Real-world Development with propertyCEO – Part 3

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…

Plans were well underway for converting the old printing works, but there were still several hurdles. Could Ritchie use permitted development rights to convert the building, or must he apply for full planning? And would residential agents agree with Ritchie’s valuation of the five flats he planned to build? If they didn’t, it would be back to the drawing board…

Developers use residential agents to sell their finished units, but they also play a crucial role before a project has started. You might think estimating the value of your finished apartments is easy, given there are loads of comparables on Rightmove. But while desktop analyses are helpful, there’s no substitute for local, real-world knowledge from residential agents, and you need to engage with them before you’ve acquired your host property or building plot.

Also, who will be buying your flats? Are they first-time buyers or downsizers? Young professionals or families? Commuters or retirees? Different buyers have different requirements for parking, room sizes, outside areas, and so on, and residential agents can give you an invaluable insight. They can also help guide you on fit and finish. Will your buyers demand granite worktops and oak flooring, or will they be happy with good old MDF and a neutrally coloured carpet? You may have a view, but it’s the residential agents who will know.

* Top Tip: Speak to at least three residential agents to get a consensus. Do your own research first so you can critique their opinions rather than just relying on them, and use agents who have recently sold in that postcode – ask to see comparables

I already knew an agent who covered the area, but that didn’t stop me from shopping around. Sometimes agents tell you what they think you want to hear – or they’ll make stuff up to try and sound knowledgeable. Getting multiple views lets you spot outliers and sort the wheat from the chaff. Agents were happy to give me their time since I’d be putting five flats onto the market, which should mean a healthy sales commission.

* Top Tip: Invite your chosen agent on-site during the construction phase to get them enthused about the project. It also allows them to talk authentically to potential buyers since they’ve seen the project evolve.

In my initial analysis, I used comparables on Rightmove to calculate estimated selling prices. The two largest flats were in the front building, an old two-up-two-down with one apartment on each floor, each with a separate entrance, and I reckoned that each flat would command £145k. The three flats in the rear factory area would be smaller and had less kerb-appeal, which would dent the prices further, so I settled on a value of £135k for two of them and £125k for the smallest one. But what would the agents think?

* Top Tip: When converting an ugly building, don’t try and sell off-plan unless it’s to an investor. Buyers won’t be able to stop themselves from driving by and looking at the existing building – and they won’t be able to imagine themselves living there. Far better to keep the hoardings on throughout and then have a big reveal once everything is finished.

The first agent I saw was super-enthusiastic but struggled to provide any recent comparables. The next two fared better and gave me some solid insights. My existing contact also had recent experience locally and was the most bullish on pricing, albeit everyone was broadly similar. All agreed the target market would be young professionals and to aim for an entry-level spec to keep prices as low as possible. Showers were preferred to baths, and parking places weren’t necessary. Ultimately, I decided to stick with my original pricing assumptions to be prudent, even though the agents’ views could support a marginally higher GDV.

* Top Tip: Creating flats with different shapes and sizes often makes them easier to sell. It also differentiates them from the ‘cookie-cutter’ flats in blocks that you’ll inevitably be competing with.

It was good to pin down the sales pricing, but my goal of a quick turnaround with little planning risk now hinged on whether we could convert the building using permitted development rights (PDRs). This is where my planning consultant came into their own. All buildings have a use class, but this may not have been previously established. Our printing works was, in theory, a light industrial building, but there was no planning history to confirm this. Our planning consultant, a wily old soul, asked the council whether his client (us) could use the building for heavy industrial use. Given the building was surrounded by residential housing, the council wrote back immediately, stating that the building was light industrial and therefore NO heavy industry activity would be permitted. This gave us precisely the confirmation we wanted!

* Top Tip: PDR schemes are the low-hanging fruit in development and make an ideal first project. You’ll still need Prior Approval from the local planning authority, but there are relatively few things they can object to. Plus, it’s typically quicker, and you have more certainty than when applying for full planning permission.

Since PDRs only allow you to change the use, we would need to make a full planning application to make any elevational changes to our building. This included putting new slate tiles on the rear roof and reducing the front shop window aperture to make it look more ‘residential’. Our planning consultant advised that this should be non-contentious, so we made both the PDR and full planning applications simultaneously – and both were ultimately approved.

* Top Tip: Commercial lenders won’t advance funds until planning permission or PDR approval is granted – another reason why the relative certainty and speed of PDRs is a significant advantage.

Things were now moving forward nicely. We were confident we could use PDRs to convert the existing building, our team saw no barriers to doing the work, and our applications were in. We’d also established that the asbestos issue wasn’t a showstopper and had got a decision in principle from our commercial lender. I’d also been sure to stay on top of my deal analysis, firming up costs and revised assumptions as they’d became known.

* Top Tip: Not all PDRs are equally useful. The most straightforward PDR involves converting commercial properties in use class E (this includes shops, offices, light industrial, banks, gyms, etc.) using the PDRs known as class MA and class G. If all these classes sound confusing, don’t worry – your planning consultant can advise you – but a little homework will also serve you well!

It was time to appoint my professional team formally, and I had each of them submit fee proposals. I signed up the architect, having first had them send me a formal design brief. I also appointed the project manager, cost consultant, and mechanical and electrical (M&E) engineer and got the latter to supply an M&E specification.

* Top Tip: To create your professional team from scratch, start by finding an architect and project manager with experience in the sort of project you’ll be doing. Speak to several and get recommendations from each of them for other team members – you’ll often find the same names cropping up. Ask to see a current project and speak to their clients. Have a fall-back position for each role – your first choice may not be available when you need them.

A major advantage of small-scale property development is that there are established processes for projects to follow. We’d be following the RIBA Plan of Work; industry-standard gateways that ensure a project can only move forward when all parties have signed off on the previous stage. We’d also be entering into what’s known as a JCT contract with our contractor – again, another industry standard that ensures everyone knows where they stand.

* Top Tip: Never sign a contract given to you by your contractor. Always use an industry recognised contract provided and put in place by your Project Manager.

The final thing I had to consider was the procurement route. For residential new builds or renovations, the three main routes are Traditional (the design and construction teams are appointed separately), Design & Build (the contractor does both elements), and Construction Management (the developer appoints individual professionals for each discipline). We’d be going with a Traditional single stage procurement route and would look to agree a fixed-price lump sum contract with the contractor. This would give us pricing certainly since the bulk of the costs are agreed upfront, however it would be critical that we provided a detailed specification. If we didn’t, or if we missed items off, then the contractor would charge us for ‘extras and overs’, which would erode our contingency fund and dent our profits.

* Top Tip: Having a two-stage contract allows you to strip out the building before you appoint the main contractor. This avoids contractors pricing in the risk of uncovering problems during the strip-out since they’ll know exactly what they’re dealing with. 

At this point, I remember thinking that things looked quite positive. What I didn’t know was that the first rumblings of an event that would later cause us a considerable headache had already begun.

Next month, Ritchie has to negotiate costs with his contractor and meet face-to-face with the commercial lender who’ll be funding the entire development. Will he be able to sell the project to them, and if not, how else could he get the funds he needed to make the project a reality?