How englobo land is valued before it's rezoned

Englobo land that isn't rezoned yet is valued in three steps. First, work out what it would be worth once rezoned. Then bring that back to today's money, because you'll wait years to get it. Then weigh it by the chance the rezoning actually happens, with the land's value as a farm as the floor if it doesn't. Whatever the land is worth above that farm value is what people call hope value.

Why not just use a rate per hectare from nearby sales?

You should look at them. They're a good check. But they rarely settle the question on their own.

Englobo sales are few and far between, and no two sites are alike. One sale might have had a Gateway determination and sewer at the boundary. Another might have been plain farmland with a creek through the middle. A sale price per hectare doesn't tell you how much of that land could be built on, how far along the rezoning was, or what the buyer was betting on. So a valuer, or a careful buyer, also works it out from the bottom up. That's the sum below.

What is the land worth once it's rezoned?

Start at the end. Picture the land rezoned, the lots sold, and ask what a developer could have paid for the raw land and still made their profit. That figure is the residual land value: sales, less the cost of building the lots, less the developer's margin. What's left over is the land. (If you want the formula and each input explained, read how to calculate residual land value.)

Here it is for our sample site, Ridgeback Creek. The site is made up, but these are the real numbers our engine gives with the report's starting assumptions. It has 24.3 ha you can build on out of 38.8 ha, and fits 367 lots.

This is the number that gets quoted in brochures, often with no mention of the next two steps. It's what the land is worth on the day the rezoning is done. That day is years away.

Why does waiting take so much off the value?

Money you'll get in nine years is worth less than money today. You could have put that money somewhere else and earned a return in the meantime, and there's risk in waiting. So the future value is shrunk by a discount rate for each year you wait.

On the sample site, our report assumes 4 years to get the rezoning through and 5 years to sell the lots (90 a year). That's 9 years, at a 9% discount rate.

More than half the value is gone, just for time. Each extra year of delay takes more. That's why the time a rezoning takes matters so much (see how long rezoning takes in NSW).

How does the chance of rezoning come into it?

Here's the part most sums skip. Even after waiting, the rezoning might not happen. So you split the value into two outcomes and weigh each one by how likely it is.

If it's rezoned, the land is worth the $23.84m above. If it isn't, you still own rural land, and rural land is worth something. That's the floor. Our report starts with a 40% chance of rezoning and rural land at $55,000 a hectare, so the whole 38.8 ha is worth about $2.13m as a farm.

Our report starts with holding costs of $18,000 a year, for things like rates and insurance, plus the studies a planning proposal needs, spread over the wait. Put in your own.

What is hope value?

Hope value is the extra a buyer pays above what the land is worth for its current use, because of the chance it can be developed. On the sample site, the land supports $10.42m today against $2.13m as a farm. The difference, about $8.3m, is the hope value. It's real money, but it only exists because of that 40%. If the chance drops, it shrinks fast.

So is the asking price fair?

The sample site is listed at $9m, below the $10.42m it supports. Looks fine. But turn the sum around and ask what chance of rezoning the $9m needs. The answer is about 33%. If you think the odds are better than one in three, the price stacks up. If you think they're worse, you're paying too much.

And if the rezoning is refused? You'd have paid $9m plus buying costs, spent four years of holding and study costs, then sold the land as a farm for about $2.1m. Our report puts that loss at about $7.9m. That's the number to sit with before you sign.

Where does the chance of rezoning come from?

No one publishes odds. It's a judgement, and it moves as a site moves through the process. Things that push it up: the site is named in the council's local housing strategy or the regional plan, there's sewer and water capacity nearby, the land has few constraints, and the planning proposal already has a Gateway determination. Things that pull it down: none of that, a council that has said no before, or large areas of flood land, mapped bushland or creek corridors.

Our report lets you change the chance and watch the value move, and it shows the chance the asking price needs. That's more useful than any single number. For the risks behind the odds, read buying rural land with rezoning potential. To see how the report lays the sum out, look at how it works.

Sources: the figures are from our sample report for Ridgeback Creek, a made-up site, with the report's starting assumptions (a user changes them for a real site). Replace them with quotes, sales evidence and your own view of the odds.