Could this be the right time for you to get into property?
By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
High street shops have been hit especially hard by the lockdown, pushing the few remaining stalwarts to shop online. And with free next day delivery and returns from many, there are fewer and fewer reasons to visit the high street. As a result, around 11,120 chain store outlets closed from January to June 2020, a net decline of 6,000 shops. Many high streets around the country are now shadows of their former selves, with empty shopfronts and charity shops gracing what was previously prime retail space.
High streets have been culturally significant in the UK for the past 100 years or so, and most people would be sad to lose theirs. However, help could now be at hand. The government is planning a complete reimagining of the high street, transforming them into centres of independent commerce. With many larger retailers already having moved out of town and online, there is room for more specialist, independent shops and boutiques, as well as cafes and restaurants, to move back in. Why would they do this? A key driver for this transformation is a plan to increase the volume of housing in and around the high street, with the government introducing further Permitted Development Rights to allow even more non-residential buildings to be converted into new homes.
This could provide the opportunity that people who’ve been considering going into property, have been waiting for.
What will change in Permitted Development Rights?
The current planning application process is slow and out of date, often creating an antagonistic relationship between Local Planning Authorities (LPAs) and property developers. If the LPA doesn’t like a plan, they can make it difficult, if not impossible, for developers to move forward. Yet, the majority of planning decision appeals get overturned, costing the taxpayer money and delaying the delivery of new homes.
The government tried to improve the predictability of the planning approval process by introducing Permitted Development Rights. These rights 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 to make a decision. And if there is no decision within that timescale, approval is given by default. This has guaranteed developers a clear timescale and more certainty, helping make the process more predictable and manageable.
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.
What’s more, the government recently announced plans to make it possible to change any building in Class E into residential use under Permitted Development. The consultation period for these plans ends shortly, and it is expected that the new rules will take effect from later this year.
By removing a key obstacle for property developers ─ getting approval to change the use of a commercial property into a residential one ─ more homes can be built far more quickly within old commercial properties. And it’s this latest proposed Permitted Development Right that will be fundamental to the government’s high street rejuvenation plans.
So, why could this change herald the rise of the independent property developer? Often when people think of property developers, they think of large companies like Barrett and Persimmon. Yet, transforming a small retail or office unit into flats is too small for large housebuilders and even medium-sized developers to be interested in. Enter then a different breed of home builder – the small-scale developer.
Who exactly will these small-scale developers be? In many cases they will be business owners, landlords, or entrepreneurs looking to diversify, however the appeal of small-scale development has broadened significantly during 2020, with many people from all walks of life seeing it as a potential route back to financial security.
Interestingly, becoming a first-time property developer doesn’t take as much skill, experience, or upfront investment as many might expect. The property developer’s main role is to assemble a team, find a good opportunity, and oversee the project ─ in some respects not too dissimilar to a home renovation project, for example, but on a different scale. People who currently work as landlords or who own their own business already have the key skills needed, albeit they need to be trained how to oversee the property development process. It’s not without risk, it’s certainly not easy and it takes time to complete a project, so get-rich-quick merchants need not apply. But as a means of creating significant returns, it’s arguably one of the most highly-leveraged business models there is.
Interestingly, this may provide another lifeline for the UK economy. Small businesses have been hit hard by the lockdown and many business owners are looking for additional or alternative sources of income. Those who lost their jobs in related fields may also be tempted by the thought of working for themselves. Independent developers are also more likely to create interesting, varied homes that provide an attractive living environment, rather than the mass-produced homes often built by larger developers.
Small-scale independent property development
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.
Some concerns about new rule changes
Some years ago, when Permitted Development Rights were first published, there were no minimum unit size requirements placed on what was built, and this made it easier to repurpose larger commercial buildings. However, a small number of unscrupulous developers went on to create cramped, substandard accommodation, often with little or no access to natural light. As a result, the government recently introduced a requirement that all permitted development projects submitted from 6th April 2021 must now meet National Space Standards. This ensures that all units developed must meet a minimum standard in terms of their size and light access.
If the government’s aim is to rejuvenate town centres, it is essential we end up with the right mix of shops, cafes and housing, otherwise there is a risk of turning our towns into an endless residential landscape. Local councils may be tempted to issue Article 4 directions to prevent this, as these effectively suspend Permitted Development Rights and require each development to have full planning permission instead. Clearly this is potentially a sledgehammer approach; one that could take us back to square one, undermining the high street rejuvenation efforts in the process. It is therefore critical that both government and councils adopt a balanced approach that allows us to create the right blend of housing, retail and commercial space in our new-look town centres.
As the new Permitted Development Rights expected may well come in on 1st August 2021, now is a good time to be planning your move into property.
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.