Why planning potential, planning permission and development value are not
necessarily the same thing

Planning permission can transform the perception of a piece of land.

A site that was previously viewed as agricultural, commercial or underused land can suddenly appear to have significant development value once permission has been granted.

For landowners, that can be a substantial change.

For investors, however, planning permission should be viewed as an important part of the investment case, not the investment case itself.

A planning consent does not automatically mean that the land represents a good acquisition. The permission still needs to be examined alongside the costs of development, planning conditions,
infrastructure, access, market demand, finance and the price being paid for the land.

The important distinction is between what the planning system permits and what the market can realistically support.

An investor considering development land therefore needs to ask more than:

“Does it have planning permission?”

The more important question is:

“What does the planning permission actually enable, what will it cost to deliver, and what is the land worth once those factors have been considered?” That is where a more objective assessment can make a significant difference.

Planning permission creates potential, not guaranteed profit

Planning permission can increase land value because it can provide a greater degree of certainty about what may be developed. However, permission does not remove the commercial risks associated with delivering the development.

For example, a site may have planning permission for ten houses.

That does not necessarily mean the site is worth a particular percentage of the eventual sales value of those ten houses.

The investor still needs to understand:

• What the houses will cost to build
• What professional fees will be required
• Whether infrastructure needs to be upgraded
• Whether there are abnormal ground or construction costs
• What planning conditions need to be discharged
• Whether there are financial obligations attached to the permission
• How long the development is likely to take
• What the completed properties are realistically worth
• How quickly they can be sold
• What finance will cost during the development

Only after these factors have been considered can the underlying land value be properly assessed.

This is why planning permission and development value should never be treated as interchangeable terms.

The number of units does not tell the whole story

One of the simplest ways to demonstrate this is to compare two hypothetical sites.

Site A

Planning permission for: 12 houses

Asking price: £1.2 million

Site B

Planning permission for: 8 houses

Asking price: £850,000

At first glance, Site A may appear to be the more attractive opportunity. It has more units and a higher development potential.

However, suppose Site A requires substantial highway improvements, difficult drainage works and expensive ground remediation.

Site B, meanwhile, has relatively straightforward access, established utilities and uncomplicated ground conditions.

The additional four houses on Site A may not create additional value if the cost of delivering them is disproportionately high. Site B could therefore provide the better investment despite having fewer units.

The lesson is straightforward:

The quantity of development does not necessarily determine the quality of the investment.

Planning conditions can materially affect value

A planning decision should never be considered in isolation from its conditions. A consent may appear straightforward when viewed in an estate agent’s particulars, but the detailed planning documentation can reveal significant requirements.

These could include requirements relating to:

• Highways
• Drainage
• Landscaping
• Ecology
• Archaeology
• Contamination
• Flood risk
• Tree protection
• Infrastructure
• Design
• Affordable housing
• Contributions or obligations

Some conditions may be relatively straightforward and inexpensive to satisfy. Others can involve substantial additional work or expenditure.

This is why an investor should understand not only whether planning permission has been granted, but also what needs to happen before the permission can actually be implemented.

A permission that is difficult or expensive to implement may have considerably less value than its headline description suggests.

Development value depends on the end product

Land does not generate value simply because something can be built on it. The value ultimately depends upon the development that can be delivered and the market for that development.

Consider a site with permission for high-value houses. The planning permission may appear attractive.
However, if comparable properties in the local market consistently sell below the values assumed in the development appraisal, the projected return may be overstated. This is where market evidence becomes important.

An investor should consider:

• Recent comparable sales
• Current competing stock
• Local buyer demand
• Achievable rental values where relevant
• Property size and specification
• The likely purchaser
• The speed at which completed units could realistically be sold

The theoretical maximum value is rarely the most useful figure. The focus should be on a realistic achievable value supported by evidence.

Gross development value is not land value

A common mistake when assessing development land is to focus heavily on the projected value of the completed development.

For example:

Projected completed value: £5 million

That figure may sound impressive. But it does not mean the land is worth £5 million.

The development may require substantial expenditure before the £5 million can be achieved.

A simplified example might look like this:

Development appraisal Amount

Projected completed value £5,000,000

Construction costs £2,500,000

Professional fees £350,000

Planning and infrastructure costs £250,000

Finance and holding costs £350,000

Contingency £250,000

Other development costs £150,000

Required return for the development risk £600,000

Indicative residual land value £550,000

The figures are illustrative rather than a valuation.

The point is that a £5 million completed development does not translate into a £5 million land value.

The residual value is what remains after the costs and required return associated with delivering the development have been considered. This is why an investor should be cautious when land is being marketed primarily on the basis of its projected end value.

Planning permission can be valuable but still overpriced

Even where a planning permission is genuinely valuable, the asking price can still be too high. This is an important distinction.

A site can be:

Developable but not. Worth the price being asked.

Suppose an investor identifies land with a realistic residual value of £900,000.

The vendor is asking £1.1 million.

The planning permission has not changed.

The development potential has not disappeared.

The issue is simply that the price being paid may leave insufficient margin for the investor to take on the associated development risk.

The appropriate response may therefore be to negotiate.

Alternatively, the investor may conclude that the opportunity is not suitable at that price.

This is one reason why the assessment of development land should remain independent of the emotional appeal of the planning consent.

Planning potential can also be mistaken for planning permission

There is an important difference between land that has planning permission and land that might obtain planning permission.

Landowners and agents may sometimes refer to:

• Planning potential
• Development potential
• Subject to planning
• Possible residential development
• Future allocation
• Proximity to settlement boundaries

These descriptions can indicate an opportunity. They do not necessarily provide the same certainty as an actual planning consent. An investor should therefore establish precisely what exists.

Is there:

• An existing planning permission?
• An outline permission?
• A reserved matters approval?
• An application awaiting determination?
• A planning allocation?
• An emerging policy position?
• Simply an assumption about what might be achievable?

Each carries a different level of certaintyand risk. The difference can have a material impact onvalue.

The cost of making the permission implementable

Another area that can be overlooked is the cost between receiving planning permission and starting construction.

A development may require further surveys, technical designs, approvals and specialist input.

For example, a planning permission might require detailed drainage information before a condition can be discharged.

That may lead to further engineering work. The resulting solution may then require additional construction expenditure.

The original appraisal can therefore change even though the planning permission itself remains exactly the same.

This is why planning should be considered as part of a wider development process rather than as a single event.

The market can change after planning permission is granted

There is another important risk. The market does not stand still.

A planning application may have been prepared when house prices, construction costs and finance rates were different. By the time the land is acquired or the development is ready to start, the underlying assumptions may have changed.

For example:

Construction costs may have increased

Finance may have become more expensive

Buyer demand may have weakened

Comparable property values may have fallen

Sales periods may have lengthened

A planning permission can remain valid while the economics of the development deteriorate.
This is why an investor should not rely solely on the fact that a site has planning permission.

The permission needs to be reassessed in the context of current market conditions.

What would have to be true for the land to be worth the asking price?

This is perhaps the most useful question an investor can ask. Instead of starting with the vendor’s asking price, the assessment can work backwards.

For the land to be worth the asking price:

• The proposed development needs to be achievable
• The end values need to be realistic
• Construction costs need to be properly assessed
• Infrastructure costs need to be understood
• Finance needs to be accounted for
• Sufficient contingency needs to be allowed
• The development programme needs to be achievable
• The investor needs to receive an appropriate return for the risk
  

If several of those assumptions are uncertain, the investor may need to reflect that uncertainty in the price.

This is where The Third Perspective becomes useful.

The seller naturally sees the potential uplift in the land.

The buyer sees the cost and risk of delivering that potential.

An independent assessment steps back from both positions and asks:

What does the evidence actually support?

That does not mean automatically taking a negative view.

It means understanding the opportunity before deciding what it is worth.

When planning permission genuinely adds significant value

None of this means that planning permission is unimportant. Quite the opposite.

A well-considered planning consent can substantially reduce planning uncertainty and create a clear development opportunity.

A site with:

• An appropriate planning consent
• Straightforward access
• Available utilities
• Manageable ground conditions
• Realistic development costs
• Strong market demand
• A credible exit strategy

May represent an excellent investment.

The important point is that the value comes from the whole proposition, rather than the planning permission alone.

A strong planning consent attached to a difficult site may be less attractive than a more modest consent attached to a straightforward one.

Frequently Asked Questions

Does planning permission automatically increase land value?

Planning permission can increase land value because it can provide greater certainty about development potential. However, the increase in value depends upon what can realistically be developed, the cost of doing so, market demand and the price being paid.

Is land with planning permission always a good investment?

No. Planning permission does not eliminate development, construction, financial or market risk. A site can have planning permission and still be overpriced or commercially unviable.

How is development land valued?

One approach is to consider the residual land value. This involves assessing the realistic value of the completed development and deducting development costs, finance, professional fees, contingency and an appropriate return for the risk. The precise approach will depend upon the
circumstances of the site.

What is the difference between planning potential and planning permission?

Planning potential describes what may be possible subject to obtaining the necessary consent. Planning permission provides a formal planning consent, although the permission may still contain
conditions and requirements that need to be satisfied.

Should an investor buy land before planning permission is granted?

There is no universal answer. Buying before planning can provide an opportunity to acquire land at a lower price, but it also introduces greater planning risk. The decision should reflect the investor’s objectives, risk tolerance, timescale and evidence supporting the proposed development.

Can planning conditions reduce the value of land?

Yes. Conditions can require additional professional work, infrastructure, mitigation or other expenditure. The financial and practical implications should be understood before the land value
is assessed.

Conclusion

Planning permission can be an important milestone in the development process.

It can reduce uncertainty, unlock development potential and create value.

But planning permission alone does not determine whether land is a good investment.

The real value of development land depends upon the relationship between what can be built, what it will cost, what the completed development will realistically be worth, how long it will take
and what return is appropriate for the risks involved.

That is why an experienced investor should look beyond the words “planning permission granted.”

The better questions are:

What does the permission actually allow?

What will it cost to deliver?

What could prevent it from being delivered?

What is the market likely to pay for the finished development?

And ultimately:

What would have to be true for this land to be worth the price being asked?

Sometimes the answer will support the acquisition.

Sometimes it will support a lower price or a different deal structure.

And sometimes the evidence will suggest that walking away is the better investment decision.

Planning permission can create potential. It is the quality of the underlying opportunity that creates value.