The World’s Best Property Development Strategy
I’m not entirely sure what the printed equivalent of clickbait is, but hopefully the title of this article doesn’t set too many expectations that I can’t subsequently fulfil. I’m only two lines in, so it could go either way at this stage. But, if, by the time you read this, the article is called “Here Are A Few Development Ideas”, then it means the editing team have adjudged that my bar was set too high. And if it’s called “The Gypsum King: My Career In Dry Lining”, then you’ll know my efforts were so bad that I was replaced by one of the secret stash of emergency articles that every editor has up their sleeve to keep regular contributors on their toes.
But, at this early stage, let’s think positive. What do I think is the world’s best property strategy? As I sit here surrounded by a range of post-Christmas detritus, I can’t help but think of chocolate. This thought isn’t usually season-dependent, but today, it’s been prompted by the remains of a (nearly) empty box of Quality Street sitting on my office sideboard. Now, I’ve probably overthought this massively, but I suspect every family in the country has a Quality Street ‘profile’. Some like the soft centres, while others prefer something they can get their teeth into a little more. And, of course, everyone has a personal favourite: a ‘go-to’ chocolate that you’re prepared to have a good old rummage for rather than rely on the ‘lucky dip’ approach. You may even be prepared to fight a parent or sibling for ownership. You may recall that such was the popularity of ‘The Purple One’ (hazelnut pieces in caramel, in case you’ve not indulged) that the makers brought out a box of Quality Street that contained nothing else, effectively making it the Man Utd of confectionary while also, one suspects, promoting familial harmony.
Of course, utopia is achieved when everyone in your family only likes hard centres, and you only like the softies. So, while they’re all arguing over the Toffee Pennies, you’ve got a clear run at the Chocolate Truffles (or vice versa). However, I suspect that our chocolate preferences are passed on genetically because I recall that, growing up, everyone in our house made a beeline for the soft centres and avoided toffees like the plague. By Boxing Day, the remnants were just a sea of spurned yellow toffee wrappers. I even recall wondering as a child why Rowntree Mackintosh (think Nestle if you’re younger than I am) even bothered to include toffees, given that they were so unpopular. It was a revelation when I discovered at a friend’s house that their family was wired the other way around. Bizarrely, they’d fight over the abominable Toffee Fingers while the sumptuous Strawberry Delights lay utterly untouched. Clearly, they were all mad.
This is all very interesting, but what does it have to do with property development, I hear the magazine’s editing team say. Well, there’s an analogous connection between the two that I thought might set the scene quite nicely. Quality Street and property development each have two distinct genres, within which a raft of further subcategories exist. In the case of Quality Street, your two main genres are hard centres or soft centres. And in property development, the equivalent choices are new builds or conversions. Let’s start there before our hand delves any deeper into the box.
New builds are called new builds in much the same way that Quick Drying Wood Stain is called Quick Drying Wood Stain – it pretty much does what it says on the tin. You’re building something new from the ground up, whether that’s a pair of semis, a block of flats, an entire housing estate or a shopping centre. Many developers like new builds because it allows them to build what they like once they’re ‘out of the ground’. With the footings in place, they’re simply building in fresh air and can, therefore, put up whatever they want without any physical constraints (subject to gaining planning permission first). Large-scale housebuilders love new builds.
Their model is very straightforward; they get their design team to create various houses and apartments, find an empty field where they can get planning permission, and then deploy their construction teams to build the project. The significant advantage here is that larger developers can build their ‘Churchill’ 4-bed detached or their ‘Bramley’ 2-bed maisonette in any field in the country; the plans are already drawn up, and their teams know exactly how to build them. This gives them significant economies of scale since, to some extent, they are deploying a cookie-cutter model. However, scale is essential to them; they won’t usually look at smaller projects, which leaves these opportunities for the smaller developers.
The biggest challenge with new builds is that they always require planning permission. And since the planning system in this country can best be described as an utter shambles, there are no guarantees that permission will be granted. Large housebuilders with deep enough pockets to play the long game can simply buy land and then wait for planning permission to eventually arrive, if it does. For smaller developers, however, it’s a high-risk strategy to purchase land and then apply for planning permission because what do they do if they don’t get it? They’d be left with a plot of land on which no one can build while presumably paying interest on the capital they borrowed to acquire it. Plus, they’ve no means of gaining any income from it. The second challenge with new buildings lies in the ground. It’s tough to tell what’s buried beneath the surface just by looking at a parcel of land. Until you start excavating, you won’t know whether you require standard footings or much deeper ones, whether there are pipes or cables lying where you want to excavate, or wells, archaeological relics or even burial remains on your plot. These issues can significantly affect the cost of developing the site, and you won’t know what you’re dealing with until you break ground. And you can’t break ground until you own the site.
Conversions are the alternative to new builds, and this typically involves taking a commercial building of some sort and converting it into residential use. This would include converting the uppers (storage floors) above a shop, turning an office building into apartments, or putting duplexes or flats into a light industrial building. Conversions have the opposite pros and cons to new builds. You don’t need to worry too much about what’s in the ground because your foundations are already built; you’re simply converting the building on top of them. However, you do have constraints above ground. One of the most significant advantages of commercial conversions is the existence of permitted development rights (PDRs) that allow you to convert these buildings into residential use without needing full planning permission. This makes projects less risky and usually much quicker to complete. But PDRs only allow you to change the use of the building and not its shape or appearance. This means you must retain the existing structure, which in turn restricts what you can build.
So, considering the pros and cons, do I prefer new builds or conversions? For me, particularly for new developers, conversions win hands down. Not only do they avoid a significant amount of planning risk, but there’s also a knack to maximising the value of these buildings. After all, if you can cut and carve a commercial building so you can create six flats and your competitors can only manage five, then not only will you make more profit, but you’ll also be able to pay more for the property in the first place, giving you a better chance of winning it. Most established developers find permitted development too much like hard work and stick to their familiar new build models, leaving a fantastic opportunity for new developers who are prepared to educate themselves.
Also, conversions are usually significantly quicker to complete from start to finish compared to new builds, which is another key benefit.
So, we’ve determined a winner between our hard and soft centres. The next question is, what type of conversion project is best? The answer is perhaps not as obvious as people might think. For many people, office conversions are the poster child of conversion projects. After all, what’s not to like? Most office buildings look similar to a block of flats externally, with windows in all the right places. They’re often either in a town or just outside one and usually have parking nearby if not on site. Surely, it’s just a question of creating partition walls inside the building to create self-contained apartments and replicating this on every floor?
While it’s not quite that simple, the theory broadly holds. The problem is that everyone else will be thinking the same as you do. As a result, competition for office conversions is fierce, which inevitably drives up the price and drives down the profit. Also, where the design options for converting a property are limited, everyone essentially comes up with the same proposed floor plan, and it’s more difficult to differentiate from your competitors. In this situation, it’s usually the person who will accept the least profit or who has got their numbers wrong who wins the deal. Either way, you don’t want this person to be you.
For me, retail conversions are the Orange Crèmes of the conversion world. They’re very nearly my favourite, just not quite. There’s a lot to like. Firstly, there are a lot of empty shops that can be converted – you only have to visit your local high street to see the evidence. We lost 18,000 retail outlets last year, with a similar number predicted to close this year. But because of how retail has evolved, there’s also scope to convert the uppers of actively trading shops, not just the empty ones. These upper floors used to be for storage, but just-in-time delivery logistics have reduced the storage requirement drastically, allowing developers to convert the unused uppers while the retail tenants remain in situ below. Some rather nice PDR wheezes apply to retail conversions, often enabling you to outbid the competition. A chap’s got to have some secrets, so I won’t mention them here. But using PDRs creatively is one of the key things that we teach our students, and let me tell you, there are plenty of PDR wheezes to play with.
As my hand rummages deeper into the chocolate box, I finally alight on the holy grail – my favourite, the Strawberry Delight (did you really think I’d prefer The Purple One?). And in property development, the equivalent would be the light industrial conversion. These bad boys are usually ugly as sin, are rarely located in a good part of town, and don’t remotely look anything like a building anyone would want to live in. So tick, tick, and tick, then? Well, here’s the thing. Ugly is beautiful when it comes to conversions, mainly because your competition is massively depleted. If most developers ignore a building because it’s hideous and they think they’d need to knock it down and start again, then they’re going to look elsewhere.
But once you know how to convert them, you’ll never look back. In fact, light industrial buildings have some stellar benefits, quite apart from the relative lack of competition. Here are just a few:
– They’re usually located in residential areas, so they’re surrounded by residential housing, a perfect place to do a conversion
– They’re likely to have a thick concrete base that extends across the entire site, which means you can build walls wherever you like without having to dig footings – you can simply build straight off the base – and can often build multiple storeys
– In construction terms, they’re often little more than four walls and a roof. This means you don’t need to move internal walls or rip out air conditioning ducting, etc., before you start, plus you’ve got massive design flexibility because there’s nothing in the way internally
– You can bring the roof and walls up to residential specification without demolishing them
– Your construction team will be working inside most of the time, making it an ideal year-round project (your contractor will love you!)
– They’re usually cheaper than office buildings and shops to buy
– There are no demolition costs (you’re converting, not rebuilding)
– There’s little contamination risk since you won’t be digging up or disturbing the base or foundations
This combination of a lack of competition coupled with the construction and cost benefits PLUS the permitted development rights makes light industrial conversions my pick of the bunch. But that doesn’t mean that they’ll be for everyone. For example, I’ve got some students who only look at agricultural conversions while others specialise in land assembly and deal sourcing. Just like Quality Street, everyone has their favourites, and there’s no right or wrong (except Coconut Éclairs, obviously). But there’s certainly plenty to choose from.
So, there we have it: my view of the world’s (or at least the country’s) best property development strategy. Next month, depending on how things go, you’ll either be hearing from me again or discovering the joys of dry lining. Either way, I wish you a Happy New Year, one and all.