What Is Property Development?
Buildings and properties are central to pretty much every aspect of our lives, but have you ever wondered how they got there? Whether they are residential, commercial or industrial, properties play a significant role in how we live our lives.
And these properties don’t just arrive by accident, they have to be carefully planned, managed, built and marketed. And that is done via a process called property development.
What is property development?
In simple terms, property development is the process of creating properties and turning them into usable or sellable buildings. In most cases a property developer is looking to add value to a property in order to make a profit, but there are different forms of property development which bring different rewards and realise different ambitions.
You could buy a plot of land and build a ground-up development from scratch. This could be a housing estate, a retail park, a complex of city centre flats or a mixed-use development.
You could renovate or refurbish a property and either sell it at a profit or rent it out for a more regular income. This is a popular ‘ground level’ entry into property development where someone with relatively little experience can start a part-time business and build it into a full-time business.
You could convert a property from one use to another, such as changing the nature of a retail unit, or converting a residential property into a hotel, or turning a closed down pub or restaurant into another form of commercial unit.
Property developers are often individuals, and often entrepreneurs, but this can develop into a business model where you take on partners. Property development is a very scalable business model, where you can take on projects big or small according to your experience, knowledge, resources and ambitions.
These can earn you a tidy £20,000 profit for six months of work or they can be multi-million pound developments that take a number of years to complete. How you manage and accomplish these projects is the art of property development.
What do property developers do?
The key objective of a property developer is to add value to the property they are taking on, within budget and on schedule. The overall aim is to make a profit, although in some cases there are incentives such as adding social value to an area, and regenerating communities with new housing, shops, jobs and healthcare facilities.
In general terms, however, a property developer is looking to buy land or property cheaply and build or develop it to sell at a profit. This sounds relatively simple but it can be extremely complex. There are certainly higher and much quicker returns to be had from property development compared to simply investing in a property and waiting for a potential capital growth. But there are also many ways in which you can wipe out any profit accumulated, because the market has changed, you have run out of finance or you make some critical errors of judgement.
Essentially, a property developer is adding value to a property by either building on land, improving a property so it is more marketable or changing the use of a property to something more marketable. This requires a lot of different skills and this is what we need to look at now.
What are the different aspects of property development?
Perhaps the most important factor that a budding property developer needs to understand is that you can’t do it all yourself. It may take a few years, but you will need to build up a big network of trusted contacts who can help and advise in the various areas of property development that you will need to get involved in.
It is very easy for an inexperienced property developer to spread themselves too thin and become swamped by the emerging size of a development. In this scenario critical things can get missed and problems can snowball into bigger problems. So as a starting point you will need to partner with:
Understanding the key elements of property development is crucial in working out what skills and experience you need to cover. These elements usually include three areas.
If you are buying land to build on, you need to have all the legal and planning aspects covered and you need to understand the market and the location for what you plan to build. You need to have a good collection of trusted and reliable tradesmen and building contractors, and you need to know whether you are ultimately going to be renting the properties or selling them.
This will dictate how and where you build. If you are simply buying a property to refurbish or convert it, you still need to know the market and you need to work out how much you can afford to spend to make the project viable. This requires some knowledge of the trades involved, what improvements will add the right kind of value to a property – ie. new kitchen, new bathroom, an extension, a conservatory, decking in the garden etc - and whether the property will ultimately sell or attract tenants.
Sometimes, before you even improve a property, you might need to pay for essential repairs, such as re-wiring or a new boiler or for external repairs such as fascias and soffits or a new driveway. This is common for properties bought cheaply and needs to be factored into your costs.
Choosing the right funding vehicle is crucial, and can make or break a property development project. As well as traditional forms of raising capital through mortgages, you have the option of bridging or mezzanine finance, which is a form of short term finance offered to you to maintain cash flow, on the basis that you will quickly be able to repay it when the property is developed and sold.
It is common to have capital tied up in property and to therefore require short term cash flow in order to progress a project. This can be restrictive and can become quite complex, and so professional advice is always recommended. Often, rental income is crucial in creating cash flow, but if you are looking to sell the property, short term finance can be a vital lifeline to get the project over the line. Essentially, financing a property development is a balancing act where you sometimes need to hold your nerve and often need to make big decisions.
Generally speaking, the project management of a development project is the day-to-day controlling of the first two elements; construction and finance. But this management is a key element in itself. You need to have the knowledge to select the right land or location in the first place and calculate potential rental yield, or research areas where property prices are growing. But managing a development project once it has started is a different beast altogether. You need to keep an eye on several different factors, such as budgets and deadlines. You need to manage your own stress as well as other people, and this involves some key decision-making. You also need to keep one eye on the next stage at all times, for example finding potential tenants, buyers or occupiers for what you are developing.
What does a property developer need to know?
In addition to the three key elements outlined above, there are a number of aspects to property development that can only really be established through experience. The only certainty in property development, perhaps, is that you will make mistakes, but the key is how you react to and learn from them.
Every property development project will include an element of risk, but there is a difference between taking an outrageous gamble where you stand to lose everything, or taking a considered risk where you have mitigated your losses. This second scenario is what you need to aim for and this usually takes the form of weighing up the pros and cons of a project and applying market knowledge and financial prudence.
It is always better to protect yourself against financial losses, so effectively, just as you would when putting a bet on a sporting event, you should only commit what you can afford to lose. Overcommitting yourself can wipe out significant capital savings, put a project at risk and can even put your whole property development career at risk. So always take advice, but at the same time, don’t be afraid to take a calculated risk if there are positive and reliable indicators in favour of it.
You might think that the markets for residential and commercial property development are very different, and they are, but this doesn’t mean they can’t be linked, and with market knowledge, this can sometimes be the key to success.
For example, having ground floor businesses with residential flats above can be very attractive in marketing a property and a location. Mixed-use developments are very popular in creating new communities or reviving neglected areas, this can also help in satisfying planning requirements for a development.
Also, applying some lateral thinking and diversifying a development for both commercial and residential use can also lessen the risk, as you are attracting different markets and not putting all your eggs in one basket. In this sense, each market is mutually beneficial to the other, and ultimately this benefits the property developer.
At an early stage of each property development project you need to establish what your ambition is, ie. are you buying to sell or buying to let? This strategy can change by development. Most people choose one path or the other, but building a property portfolio with different income streams is a good example of diversification and protecting yourself against possible losses in a certain market. As well as ambition, you also need to establish an exit strategy with every development, ie. how and when do I cut my losses if things go wrong? Although of course, in an ideal world your exit strategy is simply selling the property.
Who can become a property developer?
Basically, anyone can, particularly if you are looking at residential refurbishment and development. The property market is accessible to anyone, and even if you buy your first house and spend £10,000 of your savings on doing it up, and then sell it five years later hopefully for a profit, you are effectively a property developer.
This is a common, entry-level method of getting into property development. Other routes include buying a house nearby to rent out to students, which may eventually include your son or daughter. It is entirely up to you how much you spend on the property and how long you keep it before selling up. It may even become an inheritance. Other people start developing property as a part-time business and build it into a full-time business. Even if you buy a small, singular plot of land and build your own house to live in, you are a property developer, and all of what you have read here will apply.
People have very different ambitions for entering property development, they may want to rise up the property ladder quickly, they may simply want to add value to a property ready for when they sell it, or they may wish to add value as a nest egg for retirement, at which point they will downsize in property and reap the rewards. And commercial and mixed-use development has a whole different set of ambitions altogether.
Whatever your ambition for property development and however you have approached it, the key is making a project scalable, ie. can you move onto another property if you want to? A lot of elements go into this, but with experience you can manage two or three property developments at the same time, as long as you learn to manage risk and always have one eye on your exit strategy.