RICS Discounted Cash Flow Valuation Methodology
Valuing an overage interest before planning permission has been granted is a probabilistic exercise governed by RICS Valuation Professional Standards.
The valuation formula follows four steps:
Step 1: Estimate Potential Gross Uplift: Assess the open-market value of the land with hypothetical residential planning permission (e.g. £2,000,000) minus current agricultural base value (£200,000) = £1,800,000 gross uplift.
Step 2: Apply Contractual Clawback: 30% contractual share = £540,000 potential clawback.
Step 3: Apply Planning Probability Discount: If the land is not yet allocated in the local plan, the probability of obtaining planning permission within 5 years may be assessed at 40% (£540,000 × 40% = £216,000).
Step 4: Discount for Time Value of Money: Discounting £216,000 over a projected 5-year timeline at a 10% annual commercial discount rate produces a fair buyout valuation of approximately £134,000.