How do you arrive at gross development value?

“Gross development value is related to what you can sell the end product for in a township,” said Fernandez.

Noted valuer Elvin Fernandez gives an indication of how developers calculate the values of their completed projects.

“When you hear someone saying in the newspaper that they bought land for RM300 per sq ft, and that their GDV is RM 3.5bil, you sometimes ask yourself, will it work? How did they achieve that RM3.5bil figure?” asked Elvin Fernandez of Khong & Jaafar Sdn Bhd at the recent Township Development conference organised by Trueventus Sdn Bhd in Kuala Lumpur.
Of course, value is fixed by market mechanisms, by supply and demand. It is related to what you can sell the end product for in that township. It also depends on costs, said Fernandez, speaking in the context of the soon-to-be implemented build-then-sell system.

In fact, valuers use different methods to value a final property. One is called the comparison method of valuation. Here, valuers arrive at values by looking at the market prices of comparable properties.

For example, if a high-rise luxury condo development in Mont’Kiara is being sold for RM800 per sq ft, the GDV for a high-rise luxury condo project in the same area with 1,000,000 sq ft of apartment space may be calculated roughly as RM800mil.

“The valuer must ensure that the RM800 per sq ft that other properties are transacting for are for proper and recent sale transactions (arms length transactions) – not underdeclared or overdeclared sale transactions. The Valuer using the methodology must also make the necessary adjustments for dissimilarities between the value as reported for the unit or units that have been sold and the unit that is about to be valued.”

“But what if a particular property and the subject property don’t have comparables, however?”asked Fernandez.

“These days it is more usual for valuers to have another way of looking at value — the intrinsic values approach, which is an income approach,” he added.

This approach looks at what the developer’s expected profit is from the start, what it considers fair reward for its work, as well as the time value of money invested.

“The rule of thumb (observed over my 40 years from a large number of market and feasibility studies we do throughout the country) is that the gross development cost as a percentage of gross development value is about 60%. I use this rule of thumb when I make quick calculations, but for most of my professional work I do detailed discounted cash flow models and estimate all elements in it with as high a degree of accuracy as I can muster… Having said that, costs can vary from one project to another and the 60% can be higher or lower depending on the property in question.”

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