By Guy Murray, Head of Development Finance, West One Loans
It is unfortunate that the plethora of television programmes about property development appear to make it look simple and an effortless way to make significant amounts of money.
On the contrary, property development is not risk free and is steeped in regulation and technical detail. However, understanding the risks and the inevitable unknown within any property development is key to a successfully managed project.
A recurring theme for successful property developers over the long run is assembling a dedicated team who add value. It invariably takes time to put together a solid team and this usually takes at least two developments to find the right people you can rely on and trust. Key players are the architect, structural engineer, cost consultant and a main contractor.
Assessment of the costs
The cost of the build and its ultimate value are estimated by external consultants. The valuation process is not an exact science and can be subjective while the build costs are frequently higher than anticipated.
To estimate the development costs, an aggregate of known costs is used, for example, statutory scale fees for planning and building regulations. But in addition, there are costs that are difficult to estimate mainly because of quantity and complexity of the works.
This is often the case with refurbishment or conversion projects where the nature of the work is known in a broad sense; but without significant exploration of the project the estimate may be just an inspired guess.
Cost estimating is a key problem at the very early stages of the development when the commercial viability is being assessed. Quite often the borrower is convinced the development is commercially viable whereas it may be flawed because the design is insufficiently developed for the cost consultant to apply adequate pricing.
For the experienced developer, known recent and relevant costs may be applied to the proposed development while making allowances for anything perceived to be abnormal.
In the absence of recent and relevant cost experience there are generic price guides available. However, these price guides are reporting other peoples’ cost experience. The cost of building will vary between contractors and levels of complexity are not reflected in generic price guides.
Similarly, contractors are not viewed by their suppliers in exactly the same way - one may have preferential terms over others and the same may be said of trade contractors.
The acid test is, can the developer negotiate a building contract for the same amount or less than the original costs in the viability assessment? This is where experience shows.
Successful traits for a property developer
Property developers, particularly in the residential market, gather more experience with each development they work on and the successful ones have some common traits:
In short, the developer has created a capability to meet the needs of a market and very few experienced developers stray from their proven concept. Therefore, developers will “stick to what they know” and this includes their team who now have a clearer understanding of the needs of their developer client.
Plainly, long-term professional relationships are based not just on mutual technical competence, but on the continued commercial success of their joint client.
The successful developer is self-aware and continually assesses the weaknesses in his business model, thus “lessons learnt” is a key part of the assessment process and will include all third parties. A point missed by many lenders who have yet to realise their place in the developer supply chain.
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