The Growth in Investment of Online Estate Agencies

Over the past few months the world of estate agents has seen a rise in the investments being made in online estate agencies.  With some big names entering the arena, we wonder if we will see a long-term change in the industry…

We only have to go back to December 2013 to see the first significant investment made in an online estate agency when James Caan of Dragon’s Den fame made an investment in one of the country’s biggest online agents, Emoov.  As well as his money, Caan also became the face of the company.

Prior to Caan’s investment, Sarah Beeny of a much smaller celebrity status announced the online expansion of her sales portal, Tepilo.

On top of both of those, and more recently, the online market saw the biggest name enter the fray.  Sir Stelios Haji-Ioannou of Easyjet fame announced that he will be joining the competition with his own online estate agency, Easyproperty.

Recent reports also suggest that two more online agents are set to make waves in the digital market places.  Both EstatesDirect and PurpleBricks have received significant backing from investors.

DatingDirect, who sold out to Match.com for £30m in 2007 are putting money into EstatesDirect, whilst famous High Street store Poundland are investing in PurpleBricks.

Perhaps now is the time to sit up and begin to take notice of where the world of estate agents is heading.

So are these online estate agents, with their big financial and business backings going to change the face of the industry forever?

At the recent My Home Move Brick + Click event in Solihull, an interesting panel debate between three well-known estate agents took place.

Jon Cooke from YourMove, in favour of traditional estate agents argued that they would not be affected by their online counter parts, saying they still offered better value for money despite charging “extortionate” agency fees when negotiating a sale.

Miles Shipside from RightMove showed results of a survey from their large database of users that revealed some interesting data.

According to Miles, these are the top decisions that influenced a seller’s decision:

  1. Agent’s reputation
  2. Quality of response to my enquiries
  3. Presence of property portals
  4. Low fees
  5. Recommendations (friends + family)

With ‘low fees’ ranking as the fourth most important factor, notably behind an agent’s reputation, online estate agencies will have their work cut out for them.

Adam Day from one of the first online estate agents; Hatched; was keen to defend and promote technology that gives his company, and companies like his, an advantage over traditional agents who aren’t taking the digital world as seriously.

Mr Day was quoted as saying:

We know how traditional estate agents work and have adapted their systems with technology to give the customer a better experience.

The co-founder of Hatched was also confident that more people will move towards the online sphere when selling their property with the perceived value of the seller working in their favour and traditional estate agents’ dismissiveness of the digital world.

So will the more established brands like Hatched, HouseNetwork or HouseSimple prevail in the long run?  Or will they lose a significant part of the market share with heavy investment from the competition?

Financial backing certainly has its advantages, but it is by no means a guarantee for success.  When it comes to choosing an estate agency, we have previously mentioned the agent’s reputation.  On top of this, an agent’s experience and knowledge will also plays a vital role.  Three things money cannot buy.

For an example of this we should go back to 2008 when WOWProperty became the very first online estate agency to receive significant investment.  They have over £1.75m in their kitty, but little more than a year later the company had all but disappeared.

WOWProperty attempted to build history from thin air whilst consumers opted for more established businesses; those that had invested time forging bonds of trusts with their clients.

The modern era of online estate agents has been quietly building for a number of years now and the recent investment suggests it’s almost certainly going to grow.

Barrie Smith attended the MyHomeMove Conference in 2014. An expert in making offline businesses successful in the online space, he was intrigued by the huge investments in online estate agencies, and the current debate around the merits of the online vs offline property sales business models.

Is the tide turning for London’s Eastern Fringe?

After ‘location, location, location’ the phrase ‘the ripple effect’ is probably one of the most heard when it comes to making that crucial decision, where you should base yourself. And this decision is no less important for the commercial occupier than it is for the residential purchaser.

In London, however, it’s complicated. Given London’s sprawling nature and its ‘city-of-villages’ structure, those ripples overlap; some are stronger, some weaker. Tenants may want to be a stone’s throw from a transport hub or a buzzing street, but wherever that stone lands, its ripples will be felt further out. Not all tenants are brave enough to see where this takes them, but given the rise of rent in the capital and the scarcity of office space, it may be worth prospective tenants looking where others have not yet discovered.

So, where might this be?

The cheapest area is the Eastern Fringe side of the city as well as the area from the east of the City towards the Docklands. At the moment, at the highest end of the market in the eastern fringe, tenants can expect to pay around £25 per square foot – a fraction of the sums in other, more popular, areas of the London.

The reason behind the cheaper rent is simply because there is currently more supply than demand. The problem with the supply is that the quality isn’t great (yet). The problem with the demand is that there isn’t much (yet). The fact is, at present, many of the buildings are tired and not what tenants want in terms of facilities, appearance, or fit-for-purpose-ness, hence the lack of demand.

While the transport links are there, and will continue to improve with Crossrail in 2018, the area isn’t necessarily where clients want to find themselves. Of course, some tenants may be able to work around this, particularly if all their business is conducted online, for example, where meeting face-to-face with clients is a rarity.

Alternatively, the fast-rising number of serviced office buildings that offer meeting spaces in the more popular districts of London means that the one-off hire of a meeting room could be a solution for a business owner who doesn’t want their clients to see their cheap but not-so-cheerful premises.

The lack of demand at present may be a result of caution on the part of the tenant winning out over the need to save money on rent. Businesses considering a move to this area may face challenges in recruiting or retaining staff, as the amenities and social spaces are in short supply compared to other areas of the city.

The Above Factors Will Start Fading in Significance

Many of the buildings are undergoing development as landlords see the potential to attract more and better-quality tenants, resulting in improved longer-term rents. Aldgate will be the location of a new development, another step towards an improvement in the area, one that began with targeted regeneration plans in 2007. Goodman’s Fields, the site of an RBS cheque-clearing centre, will be a mixed-use seven-acre development of offices, apartments, retail and restaurants, the first phase of which is due to be completed next year.

Prospective tenants may need to be canny in assessing the best time to jump into the Eastern Fringe and beyond. Too soon, or to the wrong kind of property, and business may be affected: too late and rents might already have started to increase. Some tenants may in fact be ‘pushed’ rather than ‘pulled’ to this area when their leases elsewhere – originally negotiated in cheaper times – come up for renewal or review and the resulting rent increases, meaning that staying put is not an affordable option.

 The rise of other, formerly neglected, districts can offer much to the Eastern Fringe area in terms of inspiration and what can be achieved. Redevelopments and refurbishments have, over the last few years become more imaginative, to reflect the needs and wants of the TMT (technology, media, telecoms) sector and those who work within it. Old buildings are not necessarily seen as restrictive and untouchable, but quirky.

Refurbishments can also incorporate the technological installations that businesses of all sizes require now as standard, although such retro-fitting does not come without challenges – or cost. In addition, without a guaranteed tenant lined up, a landlord may be reluctant to invest this much. There is an element of risk that will need to be assessed and taken by both landlords and tenants before great changes in the scene here are achieved. In contrast, the new developments planned for these areas will offer the blank-canvas option for tenants who want to be based somewhere clean, new and bright – and reasonable.

Serviced Offices: The Way Forward

Serviced offices may be key to increasing the profile of this area and reducing vacancy rates. This sector has seen a meteoric rise not only in London but also across the UK and globally. The flexibility of these furnished, staffed, plugged-in and dressed-up office spaces is what attracts tenant businesses of all shapes and sizes, from the one-man start-up to the multinational. Tenants can try out a few square feet of space, a building, or a location and if it doesn’t work out they can move out just as easily as they moved in.

The lack of long-term commitment needed when signing up to a serviced office means less financial risk for many tenants. Since these buildings by their nature house a number of different tenants, there is also a ready-made commercial community available, which may not be the case if one’s office is sandwiched between a takeaway and newsagents for the next five years. Also, because rent prices in the Eastern Fringe are the lowest in the capital, the serviced office model should be able to offer excellent value for money, as well as sweeteners such as rent-free periods, to tenants who are prepared to take the plunge and start creating their own ripples.

Eugene O’Sullivan, is Director at Morgan Pryce – experts in London office search, negotiation and project management and act exclusively for tenants. For commercial property and offices to rent in Mayfair, Soho, Southwark and beyond, talk to Eugene today.

10 Common Planning Permission Pitfalls and how to avoid them

Much of what people know about planning permission comes from the media such as the programme Grand Designs, the experience of friends and family, or from objecting or would-be-objecting to a neighbour’s plans.

Of the process – and the cost – many actually know very little, and the wealth of information available on the internet can be a little daunting. It’s hard to know where to start, let alone where you’ll end up and what you’ll go through to get there.

Businesses have more to consider than residential owners, when what you do in a building is as monitored as the physical changes you make.

Without specialist knowledge and with an excess of enthusiasm, it’s easy to make mistakes in the planning process.

Here we introduce some of the common pitfalls when dealing with planning permissions.

1. Do you need planning permission?

First of all, consider whether you actually need planning permission at all. Most areas (conservation areas excluded) benefit from a ‘Permitted Development Order’ (PDO), which means that changes of a certain size or height, or distance from neighbours, do not require planning permission. The rules can be found on the planning portal website but it’s important to look at them carefully and perhaps consult a professional.

If a property has already been extended this might prevent further changes under a PDO. Recent legislation also means that in many areas properties used as offices can be converted to residential under a PDO – although discussion with the council may still be required.

2. Avoid the DIY trap

Do-it-yourself has its place, but the rule to remember is to stay within your skillset. Often it amounts to a false economy to have a go yourself. Consider a tiled wall that slopes, or a door that won’t close. This is no less true when applying for planning permission, which involves certain stipulations, as well as local considerations, technical requirements and possibly specialist knowledge.

‘Having a go’ at the application may be cheaper in the short term, but it may result in a failed application, or with conditions attached that compromise your plans. There are professionals who can assist, for example:

Designers.

These will not only maximise the potential use of space but will be working with planning considerations in mind.

Architects.

As above, but they will also be able to draw up the necessary plans, especially where the works involve structural changes.

Planning consultant.

A planning consultant, particularly a local one, will be familiar with the developments that have been granted permission in the vicinity – and more importantly, the ones that haven’t. They will also be able to help you address areas of your application that might elicit objections from the council, local bodies such as Highways, or neighbours, in order to resolve any issues before they are raised. Planning consultants can also be useful if you have to appeal a decision.

In fact, if you use the above services, you probably don’t need to worry about most of these points.

3. Can you really afford the investment?

There is no point in successfully obtaining planning permission for works that ultimately will prove too expensive to carry out properly. It’s difficult to budget for building works when you’re not an expert in that area.

One option is to obtain a builder’s estimate. It’s not a quote for works, but should give you an idea of how much is involved. Then add 20%. Contingency is always required for items not taken into account and latent problems that only become apparent when the diggers start digging. Also, of course, take into account any ancillary fees, such as professionals’ fees, consents planning and building regulation fees.

4. Adhere to the rules and instructions

Planning permission and the process of obtaining it has evolved over many years. Councils may have different considerations, requirements and restrictions, and a chat with one of the planning officers will always be useful. The forms accompanying the application will need to be filled in properly, accurately and comprehensively.

Every application, from a two-storey extension to a full housing development, will need:

• A location plan – obtainable from, for example, the Land Registry or from the deeds
• The existing and proposed site layout
• Existing floor plans and elevations and corresponding proposed ones
• Proposed sections
• External details such as doors, windows, drainage, roof tiles, render.

Faults and incomplete details may lead to a rejected or failed application, or extensive to-ing and fro-ing which is costly in terms of time and money.

5. Planning permission is not the only permission you need

It’s easy to get carried away with the project at hand, however, before planning permission is even applied for – and ideally before any money is spent on professionals – consider who else might need to give you permission for any works or change of use.

If your property is leasehold, it is likely that permission from a landlord or its agent is required. This is easily forgotten in the case of a long-term leasehold house, for example, where the landlord is largely absent other than an annual collection of nominal rent.

If there’s a clause in the lease that prevents alterations without permission, then consent should be sought. This can be an expensive business as landlords will be aware of the importance of the project and may wish to capitalise on your desperation.

If you go ahead anyway without consent, not only will this cause problems when you come to sell the property, but retrospective permission can be much more expensive to obtain from a landlord than permission in advance – because the landlord knows you need it.

Make sure you check the deeds, even if your property is freehold there may be restrictions (restrictive covenants) in the deeds preventing certain changes to the property. This ranges from properties 200 years old to new build properties.

If you’re unsure about any restrictions that might be present concerning your property, arrange to visit your solicitor who will be able to advise you. Often a quick scan of the deeds is all that will be required.

6. Change of use is no exception

It may be tempting where businesses are concerned, particularly small ones, to not allow planning permission to stand in the way of the perfect space, particularly if it feels the changes and/or occupation of the property are likely to be overlooked. It also may be tempting to persuade oneself that one’s business has not changed the nature of one’s home, for example, when in fact the child-minding business has become more like a nursery.

Care needs to be taken and complicated rules taken into account when dealing with use classes. A café owner may find that they have to grill all their meat and roast all their vegetables for their sandwich fillings off the premises (i.e. at home) because the use class of their leased premises does not allow food to be cooked on-site. The last thing a business needs is a visit from the planning enforcement officer and a breach of the terms of the lease. No premises means no business.

7. Don’t change your mind

Once the planning application has been submitted, it can be difficult to make changes, and even harder once it’s been approved. Anything other than minor changes might require a whole new application. So make sure you check and double check before submitting, not after.

8. You can’t get away with not having planning permission

While there is legislation in place that, in certain circumstances, mean action cannot be taken for works carried out over a number of years ago, this is not the situation you want to find yourself in. There is no guarantee your works will fall into this category, and there are stories of planning enforcement to be found in the media or on the grapevine, from dormer windows having to be removed to whole properties having to be demolished. And while you may live or work happily in a property without planning permission in place, the last thing you want when you move on – whether selling the property or at the end of a lease – are questions being asked and delays being caused – or even claims of damages by a landlord – arising from lack of appropriate consent. Solicitors (especially the other party’s solicitors) can be hard to satisfy when it comes to dotting the I’s and crossing the T’s.

Indemnity insurance is possible, but makes some owners and lawyers uncomfortable, while retrospective planning permission is far from guaranteed – and can invalidate or prevent the obtaining of indemnity insurance.

9. Don’t forget building regulations

The flip side of the planning permission coin is building regulations. It would be rare where planning permission is required not to also have to comply with building regulations. These deal largely with internal changes and energy efficient measures as well as gas and electrical works. These will also need to be signed off, often long after planning permission has been done and dusted.

It is vital not to forget the final signing-off for building regs purposes. It’s much harder to get retrospective building regulation approval, particularly where the site hasn’t been visited mid-job and where structural works such as RSJs need to be assessed.

10. Letting your permission lapse

Planning permission will last for a fixed number of years and can be passed on to future buyers. If you are planning on carrying out the works, don’t let the date pass you by. There is no guarantee that the permission will be re-granted or extended, particularly if legislative or policy changes have been introduced in the meantime, perhaps in relation to the ratio of residential property to business premises in a particular area, or where restrictions have been imposed on the number of houses of multiple occupation in ‘student’ areas.

Eugene O’Sullivan, is a commercial property expert and Director at Morgan Pryce – London office search, negotiation and project management agents who act exclusively for tenants.

Going Underground

The primary factors that drive the value and selling price of a property up are location and usable area.  These are the 2 main considerations that should be considered when selecting a property or site on which to develop.  Leaving the ‘location’ aspect to one side for now, usable area is a very shrewd way of increasing value and in some cases this can be accomplished fairly easily.

I stress the term ‘usable’ area because (to use an example) if a converted loft is not compliant with building and fire regulations, the additional space cannot be marketed as such.  This often works in a private property developer’s favour because carrying out the work to make the room compliant might not involve that much work.  An example of this might be the installation of a fixed stairway and fire doors.  Expenditure of a few thousand pounds to have this work done can release tens of thousands in eventual property value.

Another way to increase internal area is to extend.  It’s important to have quite a good idea of the size, location, shape and design of the extension before even applying for planning consent or a Certificate of Lawful Development.  A design will be needed (this doesn’t have to be professionally produced at this stage) to illustrate what is planned.  Clearly if the property has not even been purchased at this stage, the consideration must be carried out when evaluating the property.

What I’m working my way round to write about is planning the foundations of that extension.  I hasten to add that any detailed advice on this subject should be directed to either a Building Surveyor or a Building Engineer. That said, it’s extremely useful if you can carry out a very quick assessment of the property yourself prior to purchase so that you have an idea of the viability of the project.  One of the issues I have come up against recently is foundation depth due to the very close proximity of tree roots from a neighbouring property.  To ensure compliance with building regulations (and compliance WILL be checked by the purchasers Solicitor when the property is being sold onwards) the foundations must go down to minimum depths below ground level.  It is not unheard of to find that trees up to 30 metres away from a property can have an effect on the foundations.  Therefore it’s very important that this is considered in your overall property plans.

Conventional strip foundations are not suitable when having to dig so far below ground level.  Deep strip or reinforced trench fill will be better suited.  Pile foundations can also be used and might be more economical.

The illustration and table below (please excuse the standard of my drawing) provides a method of assessing how deep the foundations must go to be sufficiently strong enough to withstand the effects of nearby tree roots.  In addition to this, drains must also be incorporated into the design of the foundations.  Again, a Building professional will be able to provide more detailed information on specific situations.

Foundation depth may seem excessive, but the property or extension must be on a base that can withstand not only the penetration of tree roots but the effects trees have on their surrounds.  Large trees can draw hundreds of litres of moisture out of the ground every day.  This has the effect of soil shrinkage which often results in property damage due to the slight ‘drop’ in the side of the property closest to the tree.  If the tree is removed, the opposite effect occurs and the effected side of the property lifts slightly which can also cause damage.

Another factor to consider when evaluating the proximity of trees is Tree Preservation Orders (TPOs).  You might consider the work involved to put in deep foundations is worth carrying out, however the tree roots must not be damaged as this might harm the tree.  In some circumstances, a local planning authority might consider the removal of a tree to be worth the sacrifice if the development is important.  To be realistic though, it’s unlikely a private development would be considered in this way.

If you think the close proximity of tree roots will compromise your proposed development, speak to a Building professional or the local building control department.

Why it Pays to Tread Carefully

The vast majority of prospective property developers and investors will have to borrow money (probably in the form of a mortgage) in order to realise their plans and actually purchase a property.  In many ways it appears to make sense to avoid borrowing the funds as an individual (that is to say one of a pair or a group).  This is because a private developer might initially feel slightly intimidated by the scale of the project being considered and invite a friend or associate into the venture.  The main benefit however is that in most cases, it’s possible to combine deposits/equity and borrow more from a bank as a pair than might be possible as an individual.

There is an important point to consider when borrowing in this way though.  Recent research by the Debt Advisory Centre (link below) suggests that 1 in 5 borrowers do not realise that they are very likely to be liable for the whole debt if their partner (business or personal) cannot pay their portion of a joint debt.  Interestingly, 1 in 10 borrowers mistakenly believe that the debt is divided equally between parties.

Borrowers are usually ‘joint & severally liable’ for shared borrowing, such as a mortgage, loan or overdraft – meaning they are both responsible for the full amount if one partner can’t pay their way. But almost one in five respondents to the survey (18%) didn’t understand this.  In fact, just over one in ten (11%) thought each partner is liable for exactly half the amount borrowed, while 2% thought each borrower owes an amount in proportion to their income.  The reality of it is that in a serious financial emergency – such as relationship breakdown or redundancy – one partner could be left with responsibility for the whole debt, regardless of whether they can realistically afford it.

Ian Williams of Debt Advisory Centre comments:

“It’s easy to see how joint borrowing can become a serious problem when one partner can’t afford to repay.  In many cases, relationship breakdowns can cause the problem when one partner refuses to pay. In fact debt problems caused by separation affect one in ten people we help” 

It can be a confusing area – for example joint credit cards are usually based on a single credit agreement with the-first named cardholder responsible for paying the whole balance if things go wrong.  This is in contrast to debt secured on a property; the Mortgagee (the lender) has a ‘charge’ over the property.  This means that the lender has the legal right to take control of the property and sell it in order to recoup its losses.

  © Copyright Stephen Dawson and licensed for reuse under this Creative Commons Licence

Ian Williams goes on to say “Whatever the situation, there is help available. Lenders understand that things can go wrong, and will often agree to an affordable repayment plan if you tell them how much you can realistically afford to pay. If you are struggling to keep up with your debt repayments it makes sense to seek expert debt help sooner rather than later.”

This is not to say that all property ventures should only be approached as an individual, but the research above suggests it’s extremely important to be fully aware of the consequences and repercussions if it doesn’t go according to plan.

For more information on this subject, follow the link to the Debt Advisory Centre, or follow this link to follow on Twitter

Understanding Caveat Emptor

The term caveat emptor is often used on The Property Speculator site and a thought occurred to me that I should explain it in more detail.

 ‘Caveat Emptor’ simply means ‘let the Buyer beware’.  In terms of property transactions it means that in almost all circumstances, the onus is on the Purchaser of a plot of land or property to find out as much as he/she can prior to committing themselves in the purchase.

That said, if there is a major issue with the property and the Vendor deliberately remains silent or misrepresents the truth in some way, the Purchaser might have a case to claim damages.  For example if construction or renovation work has been carried out that is sub-standard, if the Vendor is aware of this and does not disclose it prior to the sale it is likely the Purchaser will have some right to recourse when it is eventually discovered.

In the case of environmental issues (a common occurrence on brownfield sites), the Purchaser will often adopt any liabilities arising from contamination that has originated from the site during his ownership.  It can often take a substantial amount of time for some forms of contamination to appear.  Just because a site has remained unused for some years, it does not necessarily mean that “all contamination would have been discovered by now”.

 It is the decision of the Purchaser to decide upon how deep the investigations should go.  Commercial developers now place a great deal of emphasis on the results of an environmental survey.  This is carried out prior to purchase and will have an effect on the negotiation of the purchase price.  Environmental consultant fees can amount to around 2%-3% of the build costs for a large commercial project.

© Copyright Gordon Hatton and licensed for reuse under this Creative Commons Licence

 Clearly if the land has been used only as residential for as far back as is possible to investigate, the likelihood of contamination is minimal.  However it is still possible that leakage from an oil-powered heating system or a sceptic tank has occurred on the site.It is highly recommended that a thorough site investigation is carried out and any suspicion of contamination is investigated further.

It’s not just contamination that should be considered.  It is a criminal offence under the Conservation (Natural Habitats &c.) Regulations 1994 (‘the Habitats Regulations’) to deliberately disturb protected species, this can be in the normal course of carrying out building work on a property.  The only defence to this is if the property is a dwelling house (residential property) and the event was an inadvertent consequence of carrying out some action that was permissible.  Bats are an exception to this however and they can only be disturbed if they inhabit the living area of a residential property*.  Therefore it’s extremely important to understand the consequences of what you might be taking on.

* Source – (Disturbance and protected species: understanding and applying the law in England and Wales) Natural England.

If the property poses a threat to the public in general (for example loose roof tiles),the issue must be addressed as part of the purchase process.  The potential consequences of this are 3rd party injury and subsequent legal action against the new owner under the tort of negligence.

Other issues might not be quite so dramatic in their consequences but could still result in a substantial financial loss.  These include:

  1. Sub-surface obstructions.  In most cases, these are not detected until after the site has been purchased.  In one extreme case, several heavily crash-damaged London double-decker buses were discovered buried beneath the surface.  This element of risk should be considered when negotiating the site price.
  2. Hidden mine shafts.  Again, it’s often impossible to detect these until after the site has been purchased.  These are probably more common than one might initially think and (although likely to be expensive) many building contractors are experienced in remediation work.
  3. Subsidence in a renovation property.  Again, many building contractors are experienced in this type of work but there is usually evidence of the problem before it becomes a major structural hazard.  A structural survey can drastically minimise the risk of inheriting this problem.
  4. Complicated easements across the land.  Although this does not represent a particular physical or financial hazard, it can still have a significant effect on the resale value of a property.  Look for things like gates in unusual places within a fenceline.  It could suggest a right of way or a neighbours right of access across the land you intend to purchase.  A conveyancing solicitor should identify this in the local search, but things are occasionally overlooked…

Therefore it’s important to ask the right questions prior to purchase and preferably before a price is agreed upon:

  1. What was the historical use of the land/site/plot (if it isn’t obvious)?
  2. Any disputes with local or regulatory bodies?
  3. What is the history of previous occupants?
  4. What is the planning history of the site (including rejected applications)?

When making enquiries, it is certainly possible the Vendor will reply with a standard answer of ‘not so far as the seller is aware, please rely on own investigations and surveys’.  In which case, the potential Purchaser must make his own enquiries.  There is however an implication that the Vendor has not made his own enquiries into the respective issues.  If it transpires that the Vendor did make an enquiry and subsequently chose not to disclose some problem, financial remediation might be available to the Purchaser.

 When relying on the advice of professionals to make a decision, it is important to ensure they have sufficient Professional Indemnity insurance in place.  If they are of chartered status, it is far more likely they have.

An Introduction to ‘Pricing’ Development Land

The primary use for a residual appraisal is to produce a figure for land or undeveloped property purchase, in addition it can also be used to:

  1. Establish a required profit from a project and place that figure into the calculation.
  2. Consideration of the maximum value available for build costs, above which the project will become less financially attractive.

The undeveloped property might be:

  1. Brownfield or Greenfield land where buildings have never stood.
  2. A cleared site where the property has been demolished.
  3. A property that requires renovation or conversion to a lesser or greater degree.

© Copyright Robin Webster and licensed for reuse under thisCreative Commons Licence


The very basic formula for a Residual Valuation is:

Gross Development Value or Value completed

Less

Costs and Profit

Equals

Amount available for Land Purchase/Pre-Development Property

The first value that has to be established is the Gross Development Value.  This is essentially the total value of the completely finished project.  In most cases, the comparable method of valuation will be used to obtain reasonably accurate values for Sq Ft or Sq M.  Recent transactions can be analysed and the selling price or annual rent compared to the property in question.  Although the comparable method is not flawless, it is about the most accurate method to establish (completed) property value available.

Some important considerations are:

  • If a project containing multiple dwellings is to be analysed, the GDV will be based upon the total value obtained from the sale of all the units.  The value that can be obtained on the market can be expressed as a rate per M² and can be established through the study of comparable, similar properties recent sold prices (NOT the values they are offered at).
  • When establishing the total value of the finished project, remember that common areas such as stairways, hallways and foyers are not included within this value, but they will be included in build costs.
  • The amount available for land purchase is the absolute maximum that the developer would pay for the undeveloped project.  In practice however, this figure is likely to become the Gross Land Value because he has to:
  1. Allow for professional fees (Agents and Legal) and SDLT/property taxes.
  2. Consider discounting the land value to account for general economic inflation that will occur during the development period.
  3. Any interest payable on capital used to fund the land purchase (not already included in the main finance total).

When the above have been subtracted, the Developer is left with the Net Land Value.

The second value to be looked at is the total costs of the project.  This will include build costs, consultant’s fees, finance costs, infrastructure/landscaping costs and any obligation for S.106 agreement (a contribution to the Local Council in connection with the project) or Community Infrastructure Levy (CIL).  Considerations are:

  • As mentioned above, build costs will include the total value of the units to be sold and any common built areas (based upon Gross Internal Area).  Build costs can range from £600 per M² to £1600 per M² depending on the area of your project (obviously London/South east will be more expensive than Northern England and Wales) the required quality of finish and who you intend to do the work (Main Contractors is the most expensive route).  Click on the link for information on build costs.  VAT can often be reclaimed on many costs involved with new-builds.
  • The amount spent on consultants will vary according to the size of the project.  However for the purpose of appraising the project, using percentages is the most appropriate way for the majority of projects to be looked at.  Examples are:  Architect 5-7.5% of build costs and a Project Manager around 2% of build costs) VAT will almost always be payable on consultant’s fees.
  • Site infrastructure will include drainage, water, gas and electricity supplies.  For small projects, the cost will be negligible and the same goes for landscaping costs.  This is why a percentage calculation is appropriate.
  • Finance costs will depend heavily upon the amount borrowed and the rate it’s borrowed at.  If the project is intended to be solely a development (rather than a development with the aim of letting at the end of the construction phase) then the costs should be recouped as soon as possible.  Obviously the longer it takes to recoup all construction costs; the more must be paid in finance costs.  For the purposes of calculation, a construction period of 1-12 months and a post-construction marketing period of 2-8 months should cover the vast majority of situations.
  • S.106 costs will be related to how the project as a whole ‘fits in’ to the local environment.  A contribution is often requested by the local authority to pay for changed infrastructure to serve the project.  This might be a widened road leading to the development to serve the occupants.  Follow the link to read more about s.106 obligations for developers.
  • Estate agents fees are quite negotiable depending on the size of the development.  It would not be unreasonable to attempt to negotiate a slight discount of half a percent or so for sole agents that will be acting for a large development.

The next figure is the required profit level.  This is often calculated as a percentage of the GDV value.   It’s important that the profit is considered in the equation, because it’s surprising how many novice developers regard a profit as a bonus.  To continue developing property must be regarded as a business.  If no profit is made, then the business will not survive for long.

Clearly, the higher the required profit level, the less will be available to purchase the land.  So a balance must be struck.  Pre-recession profits could be around 33% of GDV (a very crude assessment of a property development was’ 1/3rdfor land costs, 1/3rdfor build costs and 1/3rd for profit’).  It’s very doubtful whether this would still be attainable now, in practice a rate of around 15% of GDV is realistic.  It certainly helps to be conservative and cautious when appraising a development.

The final and eventual figure to be generated is the sum available for land purchase.  This can be changed considerably if the input figures are changed.  In fact one of the criticisms of the residual valuation method is that for relatively small changes in the input figures, large changes in the eventual values can be seen.  This is why it helps to be cautious with input figures, overestimation of costs is better than underestimation.

The land purchase figure is the figure that forms the basis of your negotiation.  If the property is being bid on at an auction, obviously no opportunity to negotiate will exist.  It will however provide you with a good idea of how your project finances will work and if you bid above your ideal value, the other figures will be reduced accordingly (profit is usually first to suffer).

To download the very finest guide to Assessing Land Value, the Residual Valuation method and Gross Development Value currently available on the internet for only £5, please have a look at my ‘How to Price Development Land‘ page.

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4 Principles to Consider when Looking for Development Finance

It’s no secret that entering the field of property investment or development costs a huge amount of money.  Some people are lucky enough not to need to borrow to purchase their first project, but the vast majority do.

Whether or not you receive funding will probably be the biggest factor in determining the success of your project and/or venture.  If you don’t have the available capital to begin, and no one will lend to you, you are unlikely to get very far.

Therefore, finance is very important to the novice and experienced developer alike.

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I’ve written on the subject of Property Development Risk before, and to present the subject of obtaining finance it’s necessary to bring it up again.  However it’s probably not in the way you expect.

Managing risk is very important in any business venture.  If a company exposes themselves to too much risk on a regular basis, sooner or later something will go wrong and the consequences could be substantial.  Likewise if risk is avoided at all costs, the venture is unlikely to grow.  Risk is to be embraced but in a controlled way.  Profit or losses are the wages of risk.  There are ways for a property developer to manage risk; however it should be done with a view to your partner.

When I mention a partner, I mean the bank.  If you obtain funding, you will literally be going into partnership with the bank.  It’s most definitely not like an unsecured loan or even an owner/occupier mortgage.  If you are using a substantial chunk of the bank’s money, they will want to know absolutely everything about your venture.  This is when it’s important to consider the flip-side of risk management.  Your bank is also extremely interested in risk management; therefore everything you do to limit risk, might have the effect of moving the risk in their direction.  The bank is in the driving seat, there is a good chance they have put more money into the venture than you have, so they will be working hard to limit their own level of risk.  In this situation, if you really need to borrow to realise your plans, you must take on a significant amount of risk.

Visualise the banks as being like a wild animal, they need gentle and convincing coaxing to entertain your plans.  If you offer them a deal where they end up shouldering too high a proportion of the risk, they’ll be off before you know it.

So what should you be doing to get the banks to take you seriously?

Don’t use a Limited Company.  The whole purpose of a limited company is to control and limit liability on the owner/s.  Therefore if you set up your development/investment business as a Ltd company, the bank faces substantial risk because they will be severely hampered in recouping any potential losses if the venture goes wrong.  The bank will be much more comfortable if they are lending to an individual rather than a company.

The CV of the Borrower.   The person borrowing the money should really have a good idea of what they’re doing.  And if it’s your first property development venture and you are considered a novice, it’s an excellent idea to work with someone else who does know what they’re doing.  Obviously this is a bit ‘catch-22’, you can’t borrow the cash until you’re experienced, and you can’t gain experience because you can’t get the cash.  No one said it was easy; do your homework, plan the project (especially the finances) well, take advice from a building contractor/Building Surveyor/Architect so that it’s less likely you will go far wrong.  This is what the banks are looking for.

Don’t take on too big a project before you’ve gained experience.  Most successful property developers start their new careers by carrying out very light renovations to properties that just require a bit of updating and tidying.  This way the developer gains experience, and begins to accumulate more capital (hopefully).  It’s important to learn what works well, and what doesn’t.  It makes a big difference to your decisions when it’s your money going into a project.

Don’t expect to borrow heavily against your first project.  This point is probably quite an obvious one in the current financial climate; however it’s an important point.  There are financial advantages to borrowing against a property development, but fine-tuning the gearing is something to concentrate on when you are experienced and running a larger project/portfolio.  Banks are beginning to be slightly more flexible in their lending criteria, however you really should be able to invest at least 25% into a project and also have enough in reserve to cover a part of the early construction phase and contingencies.

It’s important to see the banks point of view when approaching them for finance.  They are in a powerful position, and it is vital that the developer/investor convinces the bank they represent a low risk.

 

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Creating a Property Development Contract with your Builder

Many private property developers aim to save money by carrying out some of the construction work themselves.   This can often be very successful, and usually depends upon the competency and persistence of the developer.  However, it also depends a lot on the developer having the time to do the work.  It’s fine if the novice developer does not have to do a ‘normal’ job every weekday and can just concentrate on the construction/alteration works.  Most developers, when beginning their ventures though have to juggle a day-to-day job and run their property ventures in their spare time.  I can assure you from experience that having a full-time job and having to squeeze in work on another property in the evenings, weekends and holidays will test your motivation and persistence.  In short, it gets quite stressful.

Apart from the obviously increased expense, it usually makes a lot of sense to get builders in to do the work for you (or at least the majority of it).  The larger the project, the more benefit there is.

Where to start though?  All developers will at some point come to this stage.  Knowing that substantial outside help must be secured, but not quite knowing what to do first.

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The first step is to decide exactly what needs to be done to the property.  On smaller projects where the work will only amount to a few thousand pounds (such as very minor alterations) the route will be different to larger projects of hundreds of thousands or even millions.  On small projects it’s more likely the developer will have a good idea of what work they require the builder to carry out.  It’s very important to write this down, placing it in logical steps.  An example of this might be:

  1. Lift Patio area to rear of property (state the extent of this if possible).
  2. Re-route/prepare drains for foundations to comply with Building Regulations.
  3. Dig and lay suitable foundations in preparation for extension.
  4. Construct double-skin brick/block extension to full property height in accordance with planning conditions, tying bricks and blocks in with existing structure.

This list in its entirety should be concluded with important points, for example ‘all associated excess material and refuse to be removed from site upon completion’ and ‘all appropriate Building Regulations to be complied with’.

This list is often referred to as the ‘Scope of Work’ and becomes more important as the size of the project increases.  The scope of work can help you out at this point by enabling you to obtain several different quotes for the work if you feel you would like to look around for the most competitive price (known as ‘going to Tender’).   If the idea of compiling this list is daunting because you are not experienced enough to place the required work into steps, contact either a professional (such as a Building Surveyor, Architect or Structural Engineer) or ask a reputable builder who will not be actually doing the work (so that the scope of work is impartial) to help out.

The process of finding a suitable contractor with the use of a scope of work is called ‘Tendering’.  The larger the project the more important it is to find a contractor that will provide the right work at the right price.   Once the builder has been chosen to carry out the required works (it might be the one who produced the most reasonable quote, or the firm who you feel might be the best suited to the work you need carried out) the next step is to establish the terms of the builders contract.

In almost all cases (around 70% – 80%), a Joint Contracts Tribunal (JCT) contract is used to establish the terms of the agreement between client and contractor.

The contract type depends on the type and scope of work to be done.  For the smallest work, such as a house extension a ‘Homeowner’ contract would be used.  There is further choice within this, for cases where the homeowner is overseeing the work, and where a consultant oversees it.  At the other end of the scale is a ‘Design & Build’ contract where the contractor actually designs much of the work to be done.

It must also be mentioned, that when a project is being designed by a contractor, the company MUST have the appropriate level of competence and Professional Indemnity insurance to carry out the design work.  This can be achieved by outsourcing to a Structural Engineer or Architect.  However it is asking for trouble if a small building contracting firm designs a structure, dwelling or substantial alteration themselves without the appropriate level of design competence.  The worst case scenario is if the structure fails or becomes unsafe.  As developer, it is possible you could find yourself in court under a charge of negligence for failing to ensure the project was properly designed.   Always approach the planning of your project in a professional manner.

For a guide to choosing the most suitable JCT contract, visit their site at:

http://www.jctcontracts.com/contracts/choosing.jsp

Please note, this article has been considerably condensed.  Buy the full version for only £2 via Paypal.

The Property Speculator’s Second Podcast!

The second of the Property Speculator’s Podcasts is an interview with Andrew Montlake and Julian Ingall of Coreco Group.

Andrew and Julian are real characters are were a delight to interview.  As you would expect of the Directors of a firmly established Financial Broker partnership based within a stones-throw of the Gherkin in the City of London, they really know their stuff.

We speak about how the Candy Brothers started their multi-million pound property development company, why it’s often better to begin developing property as a private individual rather than a limited company and a few opinions on the attitude of finance providers prior to the recession.

Andrew and Julian can be contacted through the Coreco Webite ‘Contact Us’ page

Listen to The Property Speculator’s Coreco podcast here.

Subscribe to the podcasts here

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