Business Clinic: Is land developer’s valuation too low?

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, James Cordery, partner at Carter Jonas, gives advice on what to consider with land that has development potential

See also: Business Clinic: should I respond to council’s planning request?

Q: We farm 30ha on the edge of a town where a developer has planning permission for substantial commercial development.

Our land sits in a 200ha block that the same developer is hoping to get permission to develop in the next five years.

A neighbouring farmer, whose land is also in this area, is encouraging us to retain the same adviser that they are using, and we have met with them to discuss.

However, I feel that the value they’ve put on the land they want to acquire is low. Do you have any advice?

A: The value of development land is derived from the use for which planning permission is secured, but is also influenced by site-specific constraints and the associated costs of delivery.

It can be challenging to provide high level advice on development land values and regional benchmarks in the way that my farm agency colleagues are able to.

Commercial use

Nonetheless, and with regard to the proposed commercial use of your land, residentially led planning permissions have historically yielded best value for our landowning clients.

However, there are now a number of emerging trends to suggest that commercial development can generate comparable and, in some locations, greater land values.

These trends include the well-known change in consumer habits that has led to a growing requirement from retailers for improved logistics networks across the country, with high demand for large-scale distribution centres – often referred to as “big sheds”.

Other trends include the rising costs associated with residential development, both in terms of materials, labour and planning costs.

This has all meant that, while residential development land values remain robust and is fuelled by a scarcity of planning permissions coming forward, commercial development land values have caught up in locations that benefit from existing transport infrastructure.

Scale

With regard to the scale of development being proposed, bigger does not always mean better value.

We quite often find that, while a significant urban extension or commercial logistics hub is still likely to represent that so-called once-in-a-generation opportunity for a landowner, such proposals will often require the provision of significant infrastructure to deliver sustainable development.

The result of this can be lower values on a £/ha basis, compared with the values associated with the sale of smaller to medium-sized developments.

Appraisal of planning prospects

I advise my landowning clients to start with an appraisal of the planning prospects of their land to identify the timescales involved in realising development potential and to form a view on the scale and use of development that is likely to be appropriate for a given location.

These first principles will inform an appropriate view on value and help identify the best strategy for realising development potential.

Such a strategy will depend on your own circumstances and appetite for planning risk.

You may be prepared to consider self-funded promotion.

But given the likely costs involved in securing planning permission for a scheme of this scale, it may be more appropriate to consider an agreement with a developer that would secure a valuable planning permission at its own risk in exchange for a share of the uplift in development land value at the point of onward sale.

It also sounds as though the development proposals include your land as an integral part of the larger scheme with other third-party landowners.

So, you should also consider the extent to which your land may represent the “key” to unlocking wider development potential, as this may command a premium, as long as you do not overplay your hand.

If other landowners are involved, you should try to join forces with them through collaboration before entering into any agreement with a developer, to avoid any divide-and-rule tactics.

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