Land values

A2.30 Land value changes arising from a change in land use may be used to derive a social value for use in appraisal. This can provide a convenient way of estimating the impact of an intervention rather than valuing the underlying factors that caused the value to change.

A2.31 Land prices reflect different attributes of the land's use including planning permission, amenity value, proximity to urban centres and transport connectivity. Land values increased by transport improvements may rise due both to the change in planning status that facilitates development and the benefits from the transport scheme.

A2.32 The value of an intervention that enables a change in use and subsequent new development may include:

the private benefit associated with the change in land use, as represented by the uplift in land value due to a more productive use. This is defined as the value of the land in its new use (e.g. commercial or residential) minus the value of the land in its existing use and it typically accrues to landowners.

the net external effects of the resulting development on society, such as loss or gain in amenity value, transport costs, health or environmental effects and land use value changes etc.

A2.33 To understand how land values can help in the appraisal of a potential development, it is important to understand the factors that determine the land's price. The private benefit or Gross Development Value (GDV) is the estimated total revenue that could be obtained from a development, for housing it would be:

GDV = house prices x number of dwellings

A2.34 The residual method of land valuation stipulates the maximum price that will be paid for the land (commercially) after accounting for development costs and a minimum level of profit:

Land price = GDV - (development costs + fees + profit)

A2.35 Therefore the land price reflects the value of the land in its new use (the GDV) less the expected development costs and minimum required profit. In a well-functioning market, competition for the right to develop the land drives the price of land up to a point where a normal level of profit is achieved, where the change is equal to the economic rent extracted from the land.

A2.36 In appraisal terms, the difference between this new land value and its previous land value represents the net private benefits of the development. This is the final value of the site, less development costs, less the value of the land in its "old" use. Any increase as a result of a change in use reflects the economic efficiency benefits of converting this land into a more productive use.

A2.37 To estimate the full value to society of the change in use wider effects need to be accounted for. The Net Present Social Value (NPSV) of a development is the discounted sum of the land value uplift and the net value of wider effects, taking into account potential deadweight and displacement. The range of wider effects associated with a development includes the amenity cost or benefit associated with a development, potential health effects and any transportation effects arising from the development. Further details of potential external effects and appraisal values are given in the MHCLG Appraisal Guide. When considering the wide range of positive and negative effects, double counting of benefits needs to be avoided. For transport appraisal the Department for Transport's (DfT) Web-Tag guidance should be used.

A2.38 Land value data is derived from market data which is dependent on individuals' and firms' valuation of a specific piece of land. Where local land value data is available, this information can be used to appraise the net impact of a development. However, where this data is not readily available, illustrative land value data from the Valuation Office Agency (VOA) is available. This is included in the MHCLG Appraisal Guide and the MHCLG publication Land value estimates for policy appraisal. It provides estimates for the average prices of residential, greenfield and brownfield land in England from 2014, with residential land split by local authority. Further guidance on the appraisal of transport dependent land developments can be found in WebTAG Unit A2.3.