I Am A Property Developer – Ask Me Anything!

Hi Tony

I have a question: has there been a significant recent change in the willingness of your local councils to approve small developments within urban areas? It would seem likely due to the imposition from above to build more housing units. Reading Borough Council is of particular interest for us.

Thanks, Ed

I also have a question Tony.

What are the profit margins on one of your typical 4 property new build developments as opposed to say, buying a distressed suburban bungalow on a large plot and increasing the floor space by around 20% together with full refurbishment? Also, if there is additional profit is it really worth the hassle to build new based on having to provide additional guarantees to buyers?

A typical return for my family based on the bungalow refurbishment/expansion model is 20% - 25% ROI over 12 months after factoring in all costs including labour, materials, fees, financing etc.
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Hi Tony
How easy is it to convert an old closed down pub in a housing estate into, say, separate Flats? I guess the structural side of the project might vary depending on the existing building, but what about the change of use side of things too? Some of these run-down pubs are very cheap & often close to shops & bus routes.

Reply to the comment left by "Ed Atkinson" at "01/11/2013 - 20:42":

Thanks Ed. I would say that councils have become more hostile to small developments in recent years, not more favourable. This is in part a political response to all the headlines about "garden grabbing" and taking up the opportunity offered by the redesignation of backland as greenfield rather than brown by the Coalition Government in 2010. It has become far more difficult for developers of a certain kind to cram backland sites with flats and tiny houses. Some would argue this is a good thing, and I would say that as long as you follow the LPA's planning design guide (assuming they have one) very carefully, it is still possible to redevelop backland sites and make a profit with well-designed units that are "in keeping", and this needn't mean simply slavishly copying the often-indifferent design of the surrounding houses.

Another reason for life becoming harder for small developers and small sites is an increasing trend for LPAs to impose social housing obligations on smaller and smaller sites. In Wokingham, for example, you only had to give away 33-40% of your site to a housing association if you had more than 15 units; now the limit is just five units. This often makes backland redevelopment unviable. Councils are also taking the opportunity to charge higher and higher S106 and Community Infrastructure Levy taxes: new housing is being treated as a cash cow to subsidise the delivery of social housing and local infrastructure, and many small builders and developers are being reduced to only handling sites of 4 units or fewer, with no chance of ever expanding because affordable housing makes larger sites unaffordable.

Finally, it has to be said that the new planning regime makes it much more attractive for councils to encourage the national housebuilders and landowners to bring forward large sites. Wokingham BC, for example, has a strategy of concentrating 12,500 new houses to 2026 on just four Strategic Development Locations (Shinfield, Arborfield, North and South Wokingham SDLs), with large associated "contributions" towards intrastructure improvements and social housing from the developers. In contrast WBC is only allowing for 1000 other houses to be built on so-called windfall sites: that's just 80 houses a year across the borough, to be fought over by every small builder and self-builder in the area. If WBC is serious about this 1000 house limit, there may be a point where they just say "we've reached our housing allocation limit, so no more small plots will be allowed until 2027"!

However, each LPA is different, and Reading BC is always going to have problems because it is so constrained in space. Ultimately all you can do is find a likely-looking site, acquaint yourself with the Design Guide and local tax regime, and make an application in the normal way. Ultimately local planning authorities aren't supposed to "look favourably" one way or the other - they are meant to have a degree of objectivity and you have to have some faith that this is in true, even if it sometimes appears that political connections, backhanders and the big boys have everything sewn up in advance.

Reply to the comment left by "Mark Alexander" at "02/11/2013 - 12:16":

Thanks Mark. Your question seems to me almost impossible to answer, because "it depends". Every site is different, each housing market area has a different profile. I gave up doing refurbishments after 2008 because I could not make an adequate profit: the costs of purchase, remodelling and selling were high, and in a severely constrained mortgage market, the chances of actually getting the uplift in value I needed seemed far too risky: punters would see the price you paid, see the work done, and assume you were looking for a premium price and then just beat you down. With so few buyers around, it was a buyer's market.

In contrast, the attraction of new-build to me was that you were genuinely adding a new property on the site with a measurable value, plus or minus 5%. I am still evolving as a developer and building my experience, so I'm still making plenty of mistakes, usually probably on the side of over-specifying and making the properties nicer inside than they strictly need to be. My profit margins are around 20-25%, but this has been spread over several years as I've battled through the nightmare of securing planning permission, so your family are almost certainly running a better business than I am.

I'd say the additional guarantees you ask about (NHBC, Premier Guarantee etc) are a red herring as if you've built properly, in practice there are almost no costs for the two years of liability. However there is the cost of the NHBC insurance, as well as S106 taxes, planning fees and so on, all of which you escape by doing refurbishments. So if you can find a clapped-out property at the right low price, that is certainly a sensible way to go instead of the capital-intensive and planning nightmare that is new-build.

Reply to the comment left by "Steven Burnell" at "02/11/2013 - 17:08":

Hello Steven,

"How easy" in the planning world is like asking how long's a piece of string: it depends! It certainly appears to have become a lot easier to convert redundant office buildings into flats or small houses this year, as this now counts as permitted development and you will not be subject to the immense raft of regulations that apply to the creation of new housing units. You still need to seek planning permission for the change of use, but provided you can show the conversion fits the PD rules, it ought to be waved through. I think there are going to be a lot of these types of conversion, because you are not subject to S106/CIL taxes or affordable housing rules, nor do you have to follow - it appears - the local borough's design rules as regards the provision of amenity or parking space or the separation distances between buildings. Of course you will still want to provide parking and amenity space in order to make the development practical and attractive to buyers, but you do not have slavishly to follow every last dot and dash of the Design Guide. You will also get the usual objections by local householders on every imaginable ground, especially the dreaded "overlooking". But applying under PD rights is much, much simpler and faster than a fully-fledged application to build new units, which the planning system seems designed to block at every opportunity.

From the proposals I've seen so far, you need to be careful not to enlarge the footprint of the site - for an easy life, just convert as best you can within the existing building envelope and follow the building regulations regarding fire and sound insulation, means of escape etc, as advised by your architect/architectural technician.

However I've only seen proposals for change of use and conversion of office buildings so far. It's possible that a council might take a different attitude as regards a pub, because this falls under a different planning classification and the council might not want to lose the community amenity. My advice would be read the new regulations carefully and probably work with a planning consultant with experience of change of use: their fee will be worth the expense.

You may also encounter competition for pub sites from self-builders or higher-end developers looking to convert them into nice houses; a better route might be to look at unloved and largely-empty office buildings, especially those converted from domestic use at some point in the past, so they should be easy to convert back into residential units without scaring too many horses. Some Victorian cottages runs as a little block of office in a marginal location will convert more easily back into housing than a 1960s system-built glass and concrete small office building, unless you're prepared to spend some money on design work and improving the external façade.

Reply to the comment left by "Tony Atkins" at "05/11/2013 - 16:45":

It's interesting what you say about "the right price". We've been paying around 10% over asking price on sealed bids for the last 12 months or so. Recently we've been outbid. Demand is definitely increasing in our area, probably due to funding getting easier to obtain again. We had the market pretty much to ourselves when funding was virtually impossible to obtain or too pricey if it was.
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Reply to the comment left by "Mark Alexander" at "02/11/2013 - 12:16":

Actually, Mark, on reflection I think I was being unfair to myself. I gave a gross profit margin of 20-25% for my recent builds, but I'd forgotten that I still have a residue of land on both sites that is developable and has an access route. I haven't yet secured planning on either of these sites, but if I do so and build out the plots, the overall margin over three years will be more like 100% per site.

In other words, the refurbish and extend route is a good one if, like you, a developer can find sites offering a 20-25% return over a year. I would struggle to match that if I bought a similar plot of land and knocked down the old house and built two new ones or 4 flats, as I did recently. But since my residual backfill land remains to be developed, the overall returns are actually much better with new build, because of the intensification of use. Large sites escalate in value only if you have a realistic means of access to open up the rear and increase the housing density. Without the access, the refurbishment route is probably more cost-effective.

Another way of getting a good return from a large site when you have limited capital is just to get the planning permission on the extra units and then sell the site on to another builder or to self-builders. Depending on your area, a self-builder is often prepared to pay more than a developer/builder, because they value their time at zero, don't want to make a profit, and are prepared to over-pay because they want to live in the area anyway. Historically developers rarely sold their sites on to self-builders because planning was so hard to obtain and there was still profit to be made in actually building the houses as well. With the ever-increasing costs of construction combined with a tight land supply, I think more and more developers will look seriously at giving up being involved in construction and instead simply sell their sites on "shovel ready" for self-builders.

Reply to the comment left by "Mark Alexander" at "05/11/2013 - 19:19":

That's interesting Mark. Refurbishment almost becomes a dead cert when prices are rising, so people start jumping on the bandwagon and will outbid each other. I can remember watching Sarah Beeny pre-2008, when time and again her renovators were ecstatic over the gains they were making, until she pointed out that 100% of the gains were actually just down to general rises in the market: the renovators could have saved themselves all the heartache and aggro and just sat on the property and done nothing, and they'd have done just as well. As ever it's about price and location. Buy the worst house in a good street and refurbish and extend it, and you will do well, but buy a so-so house in a so-so street and you're probably wasting your time.

Reply to the comment left by "Tony Atkins" at "05/11/2013 - 19:20":

You must be a mind reader Tony, the last deal we've just got outbid on was exactly that scenario. Refurb the bungalow, split the oversized to obtain an additional plot and access, get planning for a new dwelling and then sell the plot. We would still only have made an overall ROI of 40% after all costs based on our bid but we didn't get it. We are intrigued as to who did and what they will do as we cut our margins to the bone to get that deal, considering the risk element of whether we would get planning, and we still lost out!
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