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Stepping into the property market

Even small firms can build profits by getting into development with the right strategy, say Maria Kielmas

You have run a successful building company for more than a decade and now think it is time to make some real money from building houses.

You have the experience to know what could go wrong on site and you know your region. The rest is about finding a glorified mortgage, perhaps.

Sadly, it is not as simple as that. In the world of property development the entrepreneur has to deal with a huge array of people and organisations - from lawyers, to local planning authorities. And this is before he even approaches a financier.

It is a different environment from that of the contractor who is paid at regular intervals and then moves on to the next job.

“A fledgling developer has to feel comfortable, he needs a huge amount of tenacity and is always looking for solutions,” says Robert Dick, chairman of Cala Finance, the residential property funding arm of property developer Cala Group.

Experience is key and financiers always welcome inquiries from builders with a track record, says Brian Bartaby, principal at Surrey-based Longcross Capital.

The bottom line

However, financiers make their decisions based on the gross development value of the project and their potential profit. Mr Bartaby stresses that developers have to keep in mind three important issues:

  • Are you paying the right price for the land?

  • What is the realistic time-scale for development?

  • What is the resale price?

Finding a good local agent is one way to start. Builders are not always familiar with the market even in their hometown. “But how often has this agent sold a new home?” asks Phil Akilade, managing director of Brighton-based Diverse Finance Company.

Land valuers have become more conservative in their assessments in the wake of the credit crunch, says Keith Smart, director of Leeds-based builders Bramley’s and its property affiliate, Bramley Homes.

A drop in value of Ł10 per square foot for land can make a serious impact on the expected return of 15 to 16 per cent that financiers hope for on their investment.

Banks, in general, lend about 70 per cent of the purchase price and development costs of a project. But the higher the perceived risk, the lower the bank’s exposure will be.

Bank on it

Intermediaries such as Cala, which is linked with the Bank of Scotland, can arrange a 100 per cent loan by providing their own guarantee to the bank of 25 per cent of the money required.

In exchange, Cala acquires a 50 per cent stake in the project. Mr Dick says that Cala usually guarantees between £2 million and £5 million a project.

Intermediaries also arrange various mezzanine, or gap, financing to cover any shortfall below 100 per cent of the loan. But the developer still needs seed capital for various legal fees, valuations and planning applications, as well as funding all cost overruns himself once the project is under way.
Builders are best placed to take advantage of the development market. But always remember: do your homework, get a realistic budget and time frame. And stick to them.

Getting Consent

Section 106 of the Town and Country Planning Act allows a local planning authority (LPA) to enter into a legally binding agreement or planning obligation with a land developer over a related issue.

Such agreements can cover almost any relevant issue and can include sums of money. Some examples could be:

  • The provision of an appropriate percentage of affordable housing in the development.

  • The developer will transfer ownership of an area of woodland to an LPA with a suitable fee to cover its future maintenance.

  • The LPA will restrict the development of an area of land , or permit only specified operations to be carried out on it in the future.

  • The developer will plant a specific number of trees and maintain them for a number of years.

  • The developer will create a nature reserve.

Source: Improvement and Development Agency

What’s required by the financier

  • Development precis – details of the site, where it is, size, current state and breakdown of what you intend to build or refurbish.

  • Development financial appraisal – outlining the expectations of gross sales, selling costs, site costs, stamp duty and legal fees, other professional fees, building costs, Section 106 (see box, right) and estimated profit.

  • Development cash flow – giving the time (if required), likely construction period and sales period.

  • Unit sale price estimates – comparable estimates from local agents to support end sales values and rental figures (if you cannot sell, you can refinance to a buy-to-let).

  • Site plan – the Ordnance Survey map.

  • Planning consent – copies of outlying or detailed consent and notice of any Section 106 agreements.

  • Construction tender – copies of tenders or quotes from contractors.

  • Developer CV/experience – for the individual, partnership or the limited company and indications of all third parties who will form the development team.

  • Development plans – floor plans for the development.

  • Development valuation report – if you already have one.

  • Development team – who will be involved in the development (lawyers, quantity surveyor, valuer, contractor).

  • Asset and liability statement – for each individual, member of partnership or directors of the company (essential for loans over 75 per cent).

Source: Longcross Capital