Industrial development appraisal: GDV, residual land value and profit on cost
An industrial development appraisal is the financial model that decides whether a scheme is worth building. It takes the value of the finished units, deducts ev
Key takeaways
- A development appraisal answers one question: is the finished scheme worth enough more than it costs to build to be worth doing?
- It runs from gross development value (GDV), the finished scheme's value, back through every cost to a residual land value, the most you can pay for the site.
- Profit on cost, conventionally targeted around 15 to 20 percent on a speculative industrial scheme, is the margin that absorbs the things that go wrong.
- Build cost anchors on Costmodelling's £1,100 to £1,220 per sq m for warehouses, with big sheds at £540 to £660 per sq m (Costmodelling, April 2026).
- Development finance funds the build in stages, typically 65 to 75 percent of total cost, so the appraisal is also the document a lender underwrites.
An industrial development appraisal is the financial model that decides whether a scheme is worth building. It takes the value of the finished units, deducts every cost of creating them, the land, the construction, the fees, the finance and a profit margin, and tells you what is left to pay for the site. Done properly it is the single most important document in a development, because it is where a scheme is killed cheaply on a spreadsheet before it is killed expensively on the ground.
This guide explains what goes into an appraisal, how to calculate gross development value, how the residual method backs out land value, what profit on cost and yield on cost actually measure, and how development finance funds the build. It pairs with our pillar guide on industrial unit construction costs, which sets out the build numbers in detail. We arrange development finance for industrial schemes as a broker and introducer; we are not a lender, and nothing here is financial, tax or investment advice. Every figure below is illustrative and project-specific.
What is included in a development appraisal?
A development appraisal is a structured comparison of value against cost. On one side sits the gross development value, the open-market value of the completed and let or sold scheme. On the other sits the full stack of costs needed to get there. The appraisal lines them up, applies a target profit, and solves for whichever figure you do not yet know, which on a land-buying decision is the price you can afford to pay for the site.
The cost side is built from parts, not guessed as a percentage. A credible industrial appraisal carries the land price and its acquisition costs, the construction cost from a sourced benchmark, external works and any site abnormals, professional fees, a contingency, finance costs through the build, and a letting or sales allowance to carry the scheme from practical completion to stabilised income. Leave a line out and the appraisal flatters the scheme by exactly that amount.
Establish the GDV
Value the finished scheme: capitalise the expected rent at a market yield for an investment exit, or take evidenced capital values per sq ft for an owner-occupier sales exit.
Cost the build
Construction from a sourced per sq m benchmark, plus external works and any abnormals after ground investigation.
Add the soft costs
Professional fees at a low double-digit percentage of build cost, a 5 to 10 percent contingency, and finance costs through the programme.
Apply the profit
Deduct a target developer's profit, conventionally 15 to 20 percent of cost on a speculative industrial scheme.
Solve for the residual
What is left after every cost and the profit is the residual land value: the most the site can support.
The discipline is that an appraisal runs from land purchase all the way to stabilised investment, with every stage costed. The construction numbers behind these lines are set out in our pillar guide on industrial unit construction costs, and refurbishment-led schemes follow the same arithmetic from a different start point, covered in our guide to refurbishing industrial units.
How do you calculate GDV?
Gross development value is the value of the finished scheme, and how you calculate it depends on the exit. For an investment scheme, where the developer builds units to let and either holds or sells the income stream, GDV is the annual rent capitalised at a market yield. Take the estimated rental value of the completed units, divide by the appropriate investment yield, and you have the capital value of the let scheme. For an owner-occupier sales scheme, where units are sold individually to businesses, GDV is simply the sum of the evidenced sale prices per sq ft across the units.
Both routes live or die on evidence. The rent must come from comparable lettings of similar units in the same market, not from hope, and the yield from comparable investment sales. The same applies to sales values. An appraisal that capitalises an optimistic rent at an optimistic yield compounds two errors into one badly inflated GDV, which is the most common way a scheme that should never have started gets funded.
The yield used to capitalise rent is doing heavy lifting, so it deserves a sourced anchor: UK prime distribution and logistics yields stood at 5.00 percent in January 2026 (Knight Frank, UK Logistics Market Dashboard), with secondary stock softer. Our guide to industrial property yields explains which yield to use and why a small movement in it swings GDV materially. Rental growth then supports the patient developer: Savills forecasts UK industrial rental growth of 2.7 percent for 2026 (Big Shed Prospects 2026), though a sound appraisal should not depend on forecast growth arriving on schedule.
What is residual land value?
Residual land value is the answer the appraisal is usually solving for: the most a developer can pay for a site and still hit the target profit. The arithmetic is a subtraction. Take the GDV, deduct all the construction and associated costs, deduct the developer's profit, and what remains is the residual: the value that the land itself can support. It is called residual because the land is the residue, the leftover, after value has paid for everything else.
The residual method is the standard way development land is valued, and it is why the same field can be worth wildly different amounts to different bidders. A developer with cheaper finance, a lower cost base or a higher GDV view can support a higher land price than a rival on the identical site, which is how competitive land markets work. It also explains why land value is so volatile: because it is a residual, a 10 percent move in either GDV or build cost lands almost entirely on the land line, amplified.
That worked example shows the residual doing its job: it has converted a land asking price into a yes-or-no answer. You can test facility sizes against your own numbers with our development finance calculator before taking an appraisal to a lender.
What is profit on cost and what margin should you target?
Profit on cost is the developer's profit expressed as a percentage of total development cost, and it is the headline viability metric on most schemes. If a scheme costs £3,000,000 to deliver and is worth £3,500,000 finished, the £500,000 profit is roughly a 16.7 percent profit on cost. Lenders look for it because it is the cushion that absorbs cost overruns, programme delays and softer-than-hoped values without the loan going underwater.
The conventional target on a speculative industrial scheme sits somewhere around 15 to 20 percent of cost, set toward the higher end where the risks are greater: unproven ground, a bespoke design, a thin letting market or a long programme. A scheme appraising at a 25 percent margin has real headroom; one appraising at 8 percent has none, and the first thing to go wrong wipes it out. The margin is not greed, it is the priced acknowledgement that development is risky and that the lender's debt sits ahead of the developer's profit.
The companion metric is yield on cost: the rent the finished scheme produces divided by total project cost. Yield on cost against market yield is the development trade in one line. If a scheme produces a 7.5 percent yield on cost in a market where completed estates trade nearer the 5.00 percent prime distribution yield (Knight Frank, January 2026), the gap is the developer's value creation. If yield on cost only matches the market yield, the scheme creates nothing and the appraisal is telling you not to build.
How does development finance fund the scheme an appraisal describes?
Development finance is a staged loan built around the appraisal. The lender typically advances a portion of the land cost on day one, then funds construction in arrears against certified progress, with a monitoring surveyor inspecting and signing off each drawdown. Interest usually rolls up into the facility rather than being paid monthly, which is why finance costs sit in the appraisal even though no invoice arrives, and the whole loan is repaid at the end from sales or from a refinance onto investment debt once the scheme is let.
| Element | Typical position | What moves it |
|---|---|---|
| Senior loan to cost | 65 to 75 percent of total project cost | Track record, pre-lets, scheme quality |
| Interest | From roughly 8 percent a year, usually rolled up | Leverage, borrower experience, market |
| Fees | Arrangement and exit fees on top | Lender, facility size, complexity |
| Mezzanine or stretch | Available above the senior loan | Experienced borrowers, at a price |
| Exit | Sale, or refinance onto term debt once let | Letting evidence, valuation |
Because the facility is sized off the appraisal, a tidy, evidenced appraisal speeds up credit approval and every drawdown that follows. Lenders underwrite the people as hard as the project: track record, the contractor's covenant and the professional team all carry weight, and first-time developers usually achieve better terms by pairing with an experienced contractor on a design and build contract.
Mezzanine or joint-venture equity can fill the gap between the senior loan and the developer's cash, lifting total leverage at a higher cost, which we cover on our mezzanine and JV equity page. Most development lending to companies is unregulated; where a loan would be secured on a borrower's home or otherwise falls within FCA regulation, different rules apply and we flag that at the outset. See our development finance page for how facilities are structured.
How do you stress-test an appraisal before building?
A single-point appraisal is a starting position, not a decision. Sensitivity testing is what turns it into one: rerun the model with construction 10 percent higher, the programme six months longer, rents 10 percent lower and the exit yield half a point softer, and watch whether the profit survives. A scheme that still clears a respectable margin under that stress is robust; one whose profit evaporates the moment a single input moves was never as viable as the base case implied.
The yield exit deserves particular care because it is both uncertain and powerful. A development that only works at a 5 percent exit yield is exposed if the investment market softens before the scheme completes, which on a multi-year build it well might. Building in a more cautious exit yield than today's keenest evidence is prudence, not pessimism. We stress appraisals this way before approaching lenders, because the lender's monitoring surveyor will do it anyway and it is better to have answered the question first. For acquisition of a site or a standing asset to develop on, our acquisition finance page covers the funding of the purchase itself.
Industrial development appraisal explained: common questions
What is included in a development appraisal?
A development appraisal includes the gross development value of the finished scheme on one side, and the full stack of costs on the other: land and acquisition costs, construction from a sourced benchmark, external works and site abnormals, professional fees, a contingency, finance costs and a letting or sales allowance, plus a target developer's profit. It then solves for whichever figure is unknown, usually the residual land value, the most the site can support. A credible appraisal runs from land purchase to stabilised income with every stage costed.
How do you calculate GDV?
Gross development value depends on the exit. For an investment scheme, GDV is the estimated annual rent of the completed units capitalised at a market yield, so rent divided by yield gives the capital value. For an owner-occupier sales scheme, GDV is the sum of evidenced sale prices per sq ft across the units. Both must use evidenced comparable rents, yields or sales values rather than optimistic assumptions, because an inflated GDV is the most common way an unviable scheme gets funded.
How much is 1 acre of development land worth?
There is no fixed figure, because development land is valued by the residual method: its worth is whatever the finished scheme's value can support after every construction cost and the developer's profit are deducted. The same acre can be worth very different amounts to different developers depending on their build cost, finance cost and GDV view, and because land value is a residual, small movements in value or cost swing it sharply. The only reliable way to value a specific site is to run an appraisal on the scheme it can carry.
What are the 5 valuation methods?
The five principal valuation methods recognised by RICS are the comparison method, the investment method (capitalising income at a yield), the residual method (used for development land and schemes), the profits method (for trade-related property) and the depreciated replacement cost or contractor's method. Development appraisal uses the residual method, often informed by the investment and comparison methods to establish the gross development value at the heart of it.
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