How to Become a Property Developer in the UK
With yet another year of under development, the new builds coming onto the market alone are not enough to address the supply and demand imbalance. But with base rates now firmly above the 4% mark - the first time in over a decade affecting both builders and buyers of property, and the drop in house prices late in 2022, are there still opportunities for property developers in 2023?
According to the Government sources, “To meet current and future housing needs the UK must significantly increase the supply of new homes. Most experts believe that we need to build 250,000 new homes per year, whilst over the last decade we have averaged just 130,500 per year.” Yet according to the ONS only 204,530 dwellings were completed in the UK.
That seems to be the bad news over, for now at least. When it comes to property development in the UK it seems to have a superpower all of its very own and that is to defy the economic, regulatory and legislative challenges year after year.
Three consecutive months of house price growth in 2023 has given developers new found optimism. The construction sites of the UK are busy, and the telltale sign of groundworkers on site means the major house builders are confident schedules will continue - for the next 3 months at least. The build to rent (BTR) sector is just getting going with several companies like Citra Living (part of Lloyds bank) and John Lewis going all out to persuade generation rent to stay renting. Aside from new builds, the upbeat optimism also extends to bringing old properties back into the market via refurbishment and renovation. A recent survey of 1001 of private landlords by Finbri, a development finance company, found 45% were looking to invest in property in 2023.
It appears the UK market can still support more new builds, more refurbishment and more renovations - if only there were more developers and property investors willing and able to rise to the challenge.
So, if you're ready to join the 2.5 million other UK property investors and begin taking a piece of a market that has produced consistent returns for the previous 20 years - now may well be the right time.
Since demand from prospective homeowners and property investors continues to outpace supply, getting into property development has real appeal if you're looking to make a good return on your investment. And if you're willing to take the risk, property development will give you two distinct and compelling advantages:
Firstly capital appreciation: Over time, the value of your property holdings increases. You can eventually earn a sizable monetary gain by selling your properties separately or as an entire portfolio. But you also don’t necessarily have to wait very long for your capital to appreciate - especially if your property development focus is buying property with a view to making renovations or refurbishment and quickly selling for a profit. This is known as property flipping. A recent survey, by Finbri, of over 1000 property investors showed that over 50% of property flippers made between £10K - £50K profit and only 1% made a loss.
Secondly income generation: If you choose to keep your home and rent it out, you will receive a consistent income from the tenants. In fact, according to another piece of research by Finbri rents are rising everywhere in the UK with some increases at an eye watering 14.6% in the year up to September 2022 - and no, it wasn’t London but Northern Ireland.
But how do you make your first foray into property development?
Here are 5 tested methods to generate a healthy profit margin on your property development projects.
The top 5 ways to enter the property development industry and make money are as follows:
- Purchasing a home to renovate, either for sale or rental
- Purchasing property to turn from business premises to a residential dwelling
- Adding a second dwelling or commercial building to your property
- Purchase a piece of land for a new construction - ground up development.
- Purchase a plot of land, obtain a building permit, and then sell it to another developer
How to be a successful first-time property developer: Property development advice
1. Purchasing a home to renovate, either for sale or rental
First-time property investors are sometimes lured to dilapidated, outdated homes and apartments that are in desperate need of a quick fix and a cosmetic makeover.
This kind of residential property is a great place to start if you're new to property development because it makes use of your prior home-buying and renovation expertise without requiring specialised understanding of the commercial, storage, office, or student housing markets.
● On a fix and flip, aim to make a good profit margin of at least 20%.
● In the event that the profit margin is insufficient, be ready to walk away.
● Your purchase price determines your initial profit; you have control over how much you pay, and the market determines your sale price.
Advice from experts for novice developers:
Every asset has a "ceiling value" - which is the highest price it may possibly get in an open market sale. Even the priciest fixtures and finishing touches won't push it above the ceiling.
● Find the next best street or the next emerging neighbourhood instead of purchasing the proverbial worst house on the best street.
● Listen to estate agents: open-plan living areas might increase value more than an addition.
● Decide up front whether you plan to sell or rent out your investment, but explore the alternative so you have a back-up plan if plan A doesn’t work out.
A rental of your investment property
You'll likely be searching for a buy-to-let mortgage to pay for the purchase unless it requires significant structural renovations if you don't want to keep the property.
Your development decisions will be influenced by the neighbourhood you purchased in and your anticipated rental income. For example, does this house have enough bedrooms to appeal to families, young professionals, or students?
Just one tenant, a couple or renting to a family
The most common option for new investors is a single lease with a single renter, a couple, or a family.
● Your buy-to-let mortgage, as well as additional administration and maintenance expenses, are covered by your monthly rental income, leaving you with a profit.
● Low management costs, only one tenant relationship to manage, and a good chance that they'll stay for the long term.
● Your annual profitability is at danger if there are void times when the property is vacant and unoccupied and generates no money.
HMOs - homes of multiple occupants
An alternative option to renting to a single tenant, and a popular option for conversions is an HMO - renting out specific rooms in a home where everyone uses a communal kitchen, living space and bathroom facilities.
● Individually negotiated leases.
● Possibility of significantly higher monthly rental income - but at a larger cost for management and upkeep.
● Even higher profitability is possible with a large HMO that rents to five or more separate tenants (with extra management duties) but organising the required upgrades and repairs can be more difficult.
● Even if the home isn't entirely occupied, you'll still get some rental money if you have an HMO or Large HMO.
● There’s also stricter planning for HMOs so check out your local authorities requirements before starting a project!
You can also sell the property after renovation
If you want to sell the property after you've renovated it, long-term mortgage funding isn't the best option. Early repayment fees (ERFs) may wipe out a large portion of your profit if you pay off your mortgage early.
You'll be searching for short-term capital, often known as bridge financing or bridging loans, which may be paid back whenever you like - as soon as your projects are finished.
2. Buying a commercial property to convert to residential
Any structure being used or being used for commercial purposes is referred to as commercial property, including factories and office buildings.
Since they are currently (in 2023) less likely to encounter planning permission obstacles than other types of conversion, central and local government have taken a keen interest in the conversion of commercial property to residential use, especially when the property has been vacant for a while.
Because of the proportions of the buildings involved, these conversions present developers with intriguing prospects to produce a substantially greater number of residential units.
Additionally, the larger number of units gives lenders more security and a chance to use more affordable financing.
3. Adding a second dwelling or commercial building to your property
You might be able to construct an additional property on your property, such as a second home, an office, or a commercial building, if the space is available.
If your garden is larger than usual (a good rule of thumb is around three times the size of your home), subdividing shouldn't drastically lower the value of your existing property.
The following are some of this type of development's key benefits:
● The money you save on the cost of buying land—up to £100,000 or more—can be used for development.
● By not having to dig up roads for utility companies to reach water and gas pipes, you could save some money on the costs associated with providing services to the second property.
● Obtaining planning consent is necessary for viability.
● And if there are any covenants on your house, seek guidance from a qualified property lawyer.
4. Purchasing land for a new construction project
Every developer has their eyes set on the prize: a bare plot with great profit potential that may house a small apartment tower or a handful of executive residences.
For a new developer, this is an ambitious first project, and the lender is taking their application into consideration. The possible rewards are a reflection of both parties' higher risk.
By checking the boxes next to important requirements, you can prevent your project from languishing for years behind a hoarding.
Skin in the game: You can't merely see a business opportunity and expect a lender to take on all the risk; they'll also want you to put up some of your own cash.
If you own the land, it might be possible to borrow 100% of the construction expenditures.
The required loan-to-value (LTV) on the estimated gross development value (GDV) will be a crucial element.
For a first-time developer, lenders would typically contemplate a maximum LTV of 65%; occasionally, if all other factors are favourable, they may consider a higher LTV.
Land with or without a permit for development?
No matter how much advance planning you've done with the local planning authorities, a speculative land purchase without planning authorisation carries a considerable risk.
Few lenders will want to wait with you until you submit a planning application.
Even though land with already-granted outline planning permission will cost more, it will typically be worth the price premium due to the greater accessibility of development financing.
The build time will have the most impact on the price of your financing after plans are finished and planning has been authorised.
Bring on a project manager with experience if you have little to no expertise managing construction projects.
The fees will be recovered through cost savings and the control of budget overruns from the active coordination of contractors and the construction timeline.
These are complex financial arrangements, and the best way to obtain the most appropriate funding for your project is to engage a private finance specialist.
For instance, if you're purchasing property at an auction, you'll need to finish the transaction within 28 days, and you might not have enough time to secure a mortgage. In this case, you'd require an auction bridging loan.
5. Buying land in order to obtain a building permit and sell it to a developer
This is a risky method that has the potential to yield large returns. Developers are constantly looking to increase their "land bank" of sites with planning approval they can build on in the future, which is what is driving the potentially substantial capital gains.
Investing in development land: advice for aspiring property developers
What to be wary of:
● You can make enquiries about potential planning consent before purchasing land, but the owner will be alerted.
● The process of acquiring planning clearance after purchasing a piece of land might take many months or even years, during which time you will be responsible for paying the financing for your acquisition (or the opportunity cost of that capital).
● municipal politics, regional and municipal plans, and established development priorities all have a significant impact on local governments' readiness to issue planning clearance.
● A critical component of success is knowing the area well enough to recognise an opportunity and convince a landowner to sell.
● You’ll need comprehensive knowledge of the planning process - if you don’t then upskill and this needs to be a priority.
● Have the capacity to wait to take advantage of your (substantial) prospective profit for the long term, rather than right now.
Find the appropriate financing source for your project to develop property.
Your property finance's speed, cost, and flexibility will be crucial to your success.
The finance cost is more expensive for first-time developers, reflecting lenders’ understandable caution when you don’t have an established track record.
This first project aims to keep costs under control and make a reasonable profit which will buy you cheaper finance for your subsequent development.
Your application will be carefully crafted by a professional finance broker, who will also locate the greatest financing option on the market.
Critical components to your success - here are the three key phases.
In order to become a successful developer, you need to get to grips with three key phases:
- Sourcing, feasibility and planning.
- Financing and exit strategy.
- Construction, scheduling and project management.
Sourcing, feasibility and planning.
When sourcing a property, you'll need to identify the right deal and consider its potential. You must also conduct detailed market research into local housing prices, rental values, and the eligibility of your chosen area for any funds that are available.
Feasibility is the next stage – evaluating how viable your project is in terms of construction costs and rental potential.
Finally, you'll need to plan your development project. This includes the type of renovation works, how much money is needed and when it will be available.
Financing and exit strategy:
High street banks frequently aren't set up to fund this kind of project because their lending standards won't be as flexible as those of private and specialised lenders, and you'll likely be charged much higher interest rates.
A good finance broker will be able to look at all of your possibilities, even private banks that are closed to direct borrower approaches, and find you the best loan options for your needs.
You may require a mixture of financial sources for your renovation project depending on the complexity of works required and the amount of deposit you have.
This could range from a buy-to-let mortgage, bridging finance, development finance or second charges to raise capital.
You'll also need an exit strategy; the process for recovering your investment and generating profit. This will be based on either selling the property or continuing to rent it out – with various options for each scenario available.
Construction, scheduling and project management.
Finally, you'll need to manage the construction process and ensure it's completed on schedule. This may involve hiring a contractor or managing the works yourself depending on the scale of the project and your trade expertise – with any option it requires careful planning and project management in order to keep costs down.
By taking these steps into account when setting up your investment property portfolio, you can create an effective strategy for your first successful property development. Without any one of these three steps perfected you run the very real risk of your development being loss making - a high risk strategy that is likely to fail.