Valuing Development Sites – Lessons Learned.

Original Article
April 10th, 2018


The lessons that can be learned from Dunfermline Building Society v CBRE Ltd

by Chris Rispin, Managing Director, BlueBox Partners

In 2017, a claim was heard for a breach of professional negligence by CBRE Ltd on a development site for mortgage valuation purposes undertaken for the Dunfermline Building Society back in 2007.

This is the sort of valuation only undertaken by firms with significant cover through professional indemnity insurance, but there are a few points from the case worth considering. I’ve taken the case as a basis and looked at the methodology to see what could be applied to other development valuations.

The case
This was a six-acre site in Reading including a four-storey office building and industrial units. Adjacent was a 45-metre-high gas holder and the main rail line to London. There was outline planning consent for mixed-use development (mainly residential). The end figure for the completed development was anticipated at around £107m.  

The lender wanted to lend funds on the current value of the site, which was given by the defendant as £17.5m. As a result of this valuation, the lender agreed on a loan of £8.7m  

This already complex case became more so when the borrowers defaulted at the time of the market crash. Receivers were appointed and in 2012 the site was sold for £3.75m. It was accepted that the market had dropped, but even so, the original valuation had allegedly been overstated by £3.25m.

Value implications
Setting aside the facts, let’s look at the value implications for this type of development and the valuation methodology that would need to be adopted. 

The former use of the site indicates possible contamination, so the developers would need to allow for appropriate investigation and clear up. Undoubtedly, the demolition or modification of existing buildings and preparation of the site following that would be needed, along with associated health and safety provisions. All these costs must be accounted for professionally when determining the current value of the site. The valuer would be expected to review the papers.

End value considerations
The end value of the development is also going to be interesting given its location and speculative use. There must be room for error/variation.

It would be surprising to find comparable evidence to support a current valuation as the site was in a unique location. The site also had specific criteria regarding current status, meaning the most likely valuation method to adopt would be the residual one.

This involves taking the end value of the completed development and deducting all relevant costs and developer profits. There was considerable discussion in the Court on the valuer’s use of the figures to make up the residual calculation and whether the actual selling price of the site was relevant.

Reference was made to the Information Paper 12, which relates to Development Valuations. However, this was effective from 2008, which is after the date of the valuation. They also related to the Information Paper on Comparable Evidence in Property Valuation, which dates from 2012.  

Here’s what we can learn  

Lesson 1
Apparently, the Courts will apply guidance produced after the date of the valuation to determine their rulings. Undoubtedly both the parties would have agreed on acceptable guidance. If the guidance merely consolidates previous convention then this seems reasonable, however, it’s not clear how this is decided. 

The Valuation Information Paper No. 12: Valuation of development land suggests two methods should be adopted: the residual and the comparable method. The paper, Comparable evidence in property valuation indicates that some references to offer prices is not unreasonable. The definition of Market Value also supports this. 

Given the complexity of this situation, best practice and common sense would be to use differing methods to look for commonality in the results to support the figure produced. Wide variations would indicate a level of uncertainty that makes the valuation more unreliable. The methods should be independent of each other. Reliance on an agreed price is more likely to be acceptable with evidence of substantial research and a more scientific method, particularly for commercial cases. This is part of the Red Book  criteria for market value.

Lesson 2  
If there are alternative ways to produce a valuation, they should be analysed independently to find out if the outcome is consistent. The constituent parts of the residual valuation should be supported by professionals in the hope that another valuer would have less scope for a difference of opinion. The lack of comparable evidence does raise the level of uncertainty. This uncertainty is reflected in the ‘bracket’, i.e… the acceptable level of tolerance around a non-negligent valuation. In this case the experts agreed the bracket was +/- 15%. The claimant’s expert put forward a valuation of £13.645m, therefore putting the original valuation in jeopardy, while the defendant put forward £16.25m, which would be within the bracket.  

Lesson 3  
The level of risk and uncertainty in the final valuation must be truly reflected in the report produced. The role of a valuer is to identify the risks and set them out in a consistent way so the client can take appropriate action. 

Valuation is based on the interrogation of the market and where there is not much to go on, the answer will be more opinion than fact. The Courts and the AVM (automated valuation model) providers recognise this. 

The full judgement should be analysed to understand the various arguments made in this case, especially considering the market movement at the time of the original valuation. Where there is a complex development, pricing of the completed development may take place well before the proposal is put to the banks and seen by a valuer.  

RICS standard VIP 12 requires the valuer to look at the projections for the completed properties and see whether anything had happened in the intervening period to suggest whether they might be higher or lower. Other considerations include timescales allowing for planning matters, environmental considerations and numerous other factors. What happens after a valuation is made can’t always be anticipated  

Lesson 4  
Look carefully at any market evidence relating to the information you have and value at the date of the valuation. Any speculative assumptions should be agreed upon and clearly stated if they qualify the valuation. Small scale developments, such as self-builds with no track record for the developer, should be supported by professional costings and projections. The outcome of this case saw the Judge determining the value to be £16.2m. This was virtually the same as the defendant’s expert. It’s interesting to read the full case to understand how the Judge decided such a small discrepancy in a situation where the margin of error was 15%.

This case highlights a number of points. The most important is the need for valuation practice to be supported by good guidance. The discussions in Court inevitably referenced key documents, including some that had not been written at the time. Nevertheless, they provided good benchmarks against which to make sound judgements.