By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Property development is often thought of as being a business for the wealthy or the daring. However, there has been a notable shift in this recently, driven by changes in the property investment landscape. Two key factors have played a pivotal role in this transformation.
Firstly, traditional buy-to-let property investment has lost a great deal of its appeal due to changes to taxation and regulation. This is pushing property entrepreneurs away from the rental sector and towards development; development projects as a parallel investment strategy offer the potential for significant cash returns in the relatively short term.
Secondly, the government has actively encouraged small developers to utilise permitted development rights (PDRs) to convert unused commercial properties. With an abundance of vacant commercial spaces across the UK—ranging from empty shops to redundant office spaces—there is ample opportunity to repurpose these sites. More and more people are cottoning on to the fact that development doesn’t necessarily entail constructing an entire housing estate; substantial profits can be generated by simply converting a single building.
Typically, ‘small-scale property development’ involves converting commercial buildings, such as offices, shops, or light industrial units, into residential flats. It could be as simple as converting a small office building or the upstairs storage areas in a shop. You’re likely to be building between four and 20 units, and you’ll typically be looking to target a profit of between £100,000 and £500,000 per project, with each project lasting 12-24 months or so. You could also include a new build in the definition, but this means going down the planning permission route, which is far riskier than using PDRs to convert a building.
Here are the top five questions first-time small-scale property developers need to ask before taking on this property investment strategy.
1. How much money do I need to develop property?
As an example, let’s say you buy an empty shop for £400,000 with the intention of putting four flats above it. We’ll also assume that the cost of doing this conversion (including all construction costs, finance costs and professional fees) is another £400,000. That looks like an investment of £800,000.
However, contrary to common belief, property development doesn’t necessarily require a substantial personal investment. Commercial finance providers specialise in funding developers. Those lenders will typically lend up to 70% of the purchase price of the commercial property.
In our example, you as the developer need to fund £120,000. But again that doesn’t need to be your own money; the commercial lenders are happy for you to borrow the bulk of this deposit from private investors. They will almost certainly want you to have some skin in the game, and you putting in 10% is not an unreasonable expectation. In our example that would be £12,000 (with you borrowing the balance from other investors).
The same commercial lender who advanced you 70% of the purchase price will also be happy to lend you 100% of the development cost.
So, small-scale developments can provide substantial returns with a relatively modest personal investment.
2. How do I find people to work with me on my first development?
As a first-time developer, it is important to recognise that you are the driving force behind creating wealth – you are not providing any bricklaying, plumbing, or decorating skills. For these tasks, you will be employing experienced professionals, including a project manager – they will have the necessary experience to keep the project on track. Your “CEO” role will likely be weekly phone calls with your project manager to keep yourself up to speed and to make any necessary decisions. Your focus is on the strategic aspects of development and minimising associated risks.
3. How can I find a profitable project?
The flexibility in valuing source buildings, especially in commercial conversions, offers a unique advantage. Proper training and understanding of permitted development rights empower first-time developers to uncover hidden value in buildings, gaining a competitive edge over other developers.
Let’s take a run-down commercial building. It might be worth £100,000 to someone who wants it for their business, but because you’ll be converting it to residential, you’ll be getting a huge uplift, meaning you can pay significantly more than its commercial use value. However, other developers will be looking to do the same thing, and a little expert knowledge can give you an advantage. Imagine that the other developers could get five flats into the building, but I showed you a way you could get six. With a 20% profit margin, all their profit is in their fifth flat. But your profit is in flats five AND six, allowing you to outbid the competition.
Training doesn’t just help you to avoid pitfalls, it can also allow you to see many more opportunities.
4. Why would anyone want to work with you?
Remember that your money is as good as anyone else’s. And building professionals will be paid regardless of you achieving your profit goals or not, so you being a first-time developer doesn’t make you a risk. But it does make you an opportunity; if they do a good job for you, you are likely to employ them for your next project(s). All building professionals need to move on to fresh projects to keep making money.
The same goes for lenders and commercial estate agents. They make money on the back of what you do, and they will want to work with you because that’s how they get paid.
5. How can I guarantee I won’t lose any money?
While there are no absolute guarantees in property investing, targeting a 20% profit margin, maintaining a contingency fund, and obtaining proper training significantly reduces risks. With the ability to refinance or rent out units during market downturns, small-scale developers have built-in flexibility for risk mitigation. Also, take comfort from the fact that your commercial lender will only lend you the money you need if they believe the deal makes a 20% profit; you only have a project if they have faith in you.
The critical thing to do is to do your due diligence before you commit to a project. You need to know precisely what’s involved in developing a building and where the best opportunities lie. You can use the QR code below to access a free webinar where I put more meat on the bones.
I also recommend getting yourself properly trained. There are big profits to be made in development, but you don’t want to fall into any holes – and there are plenty of them if you don’t know what to look out for. The investment in training should pay you back manyfold on just your first project, plus it means you leapfrog much of the competition who are simply ‘giving development a go’.
In conclusion, small-scale property development offers a lucrative and accessible avenue for first-time developers in the UK. Leveraging financial tools and building a competent team are key aspects of successful development projects. Before committing to a project, thorough research and proper due diligence remain essential steps in navigating this exciting and rewarding field.
