Have You Got A Too Difficult Pile?

People quite like pubs and with very good reason. I don’t mind sharing that I’ve had some very enjoyable pub moments over the years. Bastions of our traditional way of life, they’re recognised the world over as being quintessentially English, and we’ve been eating and drinking in them since Adam were a lad. Curiosity having just got the better of me, I can share with you that Ye Olde Fighting Cocks in St Albans is the oldest pub on record, its structure dating back to 793AD.

Ok, Adam may not exactly have been in his first flush of youth back then, but it’s still fair to say pubs have been with us for a while, and they’ve proved to be enduringly popular.

Yet, despite their popularity, we’re all aware that they’ve been on the decline of late. In 2021, pubs closed at a rate of over one a day, with many either being demolished or converted into residential homes. As a result, perhaps unsurprisingly, pubs have also proven popular with property developers. You can see the attraction; the buildings are usually quite spacious, in residential locations with good parking, and they’re easy to convert. They’re also often quite attractive to look at. Some swanky new apartments would slot in there quite nicely, thank you very much, so what’s not to like?

Unfortunately, most pubs fall into a category of development deal that should be neatly filed in a tray that seems to be completely absent from the desks of many developers. It’s called the Too Difficult Pile, and every developer should have one. You see, the problem with pubs is that they look super-attractive at face value, but all too often, they have a sting in their tail. Pubs sit in a planning use class called Sui Generis, which essentially means that there are no permitted development rights that allow you to convert them into residential buildings. So, you’ll need to apply for full planning permission and endure all the vagaries of our broken planning system while you wait for permission to be granted. Or refused. Then, of course, you’ll have to deal with the fact that pubs are designated community assets. This means that the local community will likely want to retain them as pubs, or at least empty/semi-derelict pubs. And if it’s the last empty/semi-derelict pub in the village, be prepared for some genuinely robust feedback from the local community. They may not have visited the pub enough to keep it in business, but by Jiminy, they’re going to put up a fight to stop it from being converted into flats. This doesn’t guarantee that you won’t be successful. It just means you’ll have chosen to hack through a jungle rather than skip across a meadow.

But pubs shouldn’t be on their own when it comes to the Too Difficult Pile. There’s another type of opportunity that looks equally attractive on first inspection but which has a somewhat different challenge. It’s known as the ‘New Build Scheme With Planning Permission’, and as a development deal, it looks like an absolute corker. You’ve probably seen them on the property portals and commercial agents’ websites. Planning permission has been granted to build a couple of two-bedroomed semis (or whatever) on a plot of land. There’s a rather uninspiring picture of said plot, which is the agent’s only real artistic contribution to the visual side of things. But then they’ve added the architect’s plans, which you have to say look rather smart, plus an artist’s impression that helps bring the whole thing to life.

We’re presented with a selection of images, each with line drawings of some random women holding the hands of small children who appear to be wandering aimlessly against a backdrop of unnaturally green shrubbery, with their suspiciously uniform yet expensive-looking sports cars nestling on each driveway. There’s even a mock-up of the interiors, with the same child-wielding women striding across modern kitchens and designer bedrooms. It all looks rather wonderful.

I’ve lost count of the number of new developers that show me these deals, thinking they look like a great opportunity. Planning permission already in the bag? Tick. An architect has already designed the scheme? Check. So, there’s zero planning risk, and you don’t even need to design the thing because it’s been done for you already. And once you’ve built it, presumably, all you’ll need to do is find some Porsche-driving mums to live there, and you’ve turned the architect’s dream into a reality. Surely it has to be the easiest type of development deal there is?

But the question you need to ask yourself is, where are you adding the value? Providing that the owner and their architect weren’t complete fools, you’ll have to assume that they’ve gained planning permission for the most lucrative development that they could get the local planners to agree to. Which means that the chances of you building something different that makes more profit are probably slim. And even if you could find an angle they’d missed, you’d still need to go back and apply for planning permission again, which you may or may not get. The point is it’s the owner who has gained the planning uplift, not you, the developer. And that gain is priced into what you’ll be paying them.

So, if all the people looking at this deal are building the same thing, which one will win it? Obviously, it will be the one who is prepared to pay the most for it. And who will that be? It will either be the one that can build it the cheapest, the one that can build it with the lowest profit margin, or the one that has got their numbers wrong. Which group should you aspire to be in? That will be the fourth group, the ones who stuck it straight into the Too Difficult Pile and moved on to something else. Unless you own a construction firm that you’ve not told me about, you’re unlikely to be able to build it cheaper than anyone else. Nor should you be prepared to reduce your profit margin since that’s a very rocky road to go down and one that will likely scupper your chances of obtaining commercial finance. Which just leaves you getting your numbers wrong, and I won’t bother explaining why that’s not a great look.

Another candidate for the Too Difficult Pile is the rose-tinted development project. You’ve just found a great opportunity, and before too long, you’ve gotten all misty-eyed about the great apartments you could build and the even greater profits you could make. You’ve spent days, if not weeks, salivating over the prospect, and even though you won’t admit it, you’ve committed one of the cardinal sins of development which is to have fallen in love with your project. Having fantasised over the deal’s undoubted charms, you belatedly realise that you’ve ignored some inconvenient truths that make the project far harder than you’d want or, dare I say it, a deal that doesn’t actually stack up. Your loved-up subconscious had pushed these awkward facts to the back of your mind while it focused on all the adorable bits. But once you start moving out of dating territory and head towards the aisle, you’re forced to look at the whole package. This is when you (hopefully) spot the now glaringly obvious fact that the deal is an uphill struggle at best or a complete dud at worst. Ruefully you reflect on what might have been and, of course, wish you’d have found all this out right at the start before you became smitten. Such folly will always cost you time and invariably cost you money too. Far better to have a checklist for every prospective deal that allows you to identify any red or amber flags at the outset. That way, you can see the obvious pitfalls before you embark on a relationship. Not exactly romantic, but we’re looking for bottom-line profit, not a marriage partner (on that score, I recommend NOT having a red flag checklist for a potential spouse unless you own a VERY reliable shredding machine).

As most people are aware, the planning system in this country is something of a minefield. What, in theory, should be a nice simple process invariably becomes a high-risk, time-consuming, nail-biting stress-fest (although I may be downplaying it a little). Risky because you’re never sure whether you’ll get permission, which begs the question of what happens if you don’t. Time-consuming because planning applications can drag on for months and sometimes years, despite the 8 (or 13) week ‘promise’ printed on the label. And nail-biting and stressful as a result of both of the above. ‘If I get planning permission…’ is a common expression used in development parlance where people tend to pay too much attention to the ‘get planning permission’ part where they should be more focused on the ‘If’ bit.

Given that you won’t be able to secure commercial funding until permission is granted, you’ll be funding any interim costs yourself with no guarantee you’ll recoup them if permission is refused. And if you’ve already bought the land or building in the hope of getting that permission, then clearly, there’s a possible outcome that could be rather bad for you. That will be where you can’t develop it, and presumably, you’ve now got to sell it, possibly at a loss, having racked up a load of architect’s fees and planning costs you can’t now get back.

So, am I saying that projects that require planning permission should be in your Too Difficult Pile? My advice, particularly for the new or less experienced developer, is to ditch schemes requiring planning permission and instead convert existing buildings using permitted development rights (PDRs). Not only does this mean you won’t need full planning permission to change the use, but you should also be able to secure commercial lending from Day 1. There’s been a recent explosion in the number of opportunities to convert using PDRs, with a substantial amount of the country’s commercial building stock now being eligible for transition to residential use without full planning being required. You’ll usually need to tick several prescriptive boxes via a process known as Prior Approval; however, in most cases, you will know you meet the criteria before you apply. Take the time to learn how to a) understand the opportunity presented by PDRs and b) sweat each asset to its best advantage, and you’ll be looking at a substantial breadth of opportunity.

However, I need to add a caveat here because not all permitted development rights are created equal. Some are nice and straightforward, where you know that you meet the required prior approval criteria before acquiring the property and can purchase with confidence, armed with the considered opinion of your Planning Consultant. Others carry a significant degree of subjectivity in their requirements, which means that it will be down to the interpretation of the local planning authority. And as soon as you become reliant on someone else’s opinion, in my view, you’re taking too much risk. So guess what? Yup, these should go straight into the Too Difficult Pile.

The same applies to something called airspace rights. This involves building extra storeys on top of an existing building, and these rights come in various flavours, depending on the nature of the host structure. These opportunities can look enticing because you can easily see how an extra couple of storeys would fit on, plus you could easily build a significant number of flats, particularly on larger sites. If only it were that simple. The first challenge is subjectivity in the airspace rights, which allows the planners to reject an application if they don’t like it. And so far, if we’re honest, planners haven’t appeared to be that keen. But even if you overcame that hurdle, you’ve still got to deal with an obvious question; how do you know that the existing building will be able to support your new additional storeys from a structural point of view? It means you’ll need to be calling on the services of your friendly local structural engineer to find the answer, which will involve time, expense, and no guarantee of success. Hence, in my book, these too get added to the you-know-what pile.

Contamination makes for another regular addition to my Too Difficult Pile. There’s a disused petrol station in the next village to mine, and every time I drive past it, a little voice pops into my head, telling me it would be the perfect site for redevelopment. The problem is that petrol stations have got enormous scope for contamination, but you won’t be able to see it. Those underground tanks could be in tip-top shape. Or they may have been leaking for years, contaminating all the land around them, even if they’ve subsequently been filled in. A quick glance at the site will tell you… absolutely nothing. But if you buy the site and later find you have a contamination problem, it won’t be Messrs Texaco or Shell in the dock; it will be the site’s current owner, namely you. And that can be an expensive and time-consuming problem to fix, particularly if the contamination has made it into a nearby water course. So, if you hear your own tiny voice fantasising about any site where contamination is likely to be a high risk, I would urge you to point it firmly in the direction of your own ‘TDP’, PDQ.

Now, if you think I’ve just gone and nuked half of the development opportunities in the country, then you’re probably right. However, I’m not saying these projects are impossible or, for that matter, unprofitable. In fact, all the projects I’ve mentioned are perfectly doable and could well go on to net you a tidy profit. The problem is that they’re not the easiest. As a developer – particularly if you’re a new developer – you’ll want to find a nice simple project with minimum risk and maximum certainty, which you can just crack on with.

The good news is that there are plenty of those around if you know where to look. With a little education, you can easily find out where the best opportunities lie and where there is the least competition. Just make sure you clear a small, A4-sized corner of your desk before you do.