The Property Speculator

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:

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

The undeveloped property might be:

Brownfield or Greenfield land where buildings have never stood.
A cleared site where the property has been demolished.
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:

Allow for professional fees and SDLT or property taxes.
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’ 1/3^rdfor land costs, 1/3^rdfor build costs and 1/3^rd 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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Apr 29th, 2012

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:

Lift Patio area to rear of property (state the extent of this if possible).
Re-route/prepare drains for foundations to comply with Building Regulations.
Dig and lay suitable foundations in preparation for extension.
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 for the full version for only £2.

Feb 15th, 2012

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

Feb 6th, 2012

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.

Dec 15th, 2011

An Introduction to Property Use Classes

Within the very large field of property, there are several categories and sub-categories of building. The reason for this is that council planning departments use these classes when planning residential, commercial and retail developments in an urban or rural environment. It is far easier to refer to the use classes as they are, rather than a description such as ‘Industrial’ or ‘retail’ as ambiguity and ‘grey areas’ are common.

© Copyright Mike Kirby and licensed for reuse under this Creative Commons Licence

The classes are issued by The Secretary of State as he/she is ultimately responsible for all UK planning matters (a method of appeal against planning decisions is to address the Secretary of State). In most cases, converting a property so that it moves from one use class to another, needs the grant of planning permission before work is allowed to go ahead. There are some exceptions however, such as a flat can be added to a retail property provided it is used in association with the retail property.

The table of Use Classes is as follows:

Use Class	Use Description	Is Change Permitted?
A1 Shops	Sale of goods and cold food, retail warehouses, hairdressers, travel and ticket agencies, post offices, domestic hire shops, funeral directors, dry cleaners, internet cafes	No change of use without permission, except to A1 plus single flat
A2 Financial and professional services	Professional (excluding health and medical services) and financial services (banks and building societies); other services appropriate in a shopping area where the services are provided principally to visiting members of the public	Change to A1 permitted only if there is a ground floor display window
A3 Restaurants and cafes	Sale of food and drink for consumption on premises, e.g. in restaurants, cafes	Change to A1 or A2 permitted
A4 Drinking establishments	Public house, wine bar or other drinking establishment	Change to A1 or A2 or A3 permitted

Hot food takeaways

Sale of hot food for consumption off the premises

Change to A1 or A2 or A3 permitted

Sui Generis

Launderettes, taxi businesses, car hire businesses, filling stations, scrapyards, shops selling or displaying motor vehicles for sale, retail warehouse clubs

No change of use permitted

Business

a Offices other than financial and professional services providing for the visiting members of the public

b Research and development

c Other industrial processes appropriate in a residential area

Change to B8 (only up to 235 m2 of floor space) permitted

General industrial

General industry, not within B1

Change to B1 or B8 (only up to 235 m2 of floor space)

Storage or distribution

Storage or distribution centres

Change to B1 (only up to 235 m2 of floor space) permitted

Sui Generis

Work registerable under Alkali etc, Works Regulation Act

No change of use permitted

Hotels

Hotels, boarding and guest houses, provided that care is not provided

No change of use permitted

Residential institutions

Residential accommodation for provision of care (e.g. old age homes); residential schools and colleges and training centres; hospitals and nursing homes

No change of use permitted

C2A

Secure residential accommodation

Prison; young offenders institutions; detention centres; secure training centres; custody centres; short-term holding centres; secure hospitals; secure local authority accommodation; military barracks

No change of use permitted

Dwellinghouses

Dwellinghouses for individuals, families and up to six individuals living as a single household

Subdivision of dwellinghouses into two or more dwellinghouses not permitted

Houses in multiple occupation

Use of a dwellinghouse by not more than six residents as a house in multiple occupation

Change to C3 permitted

Sui Generis

Hostels

No change of use permitted

Non-residential institutions

Clinics, health centres, crèches, day nurseries, day centres, consulting rooms (not attached to doctor’s house); museums, libraries, art galleries, public and exhibition halls; non-residential schools, colleges and other educational centres; public worship or religious instruction; law courts

No change of use permitted

Assembly and leisure

Cinemas, dance and concert halls; swimming pools, skating rinks, gymnasiums; other indoor and outdoor sports and leisure uses, bingo halls

No change of use permitted

Sui Generis

Theatres, amusement arcades and centres, fun fairs, nightclubs, casinos (as from 6 April 2006)

No change of use permitted

Sep 5th, 2011

Developing a Mixed-Use Property

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A very common way of getting started in property development and investment is converting or renovating a mixed use development.

‘Mixed-Use’ can mean a combination of Residential, Office or Retail within a single development (it’s highly unlikely Industrial type properties would be included in this, for example I can’t imagine a residential flat being situated above an industrial unit). So an example of this could be a shop with a flat/flats above it, or offices with residential above. Incidentally the residential portion is situated towards the top of the property because it’s not likely to require a street-level frontage, like a shop or an office might. The residential area of the property also tends to be quieter and the commercial occupants are less likely to have cause to go upstairs into this area of the property.

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It is certainly possible to convert only part of a property to a use that’s different to the original one. Be aware though that (currently) Planning Consent is required to change the use of a property (or part of a property) from Commercial to Residential and between sub-groups within Commercial. Building Regulations also need to be fully complied with.

The different ways of occupying a property are:

Freehold. This is the closest to owning the property outright (It’s only a Government body which can carry out compulsory purchase though). The Freeholder theoretically owns the plot, the land beneath the plot and the area above it (although this isn’t really enforceable in reality). Being a Freeholder offers the luxury of selling a leasehold interest in the property if he/she wishes.
Leasehold. This is usually for a period of time (term) of 99 years or more (sometimes 999 years). The freeholder effectively sells the right to use the property for the term stated in the contract. Along with this, the Leaseholder sometimes receives the right to allow Tenants to occupy the property and collect the rent. In order to reduce the chances of confusion, this is often called the Long-Leasehold interest. It is bought in a similar way to the Freehold Interest (i.e. a large amount of capital is paid for it, rather than a monthly or quarterly rent).
Tenancy. This is really just a different way of occupying the property under a leasehold interest, however for the purpose of avoiding confusion over these occupancies, I refer to it as a Tenancy (even though the occupational contract is still called a Lease…). This is paid for in the form of rent, usually paid monthly or quarterly (depending on it being Residential or Commercial). A tenancy is always shorter than the long-leasehold interest (even if it’s only 1 day shorter) but is usually much shorter, between 3 and 25 years is usual. A tenancy does not really have much value in itself other than to the landlord. This is because it’s not really possible to sell a tenancy by itself; you can however purchase the leasehold interest with a tenant already in place.

Commercial and Residential tenancies are usually quite different. The main issue is that all Commercial tenancies are awarded Security of Tenure unless specifically contracted out of it. This means that a Commercial landlord can only make the tenant leave the premise at the end of the term in certain circumstances (for example if the landlord wants to redevelop the property and has plans in place to prove this). To contract out of this, the lease agreement must specifically state that both parties wish to contract out of the Security of Tenure provisions of Part 2 of The Landlord and Tenant Act 1954, s 24-28 (or words to the same effect). Contracting out of the act should benefit both parties (such as when a lower rent is agreed upon to reflect a lower ‘risk’ to the landlord).

In contrast, Residential tenancies tend to be more heavily weighted in favour of the Landlord. A tenant does not really have any Security of Tenure at the end of the term. Many Residential tenancies are only for an initial period of 6 months. If the tenant stays in the property with the permission of the landlord at the end of the term, a Periodic Tenancy is formed. If the tenant pays rent on a monthly or weekly basis, this period becomes the notice period for either party to bring the tenancy to an end. A periodic tenancy continues until the landlord or the tenant brings it to an end.

It’s important to have an understanding of how the different types of occupation work. When developers of mixed use properties consider their projects, they intend it to work in a slightly different way to the usual private residential developer. Where a private developer buys a property at a reduced price, spends the bare minimum but produces a good finish then sells on to a new owner, a mixed use development often requires a different approach. Of course it is possible to buy and sell a mixed use development in the same way as a small residential (i.e. the freehold), but because of the combination of property types within the development it usually makes more sense to keep the freehold of the property and sell the long-leasehold interest as and when an occupier or investor is found.

If the freehold is retained, tenants can be found to occupy the office or retail portion. The residential areas of the building can be let the same way as the commercial but this involves a lot of management of tenants taking 6 or 12 month tenancies and of course, the developer will not receive capital in return in a lump sum. It’s far better to sell the long-leasehold interest in the residential units to either investors or leasehold-occupiers. This way, a profit can be made (the value of a long-leasehold interest is more-or-less the same as the freehold price) on individual units of the property. Investors or leasehold-occupiers can buy individual long-leaseholds interests one-by-one if necessary. If the residential units are above the ground floor, it is not possible to sell any of the freehold interests in these. A freehold must always be on the ground floor or associated with a property on a ground floor. If an investor purchases any of the long-leasehold interests, they will be obliged to honour any tenancies that might have been agreed prior to their completion.

It’s also important to understand how service charges apply to a property of mixed uses. A service charge is essentially a further charge to the tenant(s) to contribute to the upkeep of common areas such as grounds maintenance or cleaning and decorating of hallways and stairwells. Service charges should be ‘fair and reasonable’ and not produce a profit or a loss for the landlord. For Commercial tenants, The Royal Institute of Chartered Surveyors publish a Code of Practice guide on service charges. The method of dealing with dispute resolution will be stated in the lease. Residential tenancy service charges however, are very strictly regulated. A landlord who doesn’t follow the statutory procedures might find himself limited under law as to how much can be recovered from the tenant at the end of the occupancy.

Tenants should be supplied with a schedule of the previous year’s service costs and justification of the current level of charge. In a mixed use property however, tenants will occupy different sized areas and even use different facilities in the property. For example a Commercial tenant on the ground floor would not be expected to pay for the upkeep of a lift to service the residential units on the floors above. The principle way of deciding who should pay for what, is to consider which property a particular service will benefit. A Commercial tenant should have the opportunity of negotiating the service charge. It is sometimes possible to opt out of the charge for services that are available but will not be used.

Sep 4th, 2011

13 Steps to Getting a Property Sold

If you are planning on developing a property, the very final stage is the sale at the end. No developer wants a long wait to sell the property, no capital or rent is coming in and meanwhile mortgage repayments have to be covered. The longer it stays on the market, the more the developer will financially lose out.

So, to ensure that you have the very best chance of getting the completed property sold, here is a checklist to run through so that you know you are less likely to miss out.

Establish your position. You have to realistic about selling the property; if the market is currently flat in the area you are selling in you might well have to reduce the price at some point in the marketing process. If you are not in a particular hurry to sell, you might feel that reducing the asking price is not an option you want to consider. Don’t rule it out though.
Consider the purchaser’s aspect when pricing the property. Clearly it will depend on what the property is valued at but remember that houses are usually priced strategically just below the Stamp Duty Land Tax thresholds. This is not coincidence. If a property is priced just below the threshold and a competing one is just above it, the difference between them might only be a few thousand pounds but the cheaper one is likely to be on the market for a shorter length of time.
Consider your market. Much is made on TV property programmes of selling to ‘young professionals’; however there are occasionally people outside this category who buy properties. Of course, I recommend buying a development property with a particular customer in mind but you should certainly be selling it knowing who should be buying it. Students for example (or rather their parents), will be considering different things than a young family or a retired couple. Far better to cater for an existing local need than trying in vain to sell a property that’s being marketed to the wrong people. Speak to Estate Agents (several), they should be able to tell you where the local needs lie.
Ensure that the work that needs to be done, is actually done. If you’ve just had work done on the property then there shouldn’t be any excuse for leaking gutters, damp or mildew on walls or dodgy hinges on doors (for example). Not every developer will be carrying out a complete ‘gutting’ of the property, so if the turn-round is a rapid one to get it back on the market, make sure nothing is overlooked. If someone is having a viewing and looking round the property, if they find one obvious fault they might start to look for others.
Always have an idea of what the property is worth. Property valuation is not rocket science; it’s easy to get to know a particular area’s property market. After a few weeks you will probably be able to gauge neighbouring property prices to within around 5% of what a professional valuer would put it at. This will definitely help when it does finally get to the stage of accepting an offer, you will be able to distinguish between a silly offer and a realistic one. Having a look on a couple of property websites will help to get an idea of what neighbouring properties sold for (www.nethouseprices.com or www.rightmove.co.uk).
Choose the right estate agent. Some are good, some are bad but it’s highly likely you will be stuck with them for at least 6 months if the property does not sell. Word of mouth is a good way to get an idea of true reputation, and don’t be taken in by their sales pitch, remain sceptical! If you choose to put the property on the market with a single agent, there’s no reason why you should have to pay more than 1% (plus VAT) of the sale price. If you go with dual agents, it’s very likely you will be charged 2% (plus VAT).
Once the property is on the market, make sure it’s kept tidy inside and out whenever possible. Potential purchasers will do ‘drive-byes’, where they drive past a property to have a quick, discreet look and get a feel for the area without committing to a viewing. If there’s rubbish or builders waste left outside the property, it can be really off-putting for them.
If the estate agent has promised you that the property is displayed in their window and being aggressively marketed, periodically check that they’re telling the truth. Speaking from experience, an agent had stressed that the particulars of a house was in their window for all passers-by to see; but upon arriving at the shop, my wife and I found that not only was it not in the window it wasn’t displayed inside the shop either. They were poor agents and this was the final straw in making the decision to sack them.
Be picky about the property details produced by the agent. Their job is to get your property sold as quickly and efficiently as possible. If you feel that the details are not satisfactory, don’t be afraid of telling them. You will ultimately be paying for this service so they should always be acting in your best interests.
Pester the agent for feedback on viewings. Agents are not always the most communicative of people so they might need prompting occasionally. You might be fobbed off with a vague comment the agent picked up from the viewee, but after a few weeks of pestering them for accurate feedback, they’ll make sure they have proper answers for you. Some aspects of the property might be unavoidable, such as parking. However some things might be easily solved such as borrowing some furniture to ‘pad-out’ an empty property.
Consider exactly what you might be prepared to put in the property for the purchasers. For example you could throw in all the fitted carpets if the purchasers pay full asking price; they don’t know that you managed to get a load of inexpensive carpet from a friend. Same for curtains, you (as developer and vendor) might feel that putting up some (decent quality) curtains is of such little consideration as to be next-to worthless to the purchaser. This is not the case, buying and fitting good quality curtains and rails can run into thousands of pounds in some cases. If you can source them cheaply, you might well swing the deal in your favour.
When an offer does come along, you should have a figure in your mind that marks the border between what would be acceptable and what wouldn’t. This value has to be realistic though. In the current climate, buyers are looking for bargains and if you won’t consider dropping the price at all then it might be a while before the property sells. It’s a difficult market and sellers have to do what they can to keep their businesses running. Obviously a reduction in selling price over what you might have expected will reduce your profit margin, therefore consider this very carefully.
Do anything possible to increase the exposure of the property. Sarah Beeny’s website Tepilo is very good, and free. You won’t lose anything by making use of it! If you look around, websites and blogs can be free too these days (for example www.wordpress.com), give the property its own site! You have nothing to lose and it should not affect the arrangement you have with your estate agent.

Jul 3rd, 2011

A Quick Guide to Planning Conditions

Receiving the appropriate planning permission to carry out the work you want to, is one of the most important aspects of property development. However the grant of full or outline planning consent will be subject to some conditions that may or may not represent a problem to you.

Whenever full Planning permission is applied for and the developer (i.e. you) is notified of the positive decision, certain rules must be complied with in order to stay within the law. This ensures (from the Local Planning Authority perspective) that the developer does not apply his/her own ‘angle’ on the decision. These conditions will be stated on the decision notice itself or attached on a separate schedule.

To use an example of a ‘sticky’ planning condition that I came up against personally, a group of small-medium sized industrial units were offered to be let. These units were high quality as they were newly built, and a sub-division of a very large worldwide company (our client) was very keen to take on a lease to one of the units. The company required occasional access during unsociable hours in order to supply European factory production line components in the event of a breakdown at short notice. As I was progressing in negotiating favourable terms, it came to my attention that one of the planning conditions was a restriction on the hours that my client’s employees would be able to access the unit. Because of its very close proximity to some houses, the Local Planning Authority had applied a condition that ensured that occupants of the industrial units could not subject nearby residents to excessive noise during the weekend or outside normal working hours. There was not really any way round this, and as a result I had to find alternative premises for my client. The point of this is that although you might be celebrating the grant of planning permission on a plot or a property, the conditions that accompany it are equally important.

Planning Conditions can be related to almost anything affecting the property or land. If a newbuild property is planned, then it’s likely that some conditions will be connected to required materials, dimensions, access to the property and landscaping. Clearly you must be familiar with these before you start to build. If you intend to renovate and/or convert an existing property that has listed status, expect much more in the way of conditions. Sometimes the conditions involve something to be agreed to with the local council, in this case a fee is payable to have the conditions ‘discharged’.

Materials are an important aspect of how the finished property will look and how it blends with neighbouring properties and landscape. It’s likely that bricks and roofing tiles will have to be agreed to, prior to construction commencing on a new-build property. The local authority is also certain to take an interest in how the surface and foul water drainage system is planned. Landscaping is also important to the local planning authority; imposed conditions often request that schemes are provided and implemented within a certain period of time.

Both full and outline planning permission are subject to a maximum limit of 3 years. This means that from the date of consent, if works have not begun on the planned development, the permission is considered to have lapsed and will be void. For works to begin, planning permission must again be applied for and obtained before the works can actually begin. So if you already have planning permission for proposed works that is slowly running out, you should definitely get started to avoid a lot of inconvenience later. You should note that land or property that has existing planning consent that is approaching the end of its effective life is worth less than if the consent is fairly ‘fresh’. This is because of the increased risk of not being able to start work immediately before planning permission expires.

Access to the property is also a large consideration for the planners. If the development is substantial, questions will be asked in relation to increased traffic levels. Even if the development is a single dwelling, access to the carriageway will still be important as (for example) it might be on a blind bend in the road. Parking is also considered at some length.

In urban or built-up areas, the local planners might well impose conditions attached to the permitted hours of build. This is usually normal working hours, and there will be a restriction on working weekends and bank holidays. Sometimes if you are extending an existing property as part of the development, the local planning authority might remove some permitted development rights. This is because permitted development allows a certain degree of extension to a property. If the property is extended as part of your development, this in effect ‘uses up’ the degree of extension that is allowed. It doesn’t mean that the property can never be extended at any point in the future; it does mean however that consent must be applied for and granted.

It is common on listed properties to have at least some sign of the presence of bats. A dead bat, signs of droppings or visual signs of their presence is enough to warrant a bat survey. Building work cannot begin if there are grounds to believe that bats inhabit some area of a property. To ignore this is a criminal offence because of the protected nature of bats. A condition might well be attached to consent stipulating that a bat survey must be carried out and work cannot begin until the bats have ceased to occupy.

A very common condition attached to planning consent on rural properties (especially farms) is an Agricultural Restriction (or ‘tie’). This places a control over occupancy that only allows for residents to be involved in farming and must use the property and associated land to produce their main source of income (or words to that effect). This is very strictly enforced by councils, so be very wary of it because a property with an agricultural tie is offered at a hefty discount to one that does not have one in place. There is not really any way round this condition, so keep an eye out for it unless the property will ultimately be getting marketed as an agricultural one.

As I’ve already mentioned, having an understanding of the importance of planning conditions is very important to a property developer. However what is just as relevant is the understanding that conditions can be appealed against. Obviously there is no guarantee whatsoever that taking this route will provide you with the perfect scenario of having the planning permission that you planned in place, with minimal conditions attached. Professional developers often carry out what is known as ‘twin tracking’. This means that planning permission is applied for and while they await the ruling, identical permission is re-applied for. This is so that if one application is granted but is not what they wish for (i.e. the conditions are not considered viable) when the second permission is granted, the first can be appealed against. Unfortunately if planning consent is re-considered by the local authority, they have the power to decline the consent, meaning that permission to build anything is lost. If the developer holds a second separate certificate, then they have not lost everything and can still build, albeit with less than ideal planning conditions.

Jun 19th, 2011

Developing an Arts & Crafts Property

‘Arts and Crafts’ refers to a particular style of design that was principally founded by Artist & Writer William Morris. It was at the height of its influence between 1860 and 1910. Although the ‘movement’ (as it is known) is most often associated with architectural design, it also referred to a wider range of items such as furniture and decor.

William Morris was a Socialist, he felt that industrialisation was slowly killing off all creativity in design and believed that the usual style of Victorian design was void of any ‘soul’. He thought that design should be functional rather than overly decorative and favoured the work of Artisans and Craftsmen rather than mass produced items. The Arts and Crafts properties that exist today are very clearly more carefully and skilfully built than the vast majority of Victorian properties. The architectural features were produced to a very high standard and in the case of large houses, were sometimes completely unique. Unfortunately for a Socialist, he didn’t foresee that individually produced items proved to be very expensive. For all but the wealthy, the Arts and Crafts movement was a step backwards in terms of economy.

Arts and Crafts properties are characterised by a certain look that can show slight influences of Medieval and other styles such as Georgian and even maybe a bit of American Colonial. Arts and Crafts didn’t so much evolve from a particular style; it was a rebellion against industrialisation. The style we know today as Arts and Crafts has simply come from a movement that was not contrived in any way. It was a result, rather than a plan.

External

Features that immediately identify an arts and crafts property are low roofline, small paned windows and exposed structural components such as beams with wooden pegs. Externally, windows and doorways very often had stone mullions.

Internal

William Morris was famously quoted to say “Have nothing in your house that you do not know to be useful, or believe to be beautiful”. This was a significant departure from the Victorian and Georgian ideas of filling the house with all manner of dust-gathering knick-knacks. It also represents a genuine ‘look’ that is more in line with the present day idea of trying to keep domestic clutter to a minimum.

The colours of the inside of the houses were lighter colours than the majority of Victorian properties; I would speculate that it was because Arts and Craft houses tend to be in rural areas rather than urban and the residents didn’t have to be as concerned with air pollution. Cornicing was still there, and painted white to give a pleasant contrast with the wall colours. This relationship between walls and cornicing was simple and not as ornate as Georgian design.

One of the most obvious and dominating features in an Arts & Crafts property is the fireplace. Of course because architectural items such as this were hand-made, they were often intricately carved and also very large. Floors were dark wood (sometimes parquet downstairs), as oak was used in abundance.

Arts and Crafts style furniture is based around a classical look rather than any particular common features. Brown leather (preferably aged) is an easy way to add instant authenticity for chairs and sofas. Again, oak is used for furniture throughout the house. Oak doesn’t shrink and distort anywhere near as much as soft-woods (like pine) when it’s drying out. It should definitely look handmade, rather than mass-produced. If you don’t want to spend all that money on handmade oak furniture, staining or dark-tinged wax is available for lighter woods (such as pine or beech) and works better than you might think.

For curtains, plain but elegant is good. No Victorian or Regency-style frills or netting. Curtain poles are also plain and should be simple wood or solid brass.

Lighting was (in common with the rest of the property) kept simple but was handmade. There is no shortage of Arts & Crafts style wall light sconces available online to compliment the look; in fact to really get into the spirit of Arts & Crafts movement you could handmade some yourself.

Rugs and carpets during this era were still quite ‘fussy’ and covered with swirls and loops. This design contrasted with the dark wooden floor though so it did not seem too intrusive. Wallpaper was popular at this time, although not quite as popular as in the main period of the Victorian era. It was a similar design to the rugs and carpets.

Jun 6th, 2011

The Effect of Contamination on Development Land Value

Developing a property on contaminated land is not as ridiculous as it first seems. Contaminated land is a massive problem for developers because:

The sheer amount of contaminated sites across the UK. There are an estimated 50,000 – 100,000 potentially contaminated sites in the UK which in total, which cover around 1% of the UK landmass.
Very large companies and government agencies such as Shell, Esso, British Gas and the MoD regularly dispose of large amounts of land which will be regarded as contaminated. In some circumstances, the very fact that certain activities have been carried out on a plot, automatically labels the area ‘contaminated’.
The owner of an area of land where contamination is found to have originated from is often liable for the clean-up costs.
Successive UK governments have encouraged development on brownfield sites in preference to greenfield. This makes developers consider purchasing contaminated sites more readily.
Contamination has a very large effect on property/land value.

But, to completely disregard contaminated land as ‘undevelopable’ would be to intentionally miss out on many opportunities.

The contamination will have the effect of reducing the value of the land or property because of:

The original cause of the contamination. I.e. what the substance was/is that resulted in the contamination.
The general response to the scope of the contamination, both by the potential purchaser and the Local Authority.
The amount of work required to establish the level of contamination and what has to be done to remedy it.
The resulting effect on the eventual sale or letting value of the property.

Roughly, costs involved in a contaminated site can be categorised into Direct and Indirect. Direct costs include the funding of remedial work, and penalties for not following exactly what the local council require and in the case of a commercial investment property, a void period – where the occupants must be moved out in order to carry out the work. The indirect cost is tricky to quantify; it is associated with the effects and public perception of contamination. A desirable area can quickly become not-so-desirable when the public discover that contamination has occurred. This perception can be a very individual view among prospective purchasers or tenants. This is known as Stigma.

The actual calculation involved in establishing a basic development value on a contaminated site is really not too different from a standard Residual Appraisal. The formula for which is:

Value of land = GDV – (Build Costs + Required Profit)

To add the contamination component into the equation produces:

Value of Land = GDV – (Cost of Land Remediation + Build Costs + Required Profit)

However, this might serve to over simplify things a bit too much. This does not take the element of Stigma into consideration.

Stigma, when used in the context of contaminated land can be defined as:

“the blighting effect on property value caused by perceived risk and uncertainty in the effectiveness of contamination remediation”.

To put it another way, it is the difference in value between a remediated contaminated site and a comparable “clean” site with no history of contamination.

These uncertainties are based on intangible factors such as:

Scepticism over the effectiveness of land remediation.
The risk of inadequacy of the remediation process.
The risk of changes in legislation or remediation standards leading to further work.
The difficulty in obtaining finance.
A general fear of the unknown.

It might be argued that this general reluctance to use previously contaminated land is justified. Many people believe the term ‘remediation’ is simply another term for clean-up. It isn’t. The term ‘remediation’ simply means that the level of contamination on the site has been reduced to a level below that specified by the Environmental Agency. The term ‘Caveat Emptor’ (‘let the buyer beware) springs to mind here.

Clearly, because the influence of Stigma is difficult to quantify, it’s also difficult to measure. What can be done, is analyse the behaviour of experts in this field:

During the summer of 1998, a four-page mail questionnaire was sent to a targeted, preselected group of 208 Property appraisers in the United States and Canada. The target group consisted of 192 appraisers in the United States and 16 in Canada.

Of the participants, nearly 60% (49) reduced rental income to account for on-site contamination. However, some comments indicated that a noticeable number of respondents found no impact on the rental income of contaminated properties that were used for commercial, retail, or industrial purposes. Several additional comments indicated that some respondents also used increased operating expenses when valuing a contaminated property.

While 73% of respondents reported that they occasionally made a separate deduction for stigma, only 26% indicate that they did so as often as 75% of the time. The uncertainties and risks associated with cash flows from a contaminated property are most frequently reflected in decreased estimates of value via sales comparison analysis (73%), followed by an increased capitalization rate (66%) or an increased yield, or discount, rate (61%).

All but one of the respondents said they would not ignore anticipated or forecast remediation costs in valuing contaminated properties. Some 60% indicated that they would deduct the present worth of total remediation costs estimated by environmental experts.

Although it seems to stand to reason that properties built on previously contaminated land are negatively affected, the degree of this effect is not necessarily substantial. In the last decade or two, technology and methods have improved a great deal to make remediation techniques much more effective. I have personally dealt with previously contaminated land where a client intended to build a new, high-profile office block. The value of the site was scarcely different to a comparable site with no history of contamination.

To quote a case study, results from a study of the market sales data of post-remediated vacant residential land along the Swan River, in Perth, Western Australia, from 1992-1998 can be looked at. The intention of the study was to establish the amount of “stigma” arising from a site’s contamination history. The effects of this were measured on residential property values of remediated property. The results showed that while a site’s contamination history impacts negatively on property prices, the price decreases were offset by the positive influence on price from additional amenities provided in the area where the case study was carried out.

May 11th, 2011

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