Property Development Success is all in the Planning
By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Cliché or not, money is made from bricks and mortar – take a look at the Sunday Times Rich List and you’ll find a fair few fortunes built on property. There are stellar profits to be made, but are these profits really within the grasp of the everyday would-be property investor?
Small-scale property development means the answer is yes.
Many projects that constitute ‘small-scale’ involve converting a single existing building and they take less work on the developer’s part to oversee than your average flip or refurb does. Yet they can produce significant six-figure profits in less than 24 months, with the developer able to oversee the project in their spare time.
Why is small-scale development so attractive right now?
The government is desperate for empty brownfield sites to be converted into new homes, so much so that they’ve recently granted a whole raft of new permitted development rights (PDRs). These PDRs allow us to change the use of a building from commercial to residential without having to apply for full planning permission. This shortcuts the process and gives developers much more certainty, since the local council has far fewer grounds on which they can object.
And there are a great many empty commercial properties up and down the country that are ripe for conversion into residential. We’ve got a national shortage of homes and a massive oversupply of unused brownfield sites such as shops, offices, and light industrial units. As more businesses fail in these tough times, commercial property owners are seeing the cost of maintaining their buildings increasing (energy, mortgage, maintenance, etc.) just as their value is going down. The pressure to sell is increasing, and 2023 is likely to see commercial values dip considerably. For an aspiring developer, this should be a great time to buy.
Add to this that small-scale development requires far less capital investment on the developer’s part than flips or buy-to-lets. You will need some funds, but it will be a fraction of a typical buy-to-let or flip deposit, so you’ll get much better financial leverage. Commercial lenders and private investors are desperate to get decent returns, and many are very keen to fund good small-scale development projects, even for first-time developers.
Small scale property development also involves less work for the developer than managing a flip or refurb project. That’s because you can afford to employ the services of a professional project manager to oversee things for you, something that’s usually beyond the budget of a smaller project. It’s one of the reasons that so many landlords are moving into small-scale development; it’s a lot less hands-on than managing a house refurbishment or HMO conversion.
Rising popularity means increasing competition
As the rich pickings small-scale development can offer is attracting more and more people, you will need an edge. And key to this is recognising that the value of a commercial building is not fixed in the same way a residential building is. Most houses or flats have a known value, give or take a few percentage points. But a run-down shop with storage above will have one value to a retailer looking for a new home and a much higher value to a developer who can turn it into flats. This gives developers a distinct edge since they can afford to pay more for the property. But here’s where you can take things a step further. Most developers tend to stick to vanilla when converting commercial buildings, but if you know your stuff, you can extract more value from a building than your competition can. A little knowledge goes a long way in small-scale property development.
If Developer A can get five flats out of a building while targeting a 20% profit, selling the first four flats will cover the development cost, and the fifth will represent their profit. But if Developer B knows how to get six apartments out of the same building, their profit is much greater because that profit is created by the sale of two flats. This is why it’s critical to learn how to maximise the value of a building.
Assistance is available
In the same way that you might employ an accountant to help you minimise your tax bill, so a planning consultant can help you maximise your planning opportunity. They know the planning rules inside out and can show you the art of the possible. However, just like accountants, all planning consultants are not created equal. Some are more creative than others in exploiting the planning rules to the maximum without breaching them. That’s precisely the kind of consultant you want on your side, so make sure you meet several candidates and kick a few tyres before picking your favourite.
You don’t have to build anything yourself
It is possible to make a healthy profit simply from obtaining the permitted development approval and then selling the deal on to a local developer, something known as ‘planning gain’. You won’t make as much profit, but then you’re not having to build anything. It almost becomes a desktop exercise, where you use your knowledge of what’s possible planning-wise to profit from the uplift without having to lay a single brick.
Whether you’re developing yourself or simply sourcing projects, the key is for YOU to understand what’s possible in planning so that you don’t need to employ a planning consultant to look at every property. We have a number of students who do exactly that – they come on one of our training programmes to learn about these more advanced planning strategies and then decide to specialise in finding a particular type of property where they know they can add a lot of value. That way, they only need expertise in one specific planning area rather than all of them. Then once they’ve found a property that fits the bill, they bring in a planning consultant to make sure everything stacks up.
There’s a lot of uncertainty in the housing market at the moment, and many buy-to-let investors are licking their wounds and facing an uncertain future. But there’s never been a greater demand for new homes, and small-scale projects are an obvious alternative investment strategy. Just like their projects, small-scale developers aren’t in the same mould as their large-scale counterparts – rather than multi-millionaire wheeler-dealer, think savvy investor.