Real-world Development with propertyCEO – Part 2
Small-scale property development projects that use permitted development rights can be done in your spare time, boast six-figure returns, and have a lower cost of entry than buy-to-lets. It all sounds great on paper, but what’s it REALLY like to convert a property?
Join Ritchie Clapson CEng MIStructE, veteran developer, author, commentator, and co-founder of development training company propertyCEO, as he guides us through a real-life commercial conversion project from start to finish. Witness the highs and the lows, and learn the critical takeaways in this eye-opening, warts-and-all look at what REALLY happens where property development theory stops and the practice begins…
You can watch a video of Ritchie walking around the project. Click HERE for exclusive video content.
The story so far…
Having found an old printing works ripe for residential conversion, Ritchie had agreed on a joint venture deal with the vendor, which meant he didn’t have to buy the property. The initial numbers looked promising, but he now needed to find out what contamination existed on site (if any) and get the input of his construction and design team professionals. Would they see the same potential that Ritchie did, or would they uncover some fatal flaws?
The development process is one of constant refinement. You start with high-level assumptions and then refine your business plan as you go. You can’t nail every cost beforehand; instead, get an offer accepted based on high-level assumptions, then firm up as many costs as possible before you exchange contracts.
You should have a standard deal analyser that you use for every deal, where reasonable, high-level assumptions drive the figures. You’ll have estimated figures for professional fees and finance costs, plus you’ll have estimated build costs per square metre split by type of finish (because a premium specification will cost more to build per square metre than a basic one). Where do these pricing assumptions come from? You’ll need a cost consultant (a.k.a. a quantity surveyor) on your team, and they can give you some sensible high-level figures to use for your build cost and professional fee assumptions. Personally, I’d pay them to help you create your pricing model, as free advice is worth what you pay for it. You’ll still need them to give you firm numbers on each deal before you buy it, but you can now be confident your initial analysis on any new deal will be reasonably accurate. As for finance costs, your commercial funding broker can provide sensible assumptions and fees.
* Top Tip: Never assume your assumptions are correct! Construction costs can move quickly, so the prices quoted on your last deal may need to be validated. Before you commit, go through every price in your model and ask yourself how accurate it is. Also, revisit pricing assumptions with your cost consultant and finance broker regularly to make sure they’re not out of date.
As a developer, your role is highly leveraged, and you’ll employ professionals with a vast array of skills. However, YOU need the vision to see the potential in every deal you look at from the outset. You could refer every deal to your architect and planning consultant and ask them for their opinion, but that would take ages and cost you a fortune. It is far better to have a high-level knowledge of permitted development rights (PDRs) and the ability to create a block plan to scale, to accurately work out how many flats you can build. You can then assess any new deal quickly and only need to call in the professionals on deals with a decent chance of progressing.
Having done this exercise for the old printing works, I now needed the advice of my professional team. Not only are they the experts, but two heads are nearly always better than one. Many’s the time my architect has suggested a better layout to the one that I had in mind, and vice versa. The key protagonists at the start of any project are the architect, planning consultant and structural engineer who’ll cover design (what could be built), the contractor and project manager who’ll advise on logistics (how it can be built), a cost consultant who’ll make sure you’re construction cost assumptions are sound, and a specialist solicitor to sort out everything contractually. Finally, your specialist property accountant will be on hand to sort out the financials and corporate logistics.
* Top Tip: Establish your first and second choice professionals BEFORE you find a deal. You’ll need to move quickly once an offer is accepted, and there will be more than enough for you to do without having to try and recruit an entire team from scratch simultaneously.
I decided to arrange an ‘open day’ where I got the main protagonists to walk around the building with me one after the other. I explained what I wanted to do with the building and asked them to share their initial impressions on whether it was possible, what challenges they saw, and whether they had any better ideas.
* Top Tip: The open day approach not only makes good use of your time (you don’t have to make multiple visits), but it also means that any opportunities or challenges your architect spots can be immediately reviewed by the contractor (and vice versa).
I still didn’t know whether a PDR conversion was possible, so I asked the team to consider options for demolishing and rebuilding as well. Having walked the site with the architect, structural engineer and contractor, things were looking promising; they felt that the conversion concept to create five small one-bed flats was sound and also gave me some additional ideas on how the space could be better utilised. The two-storey building at the front was straightforward enough (one flat on each floor), but there was an internal courtyard behind it that abutted the single-storey factory unit at the rear, and I’d need to decide what to do with it. The architect had flagged that the staircase in the front building was too steep for residential use and would need replacing. This was a pain since it would use up more space, and we’d need to reconfigure the front entrance to allow access to both the upstairs and downstairs flats.
I also had my asbestos consultant go back into the property to do an intrusive survey. This involved drilling holes and pulling back boards, which I could now do since I effectively owned the building. He discovered some more asbestos, but nothing too scary.
* Top Tip: Always do an intrusive survey on older or more complex buildings, as it can unearth hidden problems. If you don’t yet own the building, you’ll need the vendor’s permission and will need to make good any damage.
It was during this stage that we made two surprising and very welcome discoveries. Having removed some plasterboard on the ground floor of the front two-storey building, we discovered a long-boarded-up set of stairs. It was the building’s original staircase, and it provided an instant solution to the narrow staircase problem identified by our architect. It had been boarded up for so long that the owner had no idea it was there, and he’d owned the building for decades.
The second discovery came the very next day. My solicitor had been looking at the deeds for the neighbouring properties and had spotted something odd.
Next door’s deeds stipulated that our property had a right of access along the alleyway between our building and theirs, something that wasn’t mentioned in our deeds at all! This was a big win, as it meant we could use this side alleyway to gain access to the ‘secret’ staircase at the rear of the building, which could now become the main entrance to our upstairs flat.
* Top Tip: Always study the deeds of both your property AND neighbouring properties to see if there are any restrictions, covenants, or rights of way listed. Also, look out for potential ransom strips, i.e. where you need to use land owned by a neighbour for access or utility pipes, etc.
In development, you always need at least two exit strategies. We were building to sell, but we also looked at renting out the new flats either as single lets or as serviced accommodation in case the market moved against us and we needed to hold the properties while waiting for selling prices to bounce back.
As well as meeting the professionals on site, I also needed to sort out the commercial finance. I briefed a specialist broker who found us a commercial lender willing to give a decision in principle based on our initial numbers. Many people assume you need deep pockets to develop property, and I wanted to prove that we could tackle this project without putting in a penny of our own money. Lenders typically advance up to 70% of the purchase price and 100% of the development costs, which gives you fantastic leverage. Better still, you can borrow the lion’s share of your 30% deposit from third-party private investors. In our case, our JV with the vendor meant we only needed development finance and could give the lender a first charge on the printing works – so no cash or private investment on our part was needed.
* Top Tip: Lenders usually want the developer to put in some cash, but this may be just a small proportion of the deposit or loan. It makes development highly accessible since it typically requires a smaller cash investment than a deposit on a cheap buy-to-let. The existence of a strong specialist broker network, as well as crowd-funding solutions, makes finding a lender very straightforward.
That evening, I sat in my office at home, reflecting on our progress. We’d caught some lucky breaks with the hidden staircase and access rights, but I still didn’t know whether I could get the scheme to work under permitted development and whether local agents would agree with my projected selling prices. And I knew all too well that both issues could have a material impact on the deal if they didn’t go my way.
Next month, Ritchie discovers what the local estate agents think of his plans, while his planning consultant deploys an ingenious ruse to try and secure the required permitted development rights.