Is 2021 the year for becoming a first-time property developer?

Property development

The government’s target of creating 300,00 new homes per annum has led to substantial changes to the planning rules in England over the last 10 months.

These should make property development much more appealing to anyone interested in developing a property development business.

The government is planning a reimagining of the high street, transforming them into centres of independent commerce. With many larger retailers already having moved out or gone online a key driver for this transformation is a plan to increase the volume of housing in and around the high street.

With more homes in town centres, demand for local shops and amenities will increase. With a more interesting, diverse range of independent retailers and eateries, the high street will also become a leisure destination for people coming in from out of town.

As Ritchie Clapson CEng MIStructE, co-founder of propertyCEO explains much depends on the ability to convert redundant town centre buildings into new homes. Let’s look as some of the changes in planning rules that are opening up opportunities for those an interest in property and looking for a new business opportunity.

Permitted Development Rights

Permitted Development Rights (PDRs) were introduced to try to improve the predictability of the planning approval process. These PDRs allow developers to change the use of a building without having to apply for full planning permission. Instead, they must notify the council using a process known as ‘prior notification/approval’, which gives local authorities fixed timescales to assess the application against a small number of set criteria, and make a decision. If there’s no decision within that timescale, approval is given by default. This guarantees developers a clear timescale and more certainty.

In September 2020, the government changed the classification of various types of non-residential buildings, lumping them into a new ‘super-category’ called Class E. This means that developers won’t need any prior approval or planning permission to change the use/class of any building in Class E to another use class within Class E (because effectively they are now all in the same use class already). An office can be converted to a shop/restaurant, and vice versa, without planning permission being required.

Also, the government recently announced plans to make it possible to change any building in Class E into residential use under Permitted Development. The consultation period for these plans is just ending. The new rules are expected to take effect later this year.

Opening up property development

By removing a key obstacle for property developers, more homes can be built more quickly within old commercial properties. This latest proposed PDR will be fundamental to the government’s high street rejuvenation plans.

So, this could mean rise of the independent property developer.

Becoming a first-time property developer doesn’t take as much skill, experience, or upfront investment as many might expect. The property developer’s main role is to assemble a team, find a good opportunity, and oversee the project. This is not dissimilar to a home renovation project – just on a different scale. Landlords and entrepreneurs already have the key skills needed, though they’ll need training in overseeing the property development process. It’s not without risk, it’s certainly not easy and it takes time to complete a project. But as a means of creating significant returns, it’s arguably one of the most highly-leveraged business models there is.

What is involved in starting in independent property development?

Most people are broadly familiar with the buy-to-let model and often feel that property development must be much riskier. Yet, it’s possible to get started in property development with a less upfront capital than becoming a landlord. It comes down to the deal you put together.

When you apply for a mortgage, the lender typically looks at you, the individual, first and then the building you intend to purchase to see if it will retain its value. If everything looks good, you get your mortgage.

With property development, specialist commercial lenders will assess the deal first and create what-if scenarios. What if the contractor goes bust? Or the market declines? They will look at your contractor, architect, planning consultant, etc. to see how robust and experienced your team is. Finally, they will look at your skills and experience.

Commercial lenders will typically lend up to 70% of property cost and 100% of development costs (assuming you have planning permission or permitted development rights), releasing the money for development in tranches over the course of the project.

To fund the additional 30% of the upfront property cost, you can turn to private lenders. Commercial lenders will usually want to see your commitment, so may require you to put in at least 10% of the 30% deposit yourself.

Setting up your business and assessing property deals comes with some expense. You’ll need a website, back-office, accounting, professional fees for architect’s reports etc. However, with less than £10,000 you could acquire a £300,000 property that could return a potential six-figure profit once developed. With experience, you can scale up, taking on several projects at once.

New rules

When Permitted Development Rights were first published, there were no minimum unit size requirements placed on what was built, making it easier to repurpose larger commercial buildings. However, a few unscrupulous developers created cramped, substandard accommodation. As a result, the government introduced a requirement that all permitted development projects submitted from 6th April 2021 must meet National Space Standards i.e., a minimum standard in terms of size and light access.

Rejuvenating town centres needs the right mix of shops, cafes and housing. Local councils may be tempted to issue Article 4 directions to prevent this, as these effectively suspend Permitted Development Rights and require each development to have full planning permission instead. A sledgehammer approach. To avoid this both government and councils need to adopt a balanced approach that allows us to create the right blend of housing, retail and commercial space in our new-look town centres.

The new Permitted Development Rights are expected to become effective from 1st August 2021. Together with the other changes that have been made in recent months this means that there are excellent opportunities for those considering a move into property.