The basic concept of property development is simple you buy a site or property for one price. Then spend your construction budget on the construction phase of the project. Then achieve the sales price or GDV as it is referred to in the industry, that’s Gross Development Value. The difference between the cost of the purchase price with the construction costs added and the uplift to the gross development value leaves the gross development profit minus finance costs and professional fees. What’s left is the net development profit, so there are three main figures which much be absolutely correct to achieve the gross development profit. These are the site purchase price, the construction costs and the gross development value, if the first two are too large or the last too small, the development will fail commercially. Before you commit to undertake any property development you should carry out a property development appraisal. This will vary in size and complexity in line with the size and complexity of the development. Working backward check the gross development values by looking at suitable comparables, other properties of similar size, location and specification, and what sales prices they have achieved. For the build costs on simple developments ask good local contractors to give you some provisional build costs. For larger or more complex property development it is worth considering employing the services of a Quantity Surveyor or QS as they are often called or an experienced development manager. They will be able to advise not just on build costs but also on the soft costs, professional fees, structural engineers, architects, connection charges for statutory supplies, gas, electric, water, etc and 106’s or other planning related costs. The last variable cost is the land, site or property purchase price. This is often where property developers make the most profit by buying a site cheaply and then obtaining a change of use by sub division or other planning gains. The value of the site usually increases sometime dramatically when planning permission is gained. This uplift in capital value is called a planning gain, this cash locked into the site or property give any development a good financial start. It is possible to reduce costs through the project by tight controls on the build costs and property development finance charges but these savings are no substitute for buying wisely and obtaining a profitable planning gain.
Do I need a planning consultant?
April 20, 2012
If you have property or land that you want to change the use on you may well go to an architect but often the best person for this job is a planning consultant. If it is a larger residential scheme or a commercial scheme it is probably best left to the expert, a planning consultant. They work more like a lawyer than an architect looking at case law and precedence rather than drawing plans and asking for approval. The first stage for a larger scheme is to start with a feasibility study these can be as little as a thousand pounds which considered against the capital value of the planning gain is relevantly small. The planning gain is the value of the site once planning permission is granted minus the value of the site preplanning. Some planning consultants will “work at risk”, this when they carry out various studies transport, need for the new proposed development and finding a suitable case to put forward for the development. They do not charge for the work they carry out instead they take a percentage of the planning gain. This is speculative on their part because if the development does not go ahead they do not get paid. It also acts as motivation to make sure they make the maximum effort to obtain the planning application.
Planning minister dismayed at the UK’s attitude towards planning
April 19, 2012
There has been much debate about planning and the built environment recently after the release of the National Planning Framework document in late March. Many in the industry are dismayed at the negative attitude of many to any changes to the built environment. New development creates opportunities and often much needed jobs. There have also been discussions over the high costs of planning and infrastructure charges that can often cause border line developments to remain at design stage. With banks, lenders and private investors taking renewed interest in speculative property development funding the review of planning charges and infrastructure levy’s has proved very timely. One developer had reportedly paid planning fees of 2million pounds on an 8million pound scheme in London. With these figures it really illustrates the need for a sensible review of planning charges. These can be a barrier to many schemes and hold back desperately needed houses and other residential and commercial property development schemes.
London office space leads the property market recovery
April 18, 2012
The ever increasing demand for London office space coupled with a lack of new developments has continued to drive prices up. The increase in yields, rental income and ultimately capital values has seen investors rushing to the market as a safe place for investment funds. The London market has not really seen any new developments ready for occupation in the past few years, so the simple economics of supply and demand means investors are in a good position. Many people in the property industry follow the London commercial market as a good indicator of the performance of the rest of the property market in the future. With land values depressed but increasing interest from funders in speculative development finance could this lead to a fresh start in the speculative development of commercial property? There seems to be an increase in occupancy in many areas around the country as companies start to feel more confident about signing leases and making other business investment. Could this be the first signs of a confidence returning to the property markets?
New money for property funding as the 95% loan to value deals double
April 17, 2012
The banks and funding houses are quietly but steadily returning to the mortgage markets and the large increase in the 95% loan to value mortgage deals available will undoubtedly improve things for first time buyers. First time buyers are well known for being the life blood of the property market and are usually an essential part of many sales chains. The first time buyer may well still be mourning the end of the stamp duty holiday but for many it is the sizable deposits required for lower loan to value mortgages that have been a bigger obstacle to home ownership. The number of 95% percent loan to value deals has more than doubled in the past twelve months from 27 to 61. This response in the increase in higher loan to value deals is simply lenders responding to a huge pent up demand from property buyers.
House builder’s profits raise, can the construction industry cope?
April 16, 2012
It has taken three years of hard slog but many house builders are rejoicing as the ones that made it through, seeing many of their competitors and other property developers fail as the market slumped in 2008. They may be enjoying low land prices with potential development plots selling at discounted rates, but is the rest of the construction industry ready for a growth in house building? Many sub contractors and supplies have thrown in the towel and moved to other industries. With this in mind many house builders are still delaying starts as they slowly try to turn round and re develop supply chains and relationships with sub contractors and main contractors. They are rewarding investors with large dividends at a time when new house starts have dropped below the 100,000 level. With housing increasingly becoming a political issue will the government turn its attentions away from the financial sector and make an effort to revive house building and the construction industries?
Green builders call for brown field development sites as well as rural acceptance schemes
April 15, 2012
Green building experts look to brown field sites to create the most environmentally friendly developments. The use of existing brown field sites can save not only on infrastructure costs in both monetary and environmental terms but also allows the reuse of floor slabs as arrogate and the possibility of reclaiming other materials such as bricks and roof coverings. There is also increased interest in the use of rural exception schemes that allows locals to buy new rural developments at discounted rates. These schemes use covenants on the properties sold to allow them to be sold at a discount to market value to genuine local residents. They work through land owners being given some of the planning gain by selling agricultural land between its value as agricultural land and its value as a potential development plot. The savings in the land purchase price is then passed onto the local buyers in the form of a percentage discount from market value like those used in the right to buy scheme. These discounts are then passed onto other local residents when the property is sold on in the future. The rural acceptance scheme has three fold benefits, the land owner receives uplift in value, local people get access to affordable housing, and the local authority get new build development properties towards their development targets.
Build to rent set to boom after demand from institutional investors?
April 14, 2012
The government backed Montague Review into Build to Rent has identified a significant interest from institutional investors in funding build to rent projects. Small changes to legislation could create a boom for the build to rent sector. With significant amounts of investment available from pension funds, insurance companies and property REITs. There is a great deal of examination being carried out into removing these investment barriers. Many institutional investors are attracted to this sector of residential property investment because there has been such a marked demand for these properties from tenants. The growth in demand has been described as rapid with input from big hitters in the property industry like, the British Property Federation, Association of Real Estate Funds and the Investment property Forum. The use of 106 agreements in conjunction with 10 year affordable rent covenants will make many developments stack up where in usual market conditions they have been unlikely to be built out. This also provides the government with a cost free method of boosting housing supply with the option to raise funds from the sale of publically owned land.
How to obtain planning permission for a site outside the village envelope?
April 9, 2012
Many planning consultants and town planners are waiting with great interest to see how the new planning guide lines will create planning precedence and effect planning applications outside the geographical plans for local authority strategic development. With the new planning guidelines presuming in favour of sustainable development what will this mean in real terms. The answer is that no one really knows, even house builders and developers have mixed opinions on whether it will make gaining planning permissions easier. For those holding potential development sites outside of the areas zoned for future development this law change could act as a lottery win. With rough figures for agricultural land fetching 4-8K per acre and development land with the correct permissions fetching 80-180K an acre you can see why site owners will invest heavily in planning consultants. Some planning consultants will chose to “work at risk”, and spilt the planning gains. This is good news for site owners as it means they can add value to their development sites by gaining planning permission without potentially incurring professional fees of tens of thousands of pounds at risk. The down side for the site owner is that they could potentially be giving away tens of thousands of pounds in planning gain profits.
Stuck with a development site you can’t finance?
April 7, 2012
Obtaining development finance has never been easy but in recent times it has proved impossible for many potential development site owners. The two biggest obstacles that effects site owner’s attempts to obtain speculative development finance is either an existing charge or finance on the site. Many speculative development finance providers simple will not consider lending on a site that is not unencumbered and already has outstanding finance charged against it. The other thing that banks and development funding providers have increasingly looked at to minimise their risk is development experience. First time or novice developers are finding it very challenging to obtain suitable development funding without the correct development team in place. Those that are able to overcome these obstacles are finding that their development sites no longer stack up because the percentages that the banks will lend are so restricted. The best way to overcome these issues is by making sure you have the correct members on the development team or carrying out a joint venture property development. Having an experienced quantity surveyor will not only give the banks confidence it will also help control build costs, assist with drawdown valuations and increase the opportunities for improved finance structures and cash flow management. Another way around these challenges is to use a private investor to clear off bridging or other finance charged on the site. This can be expensive with private investors expecting returns between twenty and fifty percent dependant on financial input and their risk levels. These considerations can often be weighed against the interest charges on existing finance or funds that are tied up in sites that the owner or development team are unable to build out.
