How to develop in a turbulent market
By Naman Pathak, Managing Director at Mountbatten Homes. In this article, he writes about how to stay on top of your game even when circumstances are chaotic.
Brexit. Covid. Councils going bust. What next? The past few years have been tricky as a property developer. Changes to interest treatment for landlords, the removal of lettings relief and stamp duty surcharges are just a handful of recent changes that have adversely affected the market.
But it isn’t all doom and gloom – the extension of the Help to Buy scheme, changes to planning policy and record low interest rates have ensured that the UK property market has survived through the toughest environment since the financial crisis. With the true effects of Covid on business still unknown, here are a few pointers to help you navigate a turbulent 2021 in the property market.
Raise sensible debt from sensible lenders
Delays on site and increased costs are all part and parcel of a developer’s life, only that in this market it can really harm you if you are levered too highly. Try to avoid mezzanine finance wherever possible and raise enough equity in the deal to ensure that you do not put yourself under undue pressure from nervous lenders.
Research the market and work with lenders who have a long track record of development finance. These are the lenders who have seen it all before and won’t be the first to start pulling the plug if things get tough.
Spread your risk
From the number of sites you have to the number of lenders, architects, contractors, (basically everyone) you work with, do not put all your eggs in one basket. Try to have 3 or so good firms or individuals at your disposal at any time. There will be a vaccine for Covid but not for poor financial decisions so protect yourself from the offset by spreading the responsibility.
Look at more ways to add value
At Mountbatten Homes, we add value throughout the supply chain, from planning through to construction. Even if you acquire consented sites, try and see how to optimise the scheme through intelligent space planning, reconfiguration or even adding a floor or extension. This will allow you to bolster your IRRs but also provide you with a bigger buffer if the market suddenly turns sour and values drop.
Stress test harder
This applies to your sales values as well as your construction cost estimates. Stress test up to 7% (even higher in high end residential) and increase your build by up to 10% - if you’re still making a good ROC then go for it!
Be lean
As most businesses have done during this period, property developers also need to be lean during this time of uncertainty. High overheads put unwarranted pressure on developers to push their margins higher, resulting in corner-cutting in the construction to save cost and overvaluing stock. The result is a badly built property which probably has an even worse GDV than was originally envisaged.
Research the area for today’s market, not yesterday’s
Usually developers try to cram in as many units as possible within a certain footprint to maximise their sale price. Research the area thoroughly and notice the current trend – is it for larger family units or smaller studios? Covid has really shifted the pendulum from small city apartments to larger family homes with outdoor space and even an office. These units are attracting a premium in some areas so one would be better off with a large 3-bedroom unit as opposed to 2 one-bedroom units.
Be Patient
The recent resurgence in the market has got some developers rather too excited. Buying at 15% ROC with the hope of GDVs going up is quite frankly not the way to go. The temptation is always there when you see a deal and have spare capital but be patient, be sensible and moreover be selective with what you are buying.
6 luxury family homes in Coulsdon completing Q4 2021
If the market dips again next year, it may be a buyer’s market where cash will be Kong (King Kong? Bad joke). Property developers live a charmed life where you need to be at the right place at the right time for a deal to work, so be patient and you will know when the right one comes your way.
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