## An analysis of how one of the most important indicators of property value changes with size and location

**Introduction**

£/square foot (sq.ft.) is a commonly used metric in the valuing of property. It is a measure of how much each square foot of the property is worth. However, what is less commonly understood is how £/sq. ft. changes depending on the size of the property, or how the local land value affects the rate of this change.

Example - Finsbury Park, London

An agent goes to a potential instruction and advises a value of £550,000 on a flat of 800 sqft. This implies a £/sqft. of £687. However, the potential client knows that a flat of 570 sqft sold for £455,000 recently just a few doors down. (implying a £/sqft of £798)

He therefore surmises that his flat should be worth 800 sqft. * £798/sqft = £638,000

The agent at this point needs to help the client understand how the size of a property impacts the £/sqft value. To do this they can show them a local £/sqft curve and explain how and why £/sqft. changes with size.

**Why do smaller properties have a larger £/ft²?**

Smaller properties still have similar costs for many of the expensive items in a property. For example, regardless of whether your flat is 800 ft² or 600 ft², you probably only have one kitchen and bathroom and they probably cost similar amounts. However, the additional cost of walls, roofs etc for the larger property is only a fraction of the internal area increase.

Therefore the larger a property gets, the cheaper it is to construct on a per square foot of area basis.

Example: A 15ft x 15ft room has a living area of 225 ft² and a wall perimeter of 60 ft, whereas a 30ft x 30ft room has a living area of 900 ft² and a wall perimeter of 120 ft.

So in this simplified example, the larger room is four times bigger but only costs twice the amount to build.

**Do all properties have the same shaped curve?**

No, the higher the local land value, the less the £/ft² reduces as the property gets bigger.

Why does this happen?

Normal markets tend to close out arbitrage opportunities. If you could make a lot of money converting houses into three flats, you would be releasing a lot of flats into the market, dropping their price and conversely be buying a lot of houses for conversion, increasing their price.

We can see the relationship between underlying land value, conversion costs and the shape (steepness/shallowness) of the curve in the following example where we look at two conversion projects, one in Kensington and the other in Waltham Forest.

In both cases we use a typical 1,800 ft² house and we create three 600 ft² flats.

**Kensington & Chelsea**

Value of house: £2,850,000 (£1583 £/ft²)

Value of three 600 ft² flats = £3,200,000 (£1778/ft²)

Conversion costs = £350,000

The curve in this high-value area is very shallow with only a 12% premium /ft² between a flat of 600 ft² and a house of 1,800 ft².

**Waltham Forest**

Value of house: £800,000 (£444 £/ft²)

Value of three 600 ft² flats = £1,050,000 (£583/ft²)

Conversion Costs = £250,000

The curve in this lower value area is much steeper with a 31% premium on space for the flats.

For a developer to make money on a conversion they need to beat these example spreads by buying the house cheaper, selling the flats for more or saving on the conversion costs.

**Conclusion**

£/ft² is a valuable metric in pricing property but must be used in context and as a curve and not a single point. Knowing the shape of the curve locally is an important factor in identifying development opportunities and in the use of comparable pricing.