Four reasons small-scale development is becoming increasingly popular
1. There are a large number of empty commercial properties all over the UK that are ripe for conversion into residential. There is a national shortage of homes and a massive oversupply of unused brownfield sites such as shops, offices, and light industrial units.
Many businesses are going to the wall, and many owners are feeling the strain as the cost of maintaining their buildings increases (energy, mortgage, maintenance, etc.) just as their value is going down – the pressure to sell is huge. 2023 is likely to see commercial values dip considerably, so, for the aspiring developer, it should be a great time to buy.
2. The government is desperate for empty brownfield sites to be converted into new homes, so much so that they’ve recently granted a whole raft of new permitted development rights (PDRs). These PDRs allow us to change the use of a building from commercial to residential without having to apply for full planning permission. This shortcuts the process and gives developers much more certainty since the local council has far fewer grounds on which they can object.
3. Small-scale development requires far less capital investment on the developer’s part than flips or buy-to-lets. So, if you quite like the idea of making six-figure profits in the next couple of years but aren’t currently rolling in cash, small-scale development could be your perfect strategy. You will need some funds, but it will be a fraction of a typical buy-to-let or flip deposit, so you’ll get much better financial leverage.
Commercial lenders and private investors are desperate to get decent returns, and many are very keen to fund good small-scale development projects, even for first-time developers.
4. It also involves less work than managing a flip or refurb project. That’s because you can afford to employ the services of a professional project manager to oversee things for you, something that’s usually beyond the budget of a smaller project. It’s one of the reasons that so many landlords are moving into small-scale development; it’s a lot less hands-on than managing a house refurbishment or HMO conversion.
Gaining an edge
The increasing popularity of small-scale development as a property strategy means there will be competition. How do you get an edge?
The value of a commercial building is not fixed in the same way a residential building is. Most houses or flats have a known value, give or take a few percentage points. But a run-down shop with storage above will have one value to a retailer looking for a new home and a much higher value to a developer who can turn it into flats.
This gives developers a distinct edge since they can afford to pay more for the property. But here’s where you can take things a step further. Most developers tend to stick to vanilla when converting commercial buildings, but if you know your stuff, you can extract more value from a building than your competition can. A little knowledge goes a long way in small-scale property development.
If Developer A can get five flats out of a building while targeting a 20% profit, selling the first four flats will cover the development cost, and the fifth will represent their profit. But if Developer B knows how to get six apartments out of the same building, their profit is much greater because that profit is created by the sale of two flats. This is why it’s critical to learn how to maximise the value of a building.
Why do so few developers know how to do this? For some, laziness. They’ve been making a tidy sum doing their bog-standard new-build projects, so they don’t see the need to learn about that new-fangled PDR stuff. Then there are other developers who know about PDRs but fail to think outside the box. They’re unaware there are ways of being creative with PDRs to maximise their profits. In short, they don’t know enough about the game they’re playing.
Help is available
In the same way that you might employ an accountant to help minimise your tax bill, a planning consultant can help you maximise your planning opportunity. They know the planning rules inside out and can show you the art of the possible. However, just like accountants, all planning consultants vary in abilities. Some are more creative than others in manoeuvring about planning rules without breaching them for maximum benefit. That’s the kind of consultant you want on your side, so make sure you meet several candidates before engaging anyone.
If property development isn’t your thing
It is still possible to make a healthy profit simply from obtaining the permitted development approval and then selling the deal onto a local developer, something known as ‘planning gain’. You won’t make as much profit, but you’re not having to build anything. Instead, you use your knowledge of what’s possible planning-wise to profit from the uplift without having to lay a single brick.
Whether you’re developing yourself or simply sourcing projects, the key is for YOU to understand what’s possible in planning so that you don’t need to employ a planning consultant to look at every property. We have a number of students who do exactly that – they come on one of our training programmes to learn about these more advanced planning strategies and then decide to specialise in finding a particular type of property where they know they can add a lot of value.
That way, they only need expertise in one specific planning area rather than all of them. Then once they’ve found a property that fits the bill, they bring in a planning consultant to make sure everything stacks up.
There’s a lot of uncertainty in the housing market at the moment, and many buy-to-let investors are licking their wounds and facing an uncertain future. But there’s never been a greater demand for new homes, and small-scale projects are an obvious alternative investment strategy. The key to stealing a march on the competition is to know planning.
