Opportunities are there if you want to start a property company

Business Insights

We’ve seen many changes to planning rules in England during the past year.

The Government’s plan 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. 

Increasing homes in town centres will increases demand for local shops and other amenities. With a wider, diverse range of independent retailers, restaurants etc., the high street will also become a leisure destination for visitors from further afield.

How can this be achieved and what might be the role for indie developers?

Permitted Development Rights

Permitted Development Rights (PDRs) 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, putting them into a new ‘super-category’ called Class E. This means that developers won’t need 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).

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.

The independent property development process

It is possible to get started in property development with a less upfront capital than becoming a landlord.

When applying for a mortgage, the lender will typically look at you first and then the building you intend to purchase to see if it will retain its value. If everything 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’ll look at your team: contractor, planning consultant, architect etc. to see how robust and experienced they are. Finally, they’ll review your skills and experience.

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 use private lenders. Commercial lenders usually want to see your commitment, so may require you to put in at least 10% of the 30% deposit yourself.

Setting up your business and assessing property deals has expense - a website, back-office, accounting, professional fees for architect’s reports etc. However, with less than £10,000 you could acquire a £300,000 property that could return a potential six-figure profit once developed. With experience, you can scale up, taking on several projects at once.

New rules

When Permitted Development Rights were first published, there were no minimum unit size requirements placed on what was built, making it easier to repurpose larger commercial buildings. However, a few unscrupulous developers created cramped, substandard accommodation. As a result, the government introduced a requirement that all permitted development projects submitted from 6th April 2021 must meet National Space Standards i.e., a minimum standard in terms of size and light access.

Rejuvenating town centres needs the right mix of housing, shops, cafes and other commercial space. So, government and councils need to adopt a balanced approach to get an appropriate blend of development.

The Permitted Development Rights, expected to become effective from August 202, should help independent property developers make their mark.

By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO