Planning permission can be both difficult and expensive to secure. A typical planning application for around 100 homes on a 10-acre site can cost hundreds of thousands of pounds, making it an unrealistic option for most land owners - especially when success is not guaranteed.
Developers will usually fund the cost of the planning application, provided they have an agreement to buy the site once permission is secured. That presents the challenge of agreeing a value. The form of planning permission - like how many homes can be built and the amount that needs to be paid to the council in planning gain - has a significant impact on the value of land. Yet at the point you’re trying to agree value, none of that is known.
There are two ways around that problem - some developers may be prepared to agree a fixed value for the site, but that will need to reflect the possibility that if they get planning permission at all, it might not be for exactly what they expected. To reflect the risk, the price they agree is essentially a discount on the true value of the site.
Other developers will commit to paying a fixed proportion of the market value of the site - usually around 90% - once planning permission is secured. As before, the discount is designed to reflect the planning risk they are taking on, and ensure they can always afford to build whatever development is permitted.
On the face of it, valuing the actual permission seems a reasonable approach to take - but even once planning permission is secured, valuing a development site is not an exact science. It is typically done using what is known as the “residual valuation method.”
Developers estimate the total selling price for the homes on the site, deduct the estimated costs and their profit margin, and what is left is the land value. (You can learn more about how developers value land in this post).
When the two biggest numbers in the valuation - the aggregated selling price of the homes and the construction cost - are estimates, it is easy to see how different people can reach wildly different conclusions as to the value of a site. Yet by this stage in the process, there is little incentive for the developer to try to maximise the land value - they already have a contract to buy the site off you, so their interests are best served by agreeing the lowest value they can.
Whether agreeing the figure upfront or negotiating it after signing a contract, the likelihood is that the value of the site won’t be maximised.
Land promoters like The Strategic Land Group exist to solve that problem. Removing risk from both developers and land promoters is central to that approach.
Land promotion companies secure planning permission on behalf of the land owner, but without it costing the land owner anything - the promoter covers all the upfront costs of the planning application. They will also deal with any technical challenges - like access, drainage and ground conditions.
Once planning permission is secured, the site is marketed for sale and sold to whichever developer makes the best offer for the site. Because planning permission already exists, there is much less risk for the eventual developer - they know that the principle of building homes on the site is already agreed, which allows them to offer more for the site.
They also know that other developers will also be bidding for the site and that they will miss out if their offer is high enough. That encourages them to make more optimistic estimates of house prices and build costs to try to increase what they can afford to pay for the site.
The land promoter is usually paid a fixed percentage of the eventual selling price - so it is squarely in their interests to deliver the best planning permission possible and to secure the best price possible. That is just the same as the land owner - the two are working in partnership rather than having a buyer-seller relationship.
Those factors combine to ensure that the actual sales price achieved is often much higher than the estimated market value.
In 2019, The Strategic Land Group had contracts in place to sell five separate development sites to house builders. The selling prices in those contracts amounted to 150% of the estimated market value provided to us before they were offered for sale. Even after taking our share of the selling price, the land owners will end up with more money than if they had sold the sites direct to developers for a figure based on a discount to market value.
That is the secret of land promotion - the land promoter takes on the cost and risk of securing planning permission, uses their expertise to find a buyer for the site and helps land owners secure the best price for their land.
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