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.

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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.

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 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

Note, this article should be read in conjunction with the Property Speculator’s Excel-based Residual Valuation Calculator.

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 and SDLT or property taxes.
  2. Pay interest charges on any money borrowed to fund the development.

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’ 1/3rd for 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

The Property Speculator’s First Podcast!

After a steep learning curve of ‘XML Files’, audio editing software and getting over the hatred of my own voice, I’m proud to announce the first of hopefully many podcasts.

In this edition, I interview Ryan Fuller of The Fuller Long Partnership.  They are an established firm of Town Planning Consultants headed by 2 former colleagues of mine (James Long and Ryan).   Ryan has been a Professional Town Planner for many years and has worked in a variety of settings.

Ryan speaks about how the novice developer should approach the process of planning applications, explains the truth about some widely-held myths and suggests a slightly different way of making development plans than the usual one.

Ryan can be contacted through the Fuller Long website which is at www.Fullerlong.com.

Please note this podcast will be placed on iTunes very soon!

Access the Fuller Long Podcast Here

Property and VAT

Having at least an understanding of tax and how it relates to a property development is valuable knowledge.  Obviously the larger the project(s) the more likely tax will feature strongly in your plans.

Contrary to what many protestors in London feel, I think there’s nothing noble in paying more tax than you absolutely have to.  Therefore, it’s good to learn.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© Copyright Sebastian Ballard and licensed for reuse under this Creative Commons Licence

At the moment, VAT is not fully recoverable on a conversion from a commercial property to a residential one.  This means that costs in the form of labour and materials will be subject to VAT at the rate of 5% on this particular type of conversion.  If you are buying the materials yourself, you will be charged the normal rate of VAT at the point of sale and will only be able to claim it back once the build is complete and it qualifies with the criteria set by HMRC.  If the project is a new build, some aspects might be zero-rated for VAT.  If you are the person purchasing materials or procuring labour, you will again be charged the full rate of VAT at the point of purchase or invoice.  This however can be claimed back from HMRC under the ‘DIY House Builders & Converters VAT Refund Scheme’ or if you are VAT registered, all incurred costs would offset your annual VAT liability.

Quoting information available on the HMRC website, the following table briefly shows the rate of VAT that should be paid on particular construction work:

Construction Work Rate of VAT
Construction of new qualifying dwellings & communal residential buildings

0%

Conversion of a non-residential dwelling into a qualifying dwelling for a housing association

0%

Conversion of a non-residential building into a qualifying dwelling (other than for a housing association)

5%

Renovation or alteration of empty residential dwelling

5%

Approved alterations to a listed dwelling

0%

Alterations to suit the condition of people with disabilities

0%

Installation of energy saving materials and grant funded heating system measures.

5%

Development of a residential caravan park

0%

Home improvements on domestic properties on the Isle of Man

5%

To qualify as a ‘qualifying dwelling’, the following conditions have to be met:

  1. If it is built from scratch, any pre-existing building is demolished to ground level.
  2. No more than a single facade (or double in the case of corner sites) of an original building is used if that is a condition or requirement of planning or listed building consent.
  3. If a new building is constructed that shares an existing wall of a neighbouring property, no internal access must exist between them.
  4. If an existing building is extended and this creates an additional dwelling/dwellings.  This does not include dwellings that are attached to business premises and cannot be disposed of separately.  The additional dwelling must also be wholly within the enlargement or extension to be zero-rated.
  5. An Annexe to an existing building is constructed.  This does not include ‘granny annexes’ or enclosed separate swimming pools.
  6. The building is one of several constructed at the same time on the same site.  This must be used together with the other buildings for a ‘relevant residential purpose’.

Services provided by professionals such as Architects, Surveyors, Project Managers and Supervisors are always standard-rated for VAT.  Plant equipment, scaffolding hire, security fencing and mobile offices cannot be zero-rated and will attract the full rate of VAT (although the service of erecting and dismantling scaffolding will be zero-rated if associated with zero-rated work).

Sometimes only part of a building might qualify for zero-rating, such as a mixed-use development.  In this case, the work that is carried out on the qualifying portion of the development can be zero-rated.  This is called apportionment.

When selling or granting a leasehold interest in a zero-rated building, it is usually only the first transfer that does not attract VAT.  On mixed-qualifying developments this can be apportioned appropriately.  All subsequent transfers will be subject to VAT but this can offset the VAT bill of the party purchasing the interest.

Usually, a property that has previously been lived in cannot be zero-rated and will attract a VAT rate of 5%.  However if you can prove that the property has not been lived in for at least 10 years, then it will be zero-rated for VAT incurred in renovation/alteration work to make it habitable as a residential dwelling.  In order to prove the building has not been lived in for a minimum of 10 years, records from the local authority in reference to council tax or electoral roll can be used, alternatively a letter from a local authority Empty Property Officer can provide sufficient evidence to render the other forms of proof unnecessary.

In the renovation or alteration of empty residential property, most VAT will be charged at a reduced rate (currently 5%).   To qualify as ‘empty’, the property must have been unlived in for at least 2 years prior to commencing the renovation work (this ignores ant occupancy by squatters or a property guardian).   If the property is inhabited during the renovation works, it still qualifies at the reduced rate provided there is a clear period of 2 years immediately prior to commencement of work.  The occupants can move in on the day after work begins.

Be aware that if you take advantage of a zero-rating on VAT, the building must stay in the specific residential use it was designed and built for.  If not, a taxable charge will apply.  This charge decreases the longer the building stays in its original use; after 10 complete years no taxable charge will apply.

Unfortunately as from the 1st March 2011, if the building is sold or it is leased to a party who does not intend to use it for its intended residential purpose a taxable charge will apply:

Number of complete years before sale or change in use:

VAT Charge (as a percentage of the total VAT that would have been payable).
0

100%

1

90%

2

80%

3

70%

4

60%

5

50%

6

40%

7

30%

8

20%

9

10%

10

0%

Subsequently, the zero-rating facility is only really suitable for constructor/investors to take advantage of.  However professional developers are likely to be in a position to avail themselves of the reduced rate of 5%.

For further information on VAT on property, follow this link to the HMRC guidance notes.

Calculating Build Costs for a Property Development Project

When establishing a budget for a property development, the issue of build costs is hugely important.  An accurate build cost value is a vital component of the residual valuation.

Build costs are not just for the construction of new build properties.  If an existing property (for example) is to be renovated and the usage changed, or a residential property needs a lot of work to bring it back to a habitable state, the costs of work will be very similar to building from new. So to use new build costs is appropriate in the majority of cases.

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Build costs are calculated using the gross internal floor area.  This is essentially the area of the internal space measured between the inside of the outside walls.  This includes all common areas such as hallways and toilets etc.

Build costs are generally available from 2 sources.  The first source is the subscription website BCIS (Building Cost Information Service), the second is SPONS (available in book format and updated every year).  Both sources are well-regarded in the construction industry as being accurate enough to use in detailed development appraisals but are expensive when you are beginning your venture (both sources are a fairly similar annual price).  When using the resources, you will find that a particular rate per M² or M³ is provided.  For example, when demolishing a building up to 50M³, a rate of £49.92 would be appropriate per M³.  The larger the building, the less expensive the work per M³ is to have carried out (economies of scale).

One of the recognised shortcomings of the residual method of development appraisal, is that the output (the land value) differs a great deal through only small changes in one of the inputs (in this case, build costs).  The larger the project, the more likely it is to happen.  For example, if 30 houses of 100 M² each are being constructed at a rate of £1,000 per M², the total build costs will be £3m.  If the build cost rate were to increase to £1010 per M², total build costs would increase to £3.03m.  So for just an increase of £10 per M², the total build costs would dramatically increase by £30,000.  Therefore it is important to get as accurate a figure as possible.  Fortunately the sources mentioned above are regarded as very accurate.

It can be a time consuming process reading through the construction cost guides if you are unfamiliar with them (I don’t profess to be an expert myself).  They are extremely thorough and specific, however if you simply want to know how much it will be to build a 3 bedroomed house (at a rate per M²) then a far cheaper (free) option exists.  A regularly updated source of inclusive build costs is at:  www.homebuilding.co.uk/buildcosts.  It obviously depends on how deeply you want to go into the analysis of costs, but this alternative provides accurate information if it’s an inclusive rate you’re looking for.  It’s compiled for self-builders, not really private property developers but it offers a good indication and shows the degree of variance across regions.  If you do need to go into the deeper intricacies of building costs then I suggest purchasing either the SPONS book or taking out a BCIS subscription (incidentally, SPONS books are available ‘used’ at a discount at places such as Amazon Marketplace but obviously the accuracy suffers as they age).

At the last update on the ‘homebuilding-buildcosts’ site (Dec 2011) a large 2-storey house being built in the South-East to an excellent standard by main contractors would be in the region of £1291 per M² to build.  At the opposite end of the spectrum, a small single storey house built to a reasonable standard through a combination of DIY and sub-contractors in the North-East or Wales would be in the region of £793 per M².  These values have been put together by experts using the more detailed costs guides.

The more detailed guides (BCIS & SPONS) allow the reader to obtain far greater information.  For example, according to the 2011 version of SPONS:

  • High quality Inner London apartments would be in the region of £2350 – £2850 per M² to build.
  • Large budget student schemes with en-suite bathroom would be £1025 – £1275 per M² to build.
  • Warehouse conversion to apartments would be £1025 – £1275 per M².
  • Minor office refurbishment in Central London would be £435 – £530 per M².

Clearly some interpretation has to be applied to this information, as regional variations on prices can move beyond the ranges listed.  It should also be remembered that these prices are inclusive of builder’s profits and overheads, but not of professional fees associated with the work.

For the more specific prices:

  • For machine-excavated trench fill foundations at 600mm wide x 1 metre deep, a rate of £79.00 – £100.00 per metre.
  • For facing-brick walls, single skin and pointed both sides would be £81.00 – £105.00 per M².
  • For a cement and sand screed floor of 50mm thick would be £12.40 – £16.80 per M².

The SPONS books and the BCIS provide a huge amount of information (the SPONS book is over 1,000 pages).  You must remember though, that looking into the specific works and simply adding the costs together is risky because without experience, it’s easy to overlook some vital work component.  This can have a significant effect on the overall build costs.

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