What are the biggest risk areas of a residual valuation for a lender?

Video Transcript

The biggest risk for a lender when it comes to residual valuations is that small changes to the inputs can have a large impact on the end valuation and it’s important for them to understand those inputs and whether they’re realistic.

The starting point for a residual valuation is the gross development value or what the completed scheme will sell for. Recent interest rate rises have put pressure on achievable sale prices, so lenders need to be comfortable that the end values are realistic.

Build costs and construction costs are also highly risky. We’ve recently seen steep increases in the cost of labour and materials, so it’s important that lenders obtain verification from an independent monitoring surveyor that an applicant’s estimated build costs are realistic.

Finally, I would say that developer’s profit is also a high risk area. Lenders need to determine whether the profit allocated to a scheme is realistic. After all, nobody’s going to take on the risk and expense of undertaking a development for little or no return.

In summary, it’s vital that lenders seek the appropriate professional advice throughout the process, as development sites can be a high-risk area.