Residual land values are theoretical, calculated by taking the capital value of a potential development and then subtracting the total development cost. These are not the same as open market land values, which reflect current use and other factors.
Residual land values are sometimes negative and, even when positive, are commonly below open market value.
In order to carry out a residual development appraisal on a locational basis, factors affecting costs and values are considered. The values of variables used represent an average for each location, with the resultant residual land values, for the locations monitored, set out in index form below.
Residual land values are an indicator of the propensity to carry out developments.
Central London Office Residual Land Value
Base (May 1987 = 100) May Nov May Nov May Nov 1992 1992 1993 1993 1994 1994 West End 62.36 65.01 48.62 83.61 149.40 159.82 Central City 22.37 20.37 21.58 31.62 44.44 46.58 Holb/Marylebone 40.49 28.31 11.66 18.84 44.67 37.60 Fringe City 24.62 25.86 24.01 25.65 39.14 44.41 6-monthly Annual % Change %Change Nov 93 - May 94- Nov 93 May 94 Nov 94 Nov 94 West End 78.69 6.98 91.16 Central City 40.56 4.81 47.32 Holb/Marylebone 137.06 -15.83 99.54 Fringe City 52.57 13.46 73.10
Compared to the boom period of the late 1980's, residual land values in the provinces are currently higher. The converse applies in Central London, where residual land values are currently well below levels of the late 1980's.
From the peak in 1989 until mid-1993, residual land values in Central London have steadily declined. Since then, they have risen quite strongly. The latter half of 1994 has seen this growth slow considerably; 5% growth in the second half of 1994 compared with over 60% growth in the first half of 1994. Following a steady decline from 1989 to mid-1991, continuous growth has been experienced for residual land values in the provincial office market. As with Central London, the latter half of 1994 for provincial city offices has also shown little growth. However, the change in growth has been far more exaggerated than that for London; 2% in the latter half of 1994 compared with a massive 183% growth in the first half of 1994.
The only exception to the general Central London pattern is Holborn & Marylebone which, rather than experiencing a slow down in growth in the latter half of 1994, actually saw a decrease of over 15% in residual land value.
In Edinburgh, the traditional office market has shown little activity due to planning constraints on the many listed buildings. The demand for modern, large floor-plate offices has led to the creation of Scotland's largest post-war commercial property development - a financial/conference area within the centre of Edinburgh known as The Exchange. Rising yields in Edinburgh have led to the residual land value falling back slightly, to œ3900/m2, in the latter half of 1994. This followed a sharp increase in the first half of 1994 when the residual land value, of œ4400/m2, was at its highest point since the boom of the late 1980's.
Manchester and Leeds have had similar patterns of growth, to each other, since around 1991. In both locations, a previous shortage of new space and a number of high profile pre-lets has led to an increase in rental values, thus making development more attractive. Tenant demand, reflected by rental value growth, saw a sudden surge in investment/development activity in early 1994. The current situation in Manchester, for example, is one of a great deal of potential development activity. However, proposed development in the core business district will provide relatively small foot-plate offices with very limited car parking space. There would appear to be something of a mismatch, therefore, in terms of proposed supply and the requirements of prospective tenants. This has led, during 1994, to the flurry of activity slowing down considerably due to nervousness and increased risk perception on the part of the investor of actually being able to secure tenants. The Department of Environment, Department of Transport and Direct Line Insurance, who will require future space, will therefore have to opt for the larger floor-plate properties in the fringe locations. This is expected to lead to a greater rate of rental value growth for fringe locations than for the traditional core area.
In short, some sort of confidence in the economic/political situation is needed, in order for the nervousness on the part of developers/investors to be abated, before the next phase of development is seen.
For further information please call Alan Patterson on 0171 629 7666, extension 2376 or write to him at Hillier Parker, 77 Grosvenor Street, London, W1A 2BT.
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