By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Over the past year the Government has introduced a number of changes to planning in England. This is aimed at helping achieve the target of the 300,000 new homes a year we need.
In addition, the intention is that our high streets will be transformed into centres of independent commerce, with empty stores and other properties becoming homes or new independent businesses.
The idea of creating new homes in a local environment may well appeal to you if you have an interest in starting a property business.
Let look at the planning changes and what this might mean for you.
Permitted Development Rights
Something you need to become familiar with is Permitted Development Rights (PDRs) which were introduced to try to improve the predictability of the planning approval process. These PDRs allow developers to change the use of a building without having to apply for full planning permission. Instead, they must notify the council using a process known as ‘prior notification/approval’, which gives local authorities fixed timescales to assess the application against a small number of set criteria, and make a decision. No decision within that timescale, means approval is given by default. This guarantees developers a clear timescale and greater certainty.
In September 2020, the government changed the classification of various types of non-residential buildings and lumped them into a new ‘super-category’ called Class E. This means that developers won’t need any prior approval or planning permission to change the use/class of any building in Class E to another use class within Class E (because effectively they are now all in the same use class already). An office can be converted to a shop or restaurant, and vice versa, without planning permission being required.
Also, the government recently announced plans to make it possible to change any building in Class E into residential use under Permitted Development. Following consultation, the new rules are expected to take effect later this year.
Opening up property development?
This latest proposed PDR will be fundamental to the government’s high street rejuvenation plans. And could lead to an increase in independent property developers.
The property developer’s main role is to assemble a team, find a good opportunity, and oversee the project- a different scale but not dissimilar to home renovation. Landlords and other business owners already have the necessary skills, though they’ll need training in overseeing the property development process. It’s not without risk and it’s certainly not easy. But as a means of creating significant returns, property development is arguably one of the most highly-leveraged business models.
How does small, independent property development work?
Most people are broadly familiar with the buy-to-let model and often feel that property development must be much riskier. Yet, it is possible to get started in property development with a lot less upfront capital than becoming a landlord. It all comes down to the deal you put together.
When you apply for a mortgage, the lender typically looks at you, the individual, first and then the building you intend to purchase to see if it will retain its value. If it all looks good, you get your mortgage.
With property development, specialist commercial lenders will assess the deal first and create what-if scenarios. What if the contractor goes bust? Or the market declines? They will look at your contractor, architect, planning consultant, etc. to see how robust and experienced your team is. Finally, they will look at you, to see if you have the core skills and experience to get the job done within budget. Most landlords or business-owners will already have these core skills and, if they are presented in the right light, will likely be approved.
Commercial lenders will typically lend up to 70% of property cost and 100% of development costs (assuming you have planning permission or permitted development rights), releasing the money for development in tranches over the course of the project.
To fund the additional 30% of the upfront property cost, you can then turn to private lenders. Commercial lenders will usually want to see that you have skin in the game, so may demand that you put in at least 10% of the 30% deposit yourself.
Of course, setting up your business and assessing property deals comes with some expense. You’ll need to set up a website, back-office, accounting, and so on, as well as paying professional fees for things like architect’s reports. However, with less than £10,000 you could be acquiring a £300,000 property that could return a potential six-figure profit once developed. And once you’ve got the hang of it, you can scale up, taking on multiple projects at once.
Rejuvenating town centres needs the right mix of housing, shops, cafes and other commercial space.
The Permitted Development Rights, expected to become effective from August 202, should make becoming a small property developer, and playing a role in this rejuvenation, a more attractive proposition.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is co-founder of propertyCEO, a nationwide property development and training company that helps people create a successful property development business in their spare time. It makes use of students’ existing life skills while teaching them the property, business, and mindset knowledge they need to undertake small scale developments successfully, with the emphasis on utilising existing permitted development rights to minimize risk and maximize returns.