Residual appraisal for a Penang redevelopment site

Step 1 - Gross development value. 320 × 950 sq ft = 304,000 sq ft saleable. At RM620 psf the headline GDV is RM188.48 million. Two policy deductions must come off before anything else:

• Affordable quota: 48 units sold at RM300,000 instead of their market RM589,000, a deduction of 48 × RM289,000 = RM13.87 million.
• Bumiputera discount on the remaining 272 market units: 30% × RM160.21 million × 7% = RM3.36 million.

Net GDV = RM14.40m (affordable) + RM160.21m − RM3.36m = RM171.24 million.

Step 2 - Costs. GFA = 304,000 × 1.25 = 380,000 sq ft = 35,303 sq m. Construction 35,303 × RM1,750 = RM61.78m; fees 8% = RM4.94m; contingency 5% of construction = RM3.09m. Development costs before marketing and land: RM69.81m. Marketing 3% of net GDV = RM5.14m. Profit 20% of net GDV = RM34.25m.

Step 3 - Finance. On a 2.5-year build with 60% gearing and progressive drawdown, the average outstanding balance is about 60% × 50% × 2.5 years = 0.75 loan-years, so interest is roughly 4.875% of the financed cost base (excluding land at this stage).

Step 4 - Residual.

R = 171.24 − 69.81 − 5.14 − 34.25 − 0.04875 (74.95 + R) 1.04875 R = 58.39 → R = RM55.7 million

Step 5 - Adjustments. Deduct about RM2.0 million for vacant possession (surrender of the remaining 34-month lease and holding costs), then apply a 10% allowance for planning and leasehold risk: (55.7 − 2.0) × 0.90 = RM48.3 million.

Conclusion. The supportable land value is in the range RM43–56 million, with about RM48 million adopted. RM95 million is not supportable. Two sanity checks make this plain: RM95m is 55% of net GDV when land typically absorbs 15–25%; and per square foot of saleable area it is RM312 psf against a selling price of RM620 psf, meaning the land would take half the gross revenue before a single pile is driven.

The tenancy. The lease has 34 months to run at RM42,000 per month. It is not a reason to add value to the appraisal as though the rent were an income stream - the developer is buying a development site, not an investment - but it is a real constraint on timing and cost.

Treat it in one of two consistent ways, and say which:

• Deferral: assume the site is cleared at lease expiry, so the construction programme starts in month 35, with the rent received during the deferral offsetting holding costs, and finance extended accordingly. The residual falls because of discounting.
• Surrender: assume early vacant possession is negotiated, and deduct the compensation - commonly 12–24 months' rent plus the tenant's relocation and reinstatement costs. On these facts, a surrender premium of the order of RM0.5–1.0 million plus the tenant's fit-out write-off is realistic; I have allowed RM2.0 million to cover the premium, professional costs and rates/security during vacancy.

What must not happen is to capitalise the rent as though it were a reversionary investment and also assume immediate vacant possession. That double-counts.

Planning status. Three separate risks:

1. Zoning. The site is Residential only in the draft local plan. The gazetted plan governs. If the site is still industrial in the gazetted plan, residential development requires a development order plus conversion of land use, with a premium and conditions imposed by the state authority.
2. Precedent. A nearby 38-storey approval at 1:4.2 is evidence, not entitlement. On 2.1 acres (91,476 sq ft) a plot ratio of 4.2 permits 384,200 sq ft GFA; the scheme needs 380,000 sq ft, leaving almost no headroom for a change in computation or a planning-condition reduction. Any plot ratio reduction above about 1% breaks the scheme.
3. Height and density. Thirty-eight storeys will need height clearance and will attract traffic, infrastructure and social-impact conditions; these cost money and time.

Reflect this in the appraisal through the 10% risk allowance and by stating the appraisal assumes a development order on terms no worse than the comparable approval. Do not embed the risk in the GDV - the GDV should already be market-evidenced.

Sensitivity table (residual land value, RM million)

Scenario	Residual
Base case	55.7
GDV 10% lower (RM558 psf)	43.1
Construction cost 10% higher	48.7
Developer's profit raised to 25% of GDV	47.5
All three combined	below 35

After the lease and planning adjustments, present a range of RM43–56 million and recommend a marketing price around RM55 million with a stated reserve, not RM95 million. Point out the asymmetry: the residual method capitalises every error in the GDV assumption, and GDV is the least verifiable input at the date of appraisal. A 10% fall in price destroys about 23% of the land value.

Caveats to state expressly

• This is a development appraisal, not a valuation of the land in its existing use; it does not comply with the Malaysian Valuation Standards as a market value opinion unless the assumptions are tested against market evidence.
• The 2.5-year, single-phase finance assumption is a simplification. A 38-storey, 320-unit scheme is a five-year cash flow with phased sales, progress payments and a retention period. Advise a discounted cash-flow model before any commitment.
• Sales absorption of 320 units at RM620 psf in this location has not been tested; provide evidence of take-up rates and unsold stock in competing projects.
• The affordable and Bumiputera requirements are applied as stated; confirm them against the current state policy and the development order conditions, since a change in quota or price cap moves the residual materially.
• Construction cost is a benchmark only; obtain a quantity surveyor's estimate.
• No allowance has been made for site clearance, piling anomalies, earthworks, utility contributions or the cost of relocating the existing tenant's machinery beyond the RM2.0 million allowed.
• The appraisal is prepared for the landowner's internal pricing decision, is dated, and may not be relied upon by third parties.