Property Development Finding A Property For Development

Date Published:

04/06/2008

Stephen Pritchard explains how to find a property that's ripe for development and how to make sure you avoid those disasters waiting to happen...

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The number of people wanting to become property developers has grown sharply over the last few years, driven by a growing interest in home improvements and by a rising market.

This interest has pushed up the prices of houses and flats that are in need of work, but a significant number of properties still have development potential. The English Home Condition Survey found that as many as five million private homes fail to provide 'decent' accommodation.

HBOS, the bank, calculates that bringing these properties up to standard would cost £48bn. This is far more than the £17bn Britons spend annually on home improvements.

For a would-be developer, the challenge lies in distinguishing between the properties that can be improved - and return a profit - from the wrecks. A renovation project that might make sense for if you plan to live there might not stack up for a commercial developer.

Gareth Morgan, chairman of the international planning and development board of RICS, the surveyors' body, points out that the cost of property is putting pressure on developers' margins. Prices at auctions in particular have risen, driven partially by newcomers to developing and partially by owner occupiers looking for a property with long-term potential.

A successful developer needs to complete the project and sell on. This means looking at the developed property through the eyes of the buyer. Buyers look at location, the style of a property and the space it offers. A developer must also allow for the cost of the work, a profit margin, and how long the work will take. Each month of development costs money, especially if the property is mortgaged.

'For developing, all the usual location rules apply: access to good transport links, shopping and facilities all making it easier to sell,' says David Hollingworth, at mortgage brokers London & Country. 'You should also consider the use of the property post-development. A property to be developed as a 'buy to let' investment aimed at young professionals will have a very different profile to one where the aim is to refurbish and sell on quickly to a family market.'

This research is critical. Surveyors and estate agents with sound local knowledge can be invaluable sources of information. It is also worth looking at the type of site that established local developers take on.

Often, these are 'infill' plots and tired properties in established, residential areas. There are relatively few fixed rules in developing but one rule of thumb that does seem to hold true is that the more profitable developments are in the more expensive areas.

Where land is scarce and expensive, extending and improving a property will really pay dividends. But developing in an area that is on the fringes of desirability carries far greater risks. A national house builder might be able to kick start an area's regeneration. A single developer will not.

'More expensive properties have more expensive land values, relative to the costs of construction,' says Gareth Morgan at RICS. 'But the costs of construction vary as little as two per cent between Mayfair and Yorkshire. In an expensive area, if you don't convert the property's roof space, you are shooting yourself in the foot.'