The net-to-gross ratio is a design number that behaves like a financial one: a few points of core and circulation can move the land bid by a third.
The net-to-gross ratio changes residual land value because sales are priced on net saleable area while build cost is paid on gross internal area: every square metre of core, corridor and plant room is built and never sold. On a fictional 10,000 sq m apartment block, each point of efficiency is worth 411,980 of land value, 6.5 per cent of the 6,356,148 the scheme supports at 80 per cent. Five points either way move the land bid by a third.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The net-to-gross ratio, or efficiency, is saleable or net internal area (NIA) divided by gross internal area (GIA). The architect sees it as a consequence of the cores, the corridor length, the plant strategy and the fire design. The appraisal sees it as the conversion rate between what is paid for and what is sold. Because residual land value is what is left after costs and profit, a few points of GDV moving while cost stays fixed fall almost entirely on the land. That is why efficiency belongs on the appraisal's front page with the build rate and the sales rate, not in an appendix of area schedules.
| Input | Value |
|---|---|
| Gross internal area (GIA), sq m | 10,000 |
| Net-to-gross ratio, base case | 80% |
| Sales value a sq m of saleable area | 6,500 |
| Build cost a sq m of GIA | 2,600 |
| Fees / contingency, on build | 10% / 5% |
| Statutory and other costs | 500,000 |
| Sales costs / developer's profit, on GDV | 2.5% / 20% |
| Finance rate / land acquisition costs | 7.0% / 6.8% |
Step 1: areas and value. 10,000 sq m GIA at 80 per cent gives 8,000 sq m saleable. GDV = 8,000 × 6,500 = 52,000,000.
Step 2: costs, on the gross. Build = 10,000 × 2,600 = 26,000,000; with fees, contingency and other costs, 30,400,000. Build finance on the half-drawn convention is 2,128,000.
Step 3: the residual and the land value.
Residual = 52,000,000 − 1,300,000 sales costs − 30,400,000 − 2,128,000 − 10,400,000 profit = 7,772,000
Land value = 7,772,000 / (1.068 × 1.072) = 7,772,000 / 1.2228 = 6,356,148
Cost per saleable sq m = 2,600 / 80% = 3,250; land value per saleable sq m = 795
Step 4: the value of one point. One point of efficiency on 10,000 sq m is 100 sq m more to sell, 650,000 of GDV, with no change in build cost. Sales costs and profit take 22.5 per cent of it, leaving 503,750 of residual and, after land costs and finance, 411,980 of land value.
Land value per point = GIA × 1% × sales rate × (1 − sales costs − profit) / land divisor
= 100 × 6,500 × 77.5% / 1.2228 = 411,980
Excel: =GIA*0.01*SaleRate*(1-SalesCost-Profit)/((1+LandCosts)*(1+Rate)^2)
| Net-to-gross | Saleable sq m | GDV | Build cost a saleable sq m | Land value | Change | Change, % |
|---|---|---|---|---|---|---|
| 70% | 7,000 | 45,500,000 | 3,714 | 2,236,347 | −4,119,801 | −64.8% |
| 75% | 7,500 | 48,750,000 | 3,467 | 4,296,247 | −2,059,901 | −32.4% |
| 78% | 7,800 | 50,700,000 | 3,333 | 5,532,188 | −823,960 | −13.0% |
| 80% | 8,000 | 52,000,000 | 3,250 | 6,356,148 | 0 | 0.0% |
| 82% | 8,200 | 53,300,000 | 3,171 | 7,180,108 | +823,960 | +13.0% |
| 85% | 8,500 | 55,250,000 | 3,059 | 8,416,048 | +2,059,901 | +32.4% |
| 88% | 8,800 | 57,200,000 | 2,955 | 9,651,989 | +3,295,841 | +51.9% |
Land value is 12.2 per cent of GDV in the base case, so a GDV change of 1.25 per cent per point, once sales costs, profit and the land divisor have taken their share, still becomes a land value change of 6.5 per cent. Two points lost in design development, from 80 to 78 per cent, take 823,960 off a bid that may already have been agreed.
The question can also be put the other way. If the scheme must deliver 8,000 sq m of saleable area, a 75 per cent design needs 10,667 sq m of GIA and 27,733,333 of build cost, and supports 4,611,833 of land; an 85 per cent design needs 9,412 sq m and 24,470,588, and supports 7,895,249. Where planning fixes the massing, efficiency changes what is sold; where the brief fixes the saleable area, it changes what is built.
The common mistake is to mix the bases: a build rate quoted per sq m of GIA applied to net area, or a sales rate per sq m of net area applied to gross. Applying the 2,600 build rate to the 8,000 sq m of saleable area instead of the 10,000 sq m GIA takes build cost to 20,800,000 and land value to 11,589,093, overstating the bid by 5,232,945, 1.82 times the real figure. It is an easy slip when a cost consultant's rate and an agent's rate arrive in the same email, and the residual's gearing turns it into a land price no scheme can pay. Write the area basis next to every rate in the appraisal. How the sales side of the same appraisal is built is covered in how to calculate GDV for a development.
The Real Estate Development Manager treats the brief as the place where cost concentrates; the brief and the cost plan's six questions are among the working documents in the free companion files for the book.
It depends on the building type: illustratively, low-rise houses can approach 100 per cent, while apartment blocks with cores, corridors and plant often sit somewhere around 75 to 85 per cent, and towers lower. The number that matters is what each point is worth: on the fictional 10,000 sq m block one point of efficiency adds 100 sq m of saleable area and 411,980 of land value.
To gross internal area, because the contractor builds the corridors, cores and plant rooms as well as the flats. Sales value applies to net or saleable area. Applying a 2,600 a sq m build rate to the 8,000 sq m of net area instead of the 10,000 sq m of gross understates build cost by 5,200,000 and overstates land value 1.82 times on the fictional scheme.
Divide by the net-to-gross ratio. At 2,600 a sq m of GIA and 80 per cent efficiency, the cost per saleable sq m is 3,250; at 75 per cent it is 3,467, and at 85 per cent 3,059. The comparison with sales value per saleable sq m is the quickest test of a design's viability.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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