Residual Land Value: What a Plot Is Worth to a Developer, Worked Through

The appraisal method developers use to price land: start from what the finished building sells for, take out every cost and the profit, and see what is left.

A developer does not price land by comparing it with other land. The land is worth whatever is left after the finished building has paid for its own construction, its fees, its finance and the profit the project has to earn. That leftover figure is the residual land value, and it is the single most useful number an owner can produce before negotiating. This is the calculation, line by line, on illustrative figures.

The situation

An overseas owner is looking at a residential plot in a Saudi city with an asking price of SAR 1,750,000. A licensed engineering office has confirmed the permitted envelope allows about 2,250 square metres of gross floor area, and a test-fit layout produces 14 apartments with a total net saleable area of 1,820 square metres. The owner wants to know whether the asking price is supportable before making an offer.

Assumptions (illustrative)

• Gross floor area permitted and designed: 2,250 square metres.
• Net saleable area from the test-fit layout: 1,820 square metres across 14 apartments.
• Illustrative achievable sale price: SAR 6,000 per square metre of net area.
• Illustrative construction cost: SAR 2,600 per square metre of gross area.
• Professional fees at 8% of construction, contingency at 5% of construction.
• Selling and marketing at 2.5% of revenue, target profit at 18% of revenue, illustrative finance cost SAR 380,000.

Step 1: Work out the gross development value

1,820 square metres of net area at SAR 6,000 per square metre gives a gross development value of SAR 10,920,000.

This is the ceiling for the whole exercise. Everything else is deducted from it, so the sale rate is the assumption that deserves the most scrutiny. Note that it applies to net saleable area, not to the 2,250 square metres of gross floor area, which is a difference of about 19% in this scheme.

Step 2: Deduct the construction cost

2,250 square metres of gross area at SAR 2,600 per square metre gives a construction cost of SAR 5,850,000.

Construction is priced on gross area because that is what gets built, including cores, corridors and walls. Using net area here is one of the most common errors in an amateur appraisal, and it understates the build cost by the whole inefficiency of the layout.

Step 3: Add the other development costs

Fees 8% of 5,850,000 equals 468,000. Contingency 5% of 5,850,000 equals 292,500. Selling costs 2.5% of 10,920,000 equals 273,000. Total other costs with construction: 5,850,000 plus 468,000 plus 292,500 plus 273,000 equals SAR 6,883,500.

Fees, contingency and selling costs are not optional extras. Leaving them out inflates the residual and lets you overpay for land by roughly the amount you forgot, which in this case is just over one million riyals.

Step 4: Take out the profit the project has to earn

Profit at 18% of 10,920,000 equals SAR 1,965,600. Revenue less costs: 10,920,000 minus 6,883,500 equals 4,036,500. Less profit: 4,036,500 minus 1,965,600 equals SAR 2,070,900.

Profit is a cost of the project in this method, not a residual itself. If you let profit be whatever is left over, you will always be able to justify the asking price, which defeats the purpose of the appraisal.

Step 5: Deduct finance and convert to a land price

2,070,900 minus finance of 380,000 equals SAR 1,690,900 available for land and its acquisition costs. Real Estate Transaction Tax is a published headline rate of 5%, so the land price itself is 1,690,900 divided by 1.05, which is about SAR 1,610,381.

The residual land value is roughly SAR 1,610,000 against an asking price of SAR 1,750,000, a gap of about SAR 139,600. The transaction tax treatment should be confirmed with ZATCA and your adviser, because it changes how much of that pot reaches the seller.

Step 6: Test the sale price assumption

If the sale rate falls 5% to SAR 5,700, revenue becomes 1,820 times 5,700 equals 10,374,000. Selling costs 259,350, profit 1,867,320, costs with construction 6,869,850. Residual before finance: 10,374,000 minus 6,869,850 minus 1,867,320 equals 1,636,830. Less finance 380,000 equals 1,256,830, and divided by 1.05 gives about SAR 1,196,981.

A 5% fall in sale price cuts the land value by about 25.7%. That gearing is the most important thing the method teaches: land value absorbs all the volatility in the project, which is why the sale rate must come from evidence and not from optimism.

What changes the answer

• The achievable sale rate, which as shown moves land value several times faster than it moves itself.
• The net to gross ratio, because a more efficient layout adds saleable area without adding build cost.
• The construction rate, which is driven by specification, ground conditions and market conditions at tender.
• The profit percentage you require, which is a decision about risk rather than a market fact.
• The length of the programme, since finance cost and cost inflation both scale with time.

What the numbers tell you

• Land is a residual, so every error elsewhere in the appraisal ends up in the price you pay for it.
• Price construction on gross area and revenue on net area, never both on the same figure.
• Treat developer profit as a cost, otherwise the appraisal will always justify the asking price.
• A small movement in sale price produces a large movement in what the land is worth.
• Take the residual figure into the negotiation as your position, and be willing to walk away from the gap.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.