Land valuation is usually carried out through the residual valuation technique.
The general idea behind the residual valuation technique is that the value of the land is what is left after the land developer takes into account the revenue that he/she can reasonably expect to receive from the sale of the development, the cost of the development, and his/her minimum required periodic rate of return.
The expected revenues from the development of a land plot are usually calculated on the basis of current market rates and prices. However, property investors need to do their own land valuation for the particular land plot that is considered for acquisition, taking into account the rents and prices that can be reasonably expected when the development will be completed and will enter the market.
Depending on the size of the land plot and the project that can be developed on it, the time of completion may be many years away from the time of analysis. For this reason, it is very important to not only use conservative assumptions regarding the expected revenues from the development, but also derive the price that will be offered for the purchase of the land after careful sensitivity analysis that takes into account and a pessimistic scenario in terms of the expected absorption rates and sales prices for the units or commercial space that will be build.
