Top Tips for Property Developers
Guest post by Steve Spragg, Underwriting Director of Affirmative Finance
Property developers can come across many difficulties when they enter into new ventures, but with careful planning and preparation, even the most adventurous projects can run smoothly and make significant profits.
We have listed some of the key problems that often affect property developers and how to remedy them so that your next development will be a successful one.
Employing a chartered surveyor at the start of your project can make all the difference. Surveyors provide valuations of buildings and land, meaning that you will get a fairly clear picture of the return you can expect to see on your investment.
Importantly, a surveyor can assess the condition of an existing building or area, highlighting any structural issues and providing multiple solutions. Moreover, chartered surveyors can also advise individuals who are partway through a project, by suggesting how to utilise the land available and communicating with planning authorities. By using a chartered surveyor, you will receive an impartial, professional opinion about your proposals and plans.
Employing qualified tradesmen to complete the project is also hugely important. Before hiring anyone, decide on exactly what you want from the project and think about what will be required. For example, do you need electricians, joiners or decorators? Would you be able to complete any tasks yourself?
Deciding on a builder is also an important step. Make sure that you shop around, find a few different quotes and discuss time frames to find the best deal for you. Hiring a project manager can also be very helpful. They will be able to liaise with builders and tradesmen, and can help you find the most appropriate deal.
Consider Planning Restrictions and Work in Line with Them
You will need to apply for planning permission when you intend to build a new property, make a major change to a building (such as an extension), or you change the use of a building (unless permitted development rights are available).
If you go ahead with your project without requesting planning permission first, you will more than likely be served with an Enforcement Notice, which may force you to undo any changes that you have made or destroy anything that you have built. Although planning permission cannot be overlooked, it is possible to appeal should you be denied.
Sometimes, planning permission is not needed for warehouses, industrial premises, or demolitions, although you will need to check this with your local planning authority. There are also special circumstances for buildings that are considered helpful for the local community if the community in question is supportive of the build. In situations like this, get in touch with your local neighbourhood planning authority.
Once you have applied for planning permission, the local authority will consider, amongst other factors, the following:
- Whether local people support the project
- Any landscaping needs
- If the building would bring too much traffic to the area
- The size and appearance of the building
- If adequate infrastructure is available, e.g. a good water supply
- What the building will be used for.
Turn Commercial Properties Into Residential Buildings
Over recent years, it has become very popular and profitable to convert commercial buildings into residences. However, some key facts should be considered before investing in projects such as this.
Firstly, hidden costs that you did not initially anticipate during the project. For example, the cost of labour can be significant. Employing a company to convert a property to residential standards can be very high.
In addition to this, there may be access problems. In busy town centres, traffic and parking spaces could be an issue. Limited people would rent a flat that was difficult to access due to excessive traffic or a lack of parking spaces.
Moreover, it may be difficult to change the external facade of the property. Many buildings, especially if they are considered historically important, cannot be altered on the outside. In circumstances like this, it is important to understand the regulations of the local planning authority and to gain the requisite planning permission.
Finally, it is important to remember that ventures like this often take a long time to complete. Gaining planning permission (if the permitted development process is not available), converting the building and ensuring good access to the property all takes time. Therefore, you should only take on projects like this if you are happy to wait a long time before receiving a return on your investment.
Choose the Right Area
Picking the right area to invest in is key when taking on property development projects. Investing in a low-crime, affluent area can be a great investment, but can obviously be expensive. However, many developers look to invest in up-and-coming locations, such as inner-city areas that are undergoing regeneration.
By spotting areas where businesses are investing and expanding, many developers can purchase buildings in the area at a relatively low price. It will then be possible to convert or renovate the property at a significant profit once the area has become more established and desirable. If other investors are taking an interest in the area, or it seems as though growing commercial companies are setting up in the area, it could be a great place to invest in.
Even though the wealth of the neighbourhood and the potential for growth in the surrounding area are important, practicalities such as good transport links and local amenities should also be considered. If a property is close to good transport links and shops, people are more likely to purchase or rent the building.
Self-build projects can also be highly profitable and rewarding. However, the following key points should be considered.
Firstly, you should seek out a suitable plot of land to build on. Consider the surrounding area, seek planning permission and hire a surveyor to assess the quality of the land.
Before taking on the project, it is also important to set a realistic budget and organise your finances to ensure that you will have the funds to complete the project.
Finding the right designer is also important for new ventures like this. Package suppliers, architects, and house designers are all able to take on self-build ventures, but it is important to gather a few quotes and explain your vision clearly to all of your potential designers.
Finally, prepare the ground for your new build. Clearing vegetation, digging trenches and ensuring that the land will not become water-logged are all crucial pre-build tasks.
It can be difficult to calculate exactly how much budget you need to set aside for any project. However, it is always best to err on the side of caution when it comes to property ventures. If you encounter unexpected issues – for example, if the building is found to be unsafe in any way, or if you decide to appeal planning (either because planning has been refused or you disagree with certain conditions) – you will need to fall back on a reliable budget. Otherwise, you could run into financial difficulties during your development.
When you plan your project it is also important to look at your costings as closely as possible. Try to consider important factors such as structural alterations, utility supplies, new bathrooms, kitchens, furnishings, and decor, and other fees you think you may come across.
Many property developers use investments, savings, or gifted and inherited finance to fund their projects. However, many choose to use development finance – a short-term funding option. Finance can be offered for a wide range of ventures, from renovations and conversions to building on undeveloped land. In some cases, all of the money needed for the venture can be provided through the loan, so it is a popular option for many developers who lack other means of funding.
If you would like to understand more about financing property developments, read the Affirmative Finance whitepaper, A Beginner’s Guide to Development Finance.
The Property Voice Insight from Richard Brown
Thank you to Steve Spragg from Affirmative Finance for such a good post on how to look at development projects.
Property development can be a very attractive proposition for property investors for several reasons, including the lure of larger profits and a shorter-term payback on the cash investment fund. However, it also carries higher complexity and higher risk when compared to many other types of property investment.
Greater complexity means bringing in more people, who will need managing and will add to the cost of a project. Development relies on external people to approve and / or service the development in order for it to be undertaken. These external people include the planning team within the local council, but could also include other council departments and utility companies among others. Thus, there is a greater risk of things taking longer or being approved as we wanted, or even at all taking place. Here, I am very pleased that in our projects we have a Chartered Building Surveyor on our team, which helps quantify, manage and mitigate these risks.
Time is another very significant point that is usually underestimated by new developers. Time on a development means cost and more cost means less profit. Rather than trying to set an unrealistic timescale and then stress out trying (usually in vain) to meet it, a better alternative is to plan for a more realistic timescale, including time to find trades, gain consents and other approvals / permissions, overcome unforeseen issues in the works phase and sell / refinance on exit. Then have at least an 'expected case' and 'best case' scenario...perhaps even a 'worst case' one too!
For many of these reasons, developer profits actually NEED to be higher than smaller refurbs and flips. Allowance needs to be made for all of the points mentioned above and then should everything go swimmingly to plan a best case outcome can be richly enjoyed. Alternatively, there will be some wriggle-room built into the expected case and a 'can live with it' worst case hopefully being the worst case that actually happens. As Steve says, this all comes about by being professional and planning ahead.
Let me know if you are interested in property development and we can talk some more.