Cost)
Hoi Lee Garden 3% 15%
Moyan Height 5% 15%
Kim Pang Garden 3% 15%
Moyan Jaya 20% 20%
Synergy Garden 15% 15%
The valuation of the subject lots of the following housing schemes can be
found in Appendix C1-C5.
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According to the research finding, the land value derived from the residual
method of valuation is comparative with the actual sale transaction price of the
subject lot. The percentage of differences between the residual value and actual
transaction price dropped in the range of -3.19 % to 9.47% except for Kim Pang
Garden. For Hoi Lee Garden, the transaction price is not available because it is a
joint venture project between land owner and developers. However, the residual
value fall into the range of the market value for the surrounding area which was
RM57.57 - RM63.60 per square meter.
For Stamp duty purposes, our department will accept the transaction price
as market value if the differences between the valuation and declared value are
within 10%. Therefore, the above valuation by residual method of valuation can
be accepted as market value except for Kim Pang Garden.
The residual value of Kim Pang Garden by residual method turned out to
be 43.08% lower than the actual transaction price of the land. The development
mixes of this project was proposed for low and medium cost development. This
might not be its highest and best uses where the selling prices of houses were
much lower than other surrounding housing projects. The estimated profit margin
at 15% might be too high for this project. If the valuation was carried out using
the profit margin of 8%. The residual value would be RM52.22 per square meter,
which is only 4.67% lower than the actual transaction price.
Housing Scheme Date of Valuation
Land
Value/sqm
Date of
Transaction
Actual
Sales price
/sq m
% of
Differences
Hoi Lee Garden Jan 2004 54.27 - - -
Moyan Height 2004 59.47 18.02.2004 57.57 -3.19%
Kim Pang
Garden March 2005 38.20
19.01.2005
54.66 43.08%
Moyan Jaya May 2006 69.84 21.03.2005 71.54 2.44%
Synergy Garden Dec 2007 76.76 25.04.2007 84.02 9.47%
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As the conclusion for the first objective, the residual method of valuation
is reliable in valuing the land with development potential. However, it is
important to make sure that the development potential is at its highest and best
uses. Otherwise, the valuation by this method might undervalue the subject
property while the surrounding properties were actually transacted at a higher
price.
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11.2 Second Objective : The Effect Of The Changes of Building Material
Cost In Residual Method Of Valuation Towards The Land Value
Hoi Lee
Garden
Moyan
Height
Kim Pang
Garden
Moyan
Jaya
Synergy
Garden
Average
Development Cost
Gross Development Value 85.02% 84.89% 85.77% 83.67% 82.76% 84.42%
Building Cost
Gross Development Value 50.78% 47.49% 45.16% 52.14% 50.91% 49.29%
Building Cost
Total Development Cost 59.72% 55.94% 52.66% 62.31% 61.52% 58.43%
From the above table, the building costs contribute the larger proportion
over the total development cost (average of 58.43%) and gross development cost
(average of 49.29%). As we all know, the building cost is not constant. It is
always changing, and normally in an upward trend. The changes of the building
material cost from 2003 to 2007 were shown in the following table.
Building Materials Cost Index for Low Rise Residential Building(Up to 5 Storeys)
From year 2003 - 2007
Year Cost Index % of changes
2003 100.00
2004 109.55 9.55%
2005 114.14 4.19%
2006 119.92 5.06%
2007 123.50 2.99%
(Sources: Statistic Department)
Changes in building cost will certainly affect the residual amount.
However, it is assumed that the gross development value would change at similar
rates so that effects would offset themselves out. The changes of gross
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development were identified by studying the changes of selling price of the
houses at the surrounding area. Double storey intermediate terrace house was
chosen because it is one of the most favourite and common building in each of the
new development scheme at the study area.
Both the percentage of the increment of building cost and gross
development value were applied into the residual valuation to calculate the new
building cost and gross development value from year 2003 – 2007. The
calculation of the percentage of changes for both the building material cost and
GDV of the housing scheme can be found in Appendix D. The residual value of
case studies from 2003 - 2007 was shown in following table:
Year
Range of Actual Sale
Value (per Sq Meter)
Average Actual
Sale Value
Hoi Lee
Garden
Moyan
Height
Moyan
Jaya
Synergy
Garden
2003 RM39.54 - RM79.04 48.78 43.81 47.71 42.28 51.47
2004 RM57.57 - RM63.60 58.74 54.27 59.47 51.46 60.86
2005 RM54.66 - RM88.95 70.67 61.47 67.49 58.18 67.70
2006 RM61.55 - RM118.84 86.77 73.67 80.99 69.84 79.63
2007 RM79.06 - RM90.19 82.83 71.62 78.90 67.02 76.76
From the above finding, it can be concluded that the market work as the
mechanism where the changes in the building material cost will be offset
themselves out by the changes in the gross development value. The valuation
using the residual method will be deriving with the similar value as the market
Year
Selling
Price(RM)
Effective
Building Area (Sq
Meter) Price / EBA
% of
Increment
2003 188,000.00 170.15 1,104.88
2004 194,250.00 161.00 1,206.52 9.20%
2005 176,800.00 140.00 1,262.86 4.67%
2006 218,000.00 162.14 1,344.52 6.47%
2007 240,000.00 176.21 1,362.04 1.30%
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The Comparison Between Actual Sale and Residual Value after the Changes of GDV
and Buidling Cost
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
80.00
85.00
90.00
2003 2004 2005 2006 2007 Year
Land Value (RM)
Average Actual Sale Value
Hoi Lee Garden
Moyan Height
Moyan Jaya
Synergy Garden
value. At the same time, it reflects the similar value changing trend which was
shown in the above graph:
From the above graph, we can observe that the valuation using residual
method after considering the changes of building material and GDV will produce
the valuation with the similar trend as the average actual sale value. The values
were increasing from year 2003 to 2006, followed by a drop in value from 2006 –
2007.
12.0 Conclusion
From the above finding, residual method of valuation reliable to be used as an
alternative approach to assess the market value of land with development potential
besides comparison method. However, the valuer must make sure the development
activities to be carried on must at its higher and best uses so that the residual value will
not be underestimated.
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The residual value reflects what a developer can afford to pay at the same time
still generate adequate profit. If there are changes in building material cost, increment in
building material cost will certainly increase the development cost. The findings
indicated that the changes of building material cost will be offset themselves out by the
changes in the revenue, or the gross development value.
As the conclusion, residual method of valuation can be used as an appropriate
method of valuation for development land. However, the valuer must perform a study of
the market, and solicit the necessary technical assistance to develop a reliable percentage
of projected sale price and development cost. This method can serve as an alternative
method when the subject market area is lacking of sufficient land transaction to employ
the comparison method.
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Bannerman, S. (1992) Sensitivity Analysis for Property Appraisal, Journal of Property
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Byrne, Peter (1996), Risk, Uncertainty Decision-Making In Property Development,
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