This report provides Information and analysis for the letting and Investment market sectors of commercial property in relevance to the wider economy, and details of the processes involved when undertaking property development. The emphasis is on the practical application of property development, with all of the stages involved in the process, thereby providing a complete overview. The definition adopted in this text is that property development is ‘a process that involves changing or intensifying the use of land to produce buildings’.
The placement process Involves building activity for commercial use. Property development Is an exciting and occasionally frustrating, Increasingly complex actively Involving the use of scarce resources. It is a high-risk activity that often involves large sums of money tied up in the production process, providing a product that is relatively indivisible and illiquid. Furthermore, the performance of the economy at national and at local levels directly influences the process.
As the development process is frequently lengthy the assumptions made at the outset may have changed dramatically by completion. Property development Is complex, often taking place over a considerable time frame. The end product is unique, either in terms of its physical characteristics and/or Its location. Furthermore, no other process operates under such constant public attention. The core sectors of commercial property: retail shops, offices and industrial- account for about 80% of the market.
Around half of this is investment property that is, rented to tenants by landlords. The rest is mostly owned by occupiers, mainly private companies, the public sector and non-profit organizations. A wide range of organizations and Individuals Invest In commercial property. Pension funds, Insurance companies, property companies and property unit trusts account for most of the market. Fewer Individuals Invest directly In commercial real estate. Combination of factors: it has performed well, while equities have been more volatile.
When buying a property, many of the same rules apply whether it is to live in, let out or renovate and sell on. Property investors must choose their purchases carefully to ensure the best possible rental income. Time is money, and if buying a property to let, it should be ready for the tenants to eve in as quickly as possible for the investment to start paying off. It is best to choose a property that does not require extensive building work or renovation, unless the asking price makes it an attractive proposition.
Property development is different in that the fundamental principal is to buy low and sell high. It is more likely, therefore, that an investment property of this type will require more time and money spent on it. Nevertheless, buying well will limit the risks and the property chosen must have the potential value. In very simple terms, the returns from commercial property are driven by the level of mental income that a property will return, and the price (I. E. The capital price) investors are willing to pay for that rental income.
The development process may be divided into the following main stages: 1. Initiation 2. Evaluation 3. Acquisition 4. Design and costing 5. Permissions 6. Commitment 7. Implementation 8. Let/manage/dispose However, property development is not an entirely sequential activity and the stages in the process often overlap or repeat. The sequence is typical of a speculative development where an occupier is not sought until the building has been completed. For example, if the development is pre-sold to an occupier, then stage 8 precedes stages 2-7.
Initiation for a different or more intensive use, or if demand for a particular use leads to a search for a suitable site. Note many of the same principles also apply to residential developments including low or medium high-density housing in the form of a high- rise building. Often office and industrial uses are combined: buildings suitable for such uses are often defined as business space. The initiative may come from any of the actors or stakeholders in the development process seeking an appropriate site in anticipation of the demand or need for any of the above uses.
Alternatively, the initiative may stem from stakeholders anticipating a potentially higher value use for an existing site due to changing demographic, economic, social, physical or other circumstances. In this case, in order to identify the most appropriate use, the initiator will seek to research the market and the potential to obtain the necessary statutory planning consent for the change of use. The initiator may not necessarily be involved in the rest of the development process, depending on their motive or objective.
Evaluation One of the most important stages of the development process is evaluation as it influences the decision making of the developer throughout. Evaluation includes market research, both in general and specific terms, and the financial appraisal of the proposal (Reed, 2007). Historically, much less attention was given to detailed market research; however, with the application of the internet this has improved. The process of financial evaluation needs to ensure that the cost of the development is reasonable and viable.
For private sector developments, the evaluation establishes he potential for profit in relation to the risks incurred. An additional objective of the financial appraisal is to establish the value of the site. This stage of the process should be undertaken prior to any commitment and while the developer retains flexibility. Though the evaluation involves the combined advice of the developer’s professional team, the decision to proceed and bear the risk rests ultimately with the developer. It is a continuous process with constant monitoring, relating directly to all the other stages.
Acquisition Once the decision to proceed is taken, there are many other decisions to be made ND steps to be taken before the site can be acquired and the development started. These should include the following listed below. Legal investigation Unless the developer is the existing site owner all legal issues concerning the site must be assessed: this includes ownership, existing planning permissions, and any rights of way, light or support. Careful preparation is required to establish who the existing owners of all the rights to the site actually are and what will be necessary to acquire them.
Any error in establishing the extent of ownership and the cost or the mime in acquiring the rights to the site can seriously affect the viability of the development. The public sector may become involved in the acquisition stage, to legal powers of compulsory purchase. However, the use of such powers can be both time-consuming and costly. The vast majority of development is undertaken through the co-operation of the original site owners, either by disposing of their interests through negotiation or by becoming partners in the development.
Ground investigation A thorough physical assessment of the capabilities of the site to accommodate the proposed use should be undertaken. Ground investigations involve the assessment of the site’s load-bearing capacity, access and drainage. All existing services (e. G. Electricity, water, gas and telephone) should be surveyed to ascertain their capacity to serve the proposed development. If the services are inadequate then the developer needs to assess the cost of their provision or expansion.
The investigation should highlight the existence of underground problems such as geological faults and made-up ground, together with the presence of any archaeological remains, contamination, underground services and storage tanks. A site survey must be undertaken to establish the measurement and configuration of the site. Finance The developer, unless using internal resources, must also obtain appropriate finance for the development project on the most favorable terms over the entire length of the scheme, before committing to a scheme. The subject of finance will be dealt with in Chapter 4.
The developer will normally be concerned with arranging two sorts of finance. Firstly, short-term finance is needed to cover costs during the development process. Secondly, long-term finance (sometimes called funding’) will be sought to over the cost of holding the completed development as an investment or, alternatively, to secure a buyer for the completed scheme. The level of detailed information that is required by the providers of the finance varies, but all will require convincing evidence of the ability of the developer, and the soundness of the preparation and appraisal of the scheme.
Design and costing Design is an almost continuous process running in parallel with the various other stages, getting progressively more detailed as the development proposal increases in certainty. The developer may have detailed knowledge of what design is required if he likely occupier is known or has been secured. In the case of a speculative scheme, the developer may need to work on a number of initial ideas with the agents and the professional team before establishing a design brief for the project. The brief is particularly important for complex schemes as it sets the design parameters for the architect.
Initially, design work will be kept to the minimum to keep costs down prior to developer commitment to the scheme. However, there should be enough detail to enable the quantity surveyor to prepare an initial cost estimate; this in turn is what he developer needs to prepare the financial evaluation. In most cases this means scaled layout plans showing the position of the proposed building(s) on the site, together with simple floor plans showing the internal arrangement of the building on outline specification of the building materials and finishes, are often desirable.
These plans along with the initial cost estimate should enable the developer to prepare the initial evaluation. By the time a decision has been made to submit a detailed planning application for the proposed scheme, the initial plans will be in much greater detail. There will be a full set of plans showing the layout, elevations and section of the building, together with a detailed specification. The developer requires increasing certainty over the cost estimates to improve the quality of the financial appraisal.
The quantity surveyor should be able to make a detailed estimate of the building cost at this stage to enable negotiations to commence with building contractors. Care in this preliminary work can save precious time and avoid unnecessary expenses at later stages of the development process. The design and costing stages include all members of the professional team and continues wrought the construction of the scheme. The developer has to ensure that at each appropriate stage the design and cost estimates are complete to avoid delays to the process.
In most cases the final product is very different to the initial design concept, and undergoes many design changes before the final drawings are completed. The developer has to ensure, where possible, significant, and potentially costly, design changes are minimized when the commitment stage is reached. Permissions Any development (with a few minor exceptions), which by statutory definition involves change of use or a building operation, requires planning permission from the local planning authority prior to its commencement.
In many instances the developer may, where a building operation is involved, apply for an outline application before full approval is obtained. An outline planning consent establishes the approved use of the site and the permitted size or density of the proposed scheme. The developer only needs to provide sufficient information to describe adequately the type, size and form of the scheme. However, an outline planning consent, on its own, does not allow he developer to proceed with the development scheme; a further detailed planning consent is still required.
A detailed application typically involves the submission to the planning authority of detailed drawings and information on sitting, means of access, design, external appearance and landscaping. It is not possible to apply for outline consent for a change of use. There may be a number of outline applications made on a particular site if circumstances change before a developer acquires the site. If the scheme changes, after detailed consent has been obtained, then further approval is required from the local planning authority.
The developer needs to make realistic initial estimates of the likely time and cost of obtaining the appropriate permission during the evaluation stage. The acquisition of planning permission can become complex, requiring detailed knowledge of the appropriate legislation and policies, as well as local knowledge of how a particular planning authority operates. The employment of ‘in-house’ planners by a developer or the use of planning consultants may be necessary and cost-effective where planning problems are envisaged or encountered.
Where permission is refused by the local planning authority the developer may appeal to the Secretary of State. In addition the where a ‘planning agreement’ is negotiated as part of the planning approval. These agreements, which used to be referred to as ‘planning gains’, deal with matters that cannot be covered as conditions to the planning approval: the provision and maintenance of a public facilities as part of a scheme. For example, there may be improvements to adjacent roads to the site to provide safe access to the site after completion of the development.
Planning agreements must be signed before approval is granted and often impose additional development costs, therefore affecting the overall evaluation of the scheme. In some circumstances there are a variety of other legal consents that may be required prior to commencement of a development. These include listed building consent (the right to alter or demolish a ‘protected’ or landmark building); the diversion or closure of a right of way; agreements to secure the provision of the necessary services and infrastructure; and, in all cases where building operations are involved, building regulation approval.
The prudent developer must clear all legal permission hurdles before making a ointment to the development. Commitment A developer must be satisfied that all the necessary preliminary work has been undertaken before any substantial commitment is made in relation to the development. Ideally all the appropriate inputs of land, finance, labor and materials, and the acquisition of statutory permissions must be satisfactorily negotiated before any agreements are signed making the developer liable for any major outlay of money.
When the preliminary work has been completed as far as possible, the project must be evaluated once again. This is because it may be that the preparation f the scheme has taken some time and the economic circumstances that determine the success of the development have changed. It is vital, therefore, that the developer pauses for thought until absolutely satisfied that the evaluation is based on the best possible information and the scheme is still viable. Until the land is acquired, the developer must keep costs to a minimum. The likely costs up to this stage are professional fees and staff time.
Depending on individual circumstances some of the professional team may be willing to work on a speculative basis or at reduced fee in order to secure full appointment once the scheme commences. In some cases the developer may be acquiring the land without the benefit of planning permission and, therefore, the contract may be made subject to obtaining the necessary planning approval. In addition, conditional contracts to acquire a site are often entered into when either the developer has had insufficient time to carry out all the important preliminary investigations, or alternatively the developer is yet to secure the necessary finance.
At some point in time all of the contracts to acquire the land, secure the finance and appoint the building contractor together with the professional team will be signed. These contracts may not necessarily be signed together; the developer must aim to achieve this as profits will be maximized. In the case of a non- profit development, ensuring that the commitment is held back until all the resources are in place will minimize cost and risk. The implementation stage can commence once all the raw materials of the development process are in place.
At this point there is a commitment to a particular site and to particular buildings at a particular cost spread over a particular time. However, the flexibility, which was previously possible in the earlier phases, has gone. What needs to be emphasized is the importance of careful evaluation and of maintaining flexibility as long as possible. Throughout this stage the underlying goal, and this aspect is often challenging, is to make certain the development is completed within both the time and budget stated in the evaluation, without comprising quality.
Depending on the experience of the developer and the complexity of the scheme, this may best be achieved by employing a project manager to coordinate the design and building process. The project manager and/or developer must anticipate problems and make prompt informed decisions to minimize delays and extra costs. Furthermore, the developer must take as much interest in the running of the project as in its promotion and the market must be monitored continuously to ensure that the product is right, which may result in amendments to the specification.
Where a nonprofit development is concerned, the developer must aim to contain costs, while maximizing the benefits of occupation. Let/manage/dispose Although this phase of development occurs often at the latter stages, it must be at he forefront of the developer’s thoughts from the initiation of the scheme. In some cases the occupier may have been secured at the start or during the development process. The development’s success will depend on the ability to secure a willing occupier at the estimated rent or price, as well as within the period originally forecast in the evaluation.
The disposal may take the form of a letting or it may be the outright sale of the freehold interest. In the case of a major retail development there are many lettings, while in that of a single office building the property may be disposed of in one major letting. It is at the evaluation stage that the letting and/or sales strategy should be thought out, and then subsequently updated, where possible and appropriate, during the course of the development. As such any agent or a member of staff employed by the developer to secure lettings/sales should be included in the development from the beginning of the process.
In addition a decision must be made at what point it would be sensible to let or sell the scheme. In many cases it is necessary to complete or virtually complete the development before seeking an occupier. This decision may not be the developer’s alone and may be heavily influenced by other actors in the process such as the financiers or the landowner (if they have remained a partner in the development). At the start of the process the developer has to decide whether the property investment created is to be held as such or sold to realism any profit, unless it has been pre-sold to the long-term financier of the scheme.
Such a decision is dependent on the motivation of the developer as well as the prevailing property investment market conditions at the time. However, developers have to be flexible to accommodate any changes in the investment market prior to completion of the scheme. This means that careful thought needs to be given to the investment value at the initial evaluation and design the developer needs to fully research their requirements. The location, specification and financial strength of the tenant(s) will be critical in achieving the best price for the investment.
The developer may employ an agent to secure a sale of the property to an investor. The agent should be employed as early as possible to advise on the optimal specification and design of the property development scheme. In accordance with best practice, the development process and the developer’s responsibility would not cease with the occupation of the building. There is still a need for the developer to maintain contact with the occupier, even though no direct landlord/ tenant relationship may exist.
This is because developers can learn more about occupiers’ requirements in general and, in particular, the shortcomings of the completed building from a management point of view. Therefore, management needs to be considered as part of the design process at an early stage if the final product is to benefit the occupier and earn the developer a good reputation. The financial success of the development cannot be assessed until the building is omelet, let and, where appropriate, sold. Often it may not be until the first rent review under the terms of the letting (typically 5 years after occupation) that the overall picture will become clear.
Main actors Within each stage, and across some or all of them, there are a variety of important actors who each contributes to the outcome of the property development process and who may have very different perspectives and expectations. Landowners Developers Developers operate primarily as either traders or investors. Most small companies have to trade, that is to sell the properties they develop, as they do not have the UAPITA resources to be able to retain their completed schemes.
Many larger public quoted development companies (often referred to as merchant developers) have preferred to trade developments to capitalize on rising rents and values. However, such a strategy can have flaws – for example, in the sass many borrowed money on the strength of their future profits and most went into receivership during the financial crash of the early sass, the reason being that their limited assets were insufficient to support them. Although some survived, they were effectively controlled by their bankers.
Many trader-developers seek to evolve into investor-developers as success enables them to retain profits for investment purposes. At the other end of the scale, some of the largest companies – in terms of capital assets – engage in hardly any new development at all, being content to manage their property portfolio and undertake predominantly refurbishment and redevelopment work. Residential developers operate almost solely as traders as the market is heavily biased towards owner occupation, although many often become significant landowners during the development process.
Property companies formulate their policy according to the conditions. Public sector and government agencies As a result of central government policy the UK public sector currently undertakes relatively little direct development. Local authorities are primarily involved with developments for their own occupation or community use and the provision of infrastructure. Local authorities are both constrained by their financial resources and limited by their legal powers. Furthermore, local authorities have to be publicly accountable and are obliged to have regard to the overall needs of the community hey serve.
Local authority involvement in the development process will depend on whether they wish to encourage development or control development in order to maintain standards. Many local authorities undertake economic development activities, with the limited resources they have to promote development and investment in their area. Many active authorities act as a catalyst to the development process by supplying land, and where possible buildings, to achieve economic development of their area. Participation may be limited to the role of landowner in maintaining a long-term interest in a development.
Local authorities will often retain the freehold of their development sites and grant a long leasehold interest to the developer, then share in rental growth through the ground rent. Previously I-J government policy was promulgated on the basis of only intervening in the development process where private market forces failed to bring forward development, particularly in areas targeted for economic development. The government’s urban regeneration initiatives are administered through several government agencies including Urban Development Corporations (Duds), English
Partnerships, the Welsh Development Agency and Scottish Enterprise. Their role is seen as an enabling role, bringing forward development and attracting investment, in partnership with the private sector. They are able to assist developers with land assembly, site reclamation, the provision of infrastructure, financial grants and, more recently, rental guarantees, following the relaxation of Treasury rules. Other government initiatives aimed at attracting occupiers with financial incentives to specific areas of the country include Enterprise Zones and Regional Selective Assistance.
Planners The I-J planning system has existed in a comprehensive form since 1947 and is firmly established as the major regulator of property development. Planners can be divided into two broad categories: politicians and professionals. The politicians, usually on the advice of their professional employees, are responsible for approving the development plans drawn up by professionals in accordance with government policy. They are also responsible for determining whether applications for permission for development proposals should be approved or refused.
The professionals are responsible for advising the politicians and administering the yester. The main purpose of planning is to ‘encourage development’ and to prevent ‘undesirable development’. The basis for determining planning applications is laid government must adhere to these and determine its own local policy through the main medium of development plans. Individual planning applications are determined in the light of these development plans, written government policy and advice, previous decisions and the particular nature of the application.
Nevertheless often in practice there are many gaps and conflicts in the guidance, which means hat developers often employ planning consultants to assist them in negotiations with planners. Developers need to know what use, what density and what design standards are required in order to obtain permission. A successful application is usually best achieved by prior negotiation with the authorities and this may involve agreement by the developer to provide infrastructure or community facilities in the case of a large development, known as a ‘planning agreement’.
This type of agreement is endorsed by government guidance provided it reasonably relates to the development proposed. In the context of tight public spending controls, a planning agreement is seen by local authorities as a means of securing useful benefits for the community. However, the issue of planning agreements has been controversial and there is a limit as to how much a developer can afford and so a test of ‘reasonableness’ is usually applied to applications.
Planning authorities differ widely in their policies towards development. Those in areas of low economic activity typically wish to encourage development activity, putting only minimal restrictions on proposals, particularly those that will provide employment. Authorities in areas of high economic activity mainly see their role as imposing higher standards, and even slowing down development in order to achieve a better balance of uses and improved design of buildings.
In this situation there is an increased level of conflict between developers and planners, leading to increased use of the appeals system, especially in areas of high economic activity. In some instances the conflict is caused by the politicians ignoring the advice of the professionals. Financial institutions Unless a development is being financed entirely with a developer’s own capital or hat of a partner, then financial institutions, as providers of finance, have a very important role in the development process.
Financial institution is a term usually used to describe pension funds and insurance companies. However, there are many other financial intermediaries such as clearing and merchant banks (both UK and international), as well as building societies who also provide finance for property development. There are two main types of money required for development: short- term money, also known as ‘development finance’, to cover the costs during the development process; and the long-term money, or funding, to cover the cost of eliding the completed development as an investment.
Alternatively, the developer will in the long term seek a buyer for the completed scheme to repay the short-term loan and realism any profit. Financial institutions (pension funds and insurance companies) are motivated by direct financial gain. However, unlike developers, they take a long-term view, needing to achieve capital growth to meet their payment obligations in real terms to pensioners and policyholders. Note that pension, life and investment funds are usually Judged on their short-term performance, both in
