Land Economics and Real Estate Development
The exam tests land market theory and the development appraisal, including the residual land value calculation.
Theory
Land supply is fixed and demand is derived from the use of space. Bid-rent theory, after Von Thunen and Alonso, explains the competition for accessible sites; Ricardo's differential rent explains why better sites earn more; the rent gap explains redevelopment pressure. Highest and best use must be legally permissible, physically possible, financially feasible and maximally productive.
The development process
Site identification, due diligence and title, feasibility appraisal, planning permission, funding, procurement of the professional team, construction, letting or sale. Development risk is carried at every stage, so finance costs, void periods and contingency must be modelled, and the appraisal tested by sensitivity analysis.
Worked example (residual land value)
Gross development value N600m; construction N300m; professional fees 10% of construction = N30m; contingency 5% of construction = N15m; marketing and legal 5% of GDV = N30m; developer's profit 20% of GDV = N120m. Residual land value = 600 - 300 - 30 - 15 - 30 - 120 = N105m. If the land is asking N130m, the scheme is not viable as designed: reduce the price, increase density or phase the development. Present the appraisal as a table and show the land value as a balance.
Traps
Using GDV instead of net receipts; omitting finance charges and void periods; calculating professional fees on GDV rather than construction; assuming planning permission without checking use class and density; no sensitivity test.