Property Development Tutorial

Big, scary and full of risk, or exciting with potential for massive gains?

Whichever way you look at it, development is no doubt the most advanced strategy – as well as the riskiest! This is only a brief introduction to this vast subject. There is so much to learn. Many people have come unstuck trying to take on projects they are insufficiently prepared for, either in terms of experience or finances. Do not let that be you! Educate yourself and seek expert advice before undertaking a project. Line-up your finances before you start. Estimating timescales is also important, as time is money.

What Does Property Development Involve?

Development encompasses a range of activities, from the renovation of existing buildings to conversions, extensions or the construction of buildings. A developer may buy land with the intention of building property either to rent or sell, or simply to gain planning permission - thereby increasing the value significantly, to sell on. Alternatively, a developer may purchase land or property with planning permission in place, to commence work on the construction and make profits on the sale or rental of the finished units.

Build-to-rent is a phenomenon that has gained in popularity in recent years. It is often associated with large developers, who may build big student accommodation blocks or other city developments; but the term can be applied to small developers also, who may build units to rent either as buy-to-let single units, HMOs or short term lets.

When choosing a plot or building to develop, you must be aware of the physical and practical constraints that a site may have, such as access, parking, the lay of the land and what facilities and utilities are nearby to provide affordable connections. There can be an endless stream of details that someone must make decisions on, from the foundations to the roof, from tiling to taps and every other detail.

How to Get Planning Permission

Working with a team of professionals to plan a development project

You will need to gather and co-ordinate a team of professionals to help you undertake a development project. While your role as the developer is to orchestrate your team, much of the work is done by the relevant professionals required for each aspect of the project, including architects, surveyors, contractors and others.

Most development projects will require planning permission, unless they fall within the scope of permitted development. So how can you assess the likelihood of getting profitable plans approved?

A Local Planning Authority (LPA) is the local authority, council or district that exercises control over planning on a local basis and it is through the LPA that planning permission must be sought. For all properties or land being considered, always look-up the planning history on the local council’s website. If others have tried and failed to get planning permission, that may give clues about what plans are likely to be approved or not.

Gain an understanding of planning policies. In 2012, the government brought in the National Planning Policy Framework (NPPF). The national framework should act as guidance for local plans, but there can be anomalies.

Create plans that are appropriate for local needs. It is important to know what the LPA’s overall plan is for the area and to submit plans that are in harmony with it. Every area will have a town plan outlining what development they may be looking to either encourage or avoid, which you can search for on the local council’s website.

Planning permission is granted subject to further conditions. If you are buying a site with planning permission, check whether these conditions have been met (or discharged) by the seller. Conditions typically include the need for extra details to be submitted regarding such matters as:

  • Access, driveways and parking
  • Drainage
  • Trees - some bigger specimens can have a tree preservation order (TPO), meaning they cannot be removed.

Additionally, restrictive covenants may exist on the property title. Your solicitor must help to identify these before you buy the site. Restrictive covenants can limit the alterations that may be done to a property, or the types of future use of the land or building.

Planning permission is always granted for a limited time period. The development must normally commence within 3 years, or else the permission will lapse.

Community Infrastructure Levy (CIL) and Section 106

The Community Infrastructure Levy (CIL) is a charge that local authorities can set on new developments to raise funds to help with the infrastructure, facilities and services needed, or to support new homes and businesses in the area, such as schools and transport improvements. Within the national guidelines, each local authority can set out its own charges and these may vary depending on the type of development. The general idea behind CIL is that development imposes additional needs for infrastructure requirements in the area, such as more school places required, heavier road use and upon other local amenities.

The National Planning Policy Framework (NPPF) makes provision for planning obligations that are legally enforceable under Section 106 of the Town and Country Planning Act 1990 to mitigate the impact of a development.

How Long Does It Take to Get Planning Permission?

If your project needs planning permission, be aware that local authorities work to time guidelines. It should normally take between 10 - 12 weeks for more straightforward plans to get planning permission, but draft plans may need to be sent back and forth several times while the council advise of any amendments they require.

Every case is different, and the whole process could take much longer than expected from the time you first instruct an architect to when you finally get your planning permission.

If the project has the benefit of permitted development rights, while planning permission is not required, you should still apply for a “lawful development certificate” from the local council but this should be a lot quicker to obtain.

Permitted Development Rights and Restrictions

Developers should be aware of “Permitted Development rights” which refers to certain types of projects that do not require planning permission. Some types of development may be given special permitted development rights from time to time, for example office to residential conversions.

In some area of the country, known as ‘designated areas’, permitted development rights are restricted, such as in:

  • A Conservation Area
  • A National Park
  • An Area of Outstanding Natural Beauty
  • A World Heritage Site or
  • The Norfolk or Suffolk Broads

There are also different requirements if the property is a listed building.

More things that you need to be aware of, which are further discussed in The Complete Guide to Property Strategies include:

  • Article 4 Restrictions, which may remove some permitted development rights;
  • Green belt areas designated for fields and parks, where any building is severely restricted;
  • Brownfield sites refer to derelict, demolished or under-used land that is more likely to be available for development;
  • Planning use classes: every building or site is designated to one or other use class which determines the type of building it is and / or the types of building likely to be approved on the site.

Calculating the Gross Development Value (GDV)

For potential developments, three key things you need to know are:

  1. Price per square metre on acquisition;
  2. Price per square metre on the build or refurb cost;
  3. Price per square metre on the finished development: the gross development value (GDV).
Calculating the expected profit to determine if the project is worthwhile

The gross profit (before finance costs) can be found by subtracting points 3 − 2 − 1. You need to work backwards from (3) the estimated final value (the GDV), deducting (2) the development costs and (1) the cost of acquisition of the site, to estimate or arrive at the expected profit, to determine if the project is worthwhile.

When appraising the viability of a development, start with the Gross Development Value (GDV) which is the gross or open market value of all the properties that you are aiming to build or develop. To estimate, consider the price of comparable properties nearby and check with a professional valuer.

From this end figure, work backwards to consider all costs including build costs, as well as CIL and affordable homes if necessary, as well as professional fees, building costs, planning fees and everything – determining the price that should be paid for the site to allow for sufficient profit. The ‘industry norm’ for profit is around 20%.

Your architect or planner can prepare a “tender” document (an invitation for quotes) based upon costs for each main section of works including electrical, plumbing, roofing, decorating, etc.

When considering a site, remember to factor-in the costs for demolition of derelict or unsuitable buildings, if any. You also need to account for insurance, all surveys required and other professional costs.

Finance costs if any must also be taken into account and you should always have sufficient funds for ‘contingency’ (an extra sum to cover for the unexpected) and allow for time overruns, as things often cost more and take longer than expected!

Never underestimate the complexity of development, the risks and the many professionals that you may need to get on board. It is always a team effort. If it all seems too much, then crowdfunding (investing in others development projects) could be a good alternative.