By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Is property investment still a good long-term strategy, or has the taxation and regulatory reforms over the past five years made the prospect of property investment unviable for the investor looking to generate long-term capital growth and income?
Well, there are opportunities, but they don’t lie in acquiring buy-to-let properties. The government has created a raft of permitted development rights that allow non-residential buildings to be converted into residential homes without the need for planning permission. Buy-to-let is dead, long live buy-to-convert.
But the major homebuilders have this market sewn up? As it turns out, they haven’t. The significant majority of brownfield opportunities sit way below the scale necessary to interest the big boys. The government has recognised this and is instead targeting small-scale developers, many of whom will be undertaking development projects for the first time.
This repository of buildings that are ripe for residential conversion has been increasing of late – look at the number of redundant stores in the wake of the recent collapse of Arcadia, Debenhams, et al. As our shopping habits have changed, so many High Streets have become ghettos. As these primary brands depart our town centres, the secondary retail around them is also affected. There is likely more to follow; when the furlough scheme ends, we will see a significant number of businesses collapse, and their properties, whether retail, commercial or industrial, will become vacant. One struggles to envisage buyers queuing to snap them up.
Where does this leave the humble landlord? With more experience than you might think. Some landlords undertake a renovation or a conversion of their buy-to-let properties before they rent them out, and many small-scale development projects are not much more complex than that. It is a highly leveraged business. The small-scale property developer has an army of professionals on their team, including a project manager, all of whom have a significant amount of experience in development. The developer’s key actions are identifying the opportunity, appointing the team, and ensuring the finance is obtained.
Ah yes, the finance. Don’t property developers need to have a small fortune in the bank to develop their projects? The answer in most cases is ‘no’. Whereas landlords typically fund their buy-to-let deposits personally, developers often secure a significant part of their deposits from private investors. The remainder of the asset capital and the development funding is obtained from a single commercial lender.
What are the skills that this new small-scale developer might need? Interestingly, very similar skills to those of a landlord, senior manager, or business owner. There has to be an overarching understanding of what’s involved in development, but most of the heavy lifting and technical issues are delegated to the professional team.
So, what are the advantages of development over buy-to-let investments? Well, one major difference is the speed with which capital is created. You can expect a small-scale development project that would typically return a six-figure profit to be completed within 12 to 24 months. For a buy to let investment, the pay-back period is usually a lot longer.
Imagine you have £50k to invest in property. The Many Worlds Interpretation of Quantum Mechanics would have a mind-boggling number of versions of you doing that same mind-boggling number of different things with your cash. But let’s stick to just two worlds. In one world, you use your £50k as a deposit on a £200k three-bed semi, which you then rent out to a nice family. You clear around £300 per month in profit, but it will be several years before your equity growth enables you to remortgage and raise a deposit for buy-to-let number two.
Meanwhile, on another world, you use your £50k as the deposit on a small development project, a retail building that can be converted into flats using permitted development rights. You obtain the remainder of the financing you need through a commercial lender, and you expect to receive a profit of £150k within 18-24 months. You can also make up any deposit shortfall by tapping into private investment.
And while world-one-you is still waiting for equity growth (and occasionally dealing with broken boilers), world-two-you has made enough profit in 18 months to buy three of world-one-you’s buy-to-let houses AND has £50k left over to start a second development project.
Project things forward and, given that it’s possible to run multiple development projects at once, you can see how world two’s portfolio growth could be stratospheric compared to world one’s.
Which world would you rather live in?
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.