Sourcing of development sites
The Developer has to find a site suitable for development. So let’s talk about site sourcing. How do you find a development opportunity ?
The Project
You will be able to identify many opportunities for redevelopment, but we should not be too excited about a site until we have assessed the viability of a project. It has to ‘stack up’. That comes about only if the value of the site for redevelopment exceeds the current use value. Indeed the price should reflect the Residual land value. The residual land value is what remains following deduction of costs, construction, fees, finance and profit from the projected sales, the Gross Development Value GDV. The calculation undertaken to analyse these figures is the Development Appraisal. The Residual Land value of the site must be greater than the existing use value EUV. Few will undertake a development project with all the effort skill and risk this involves merely to improve the environment. It must be clear. Do the figures genuinely anticipate a return of 15 to 20% of GDV or more? If the answer is no, there is no point in going ahead.
Mindset
The sourcing of development projects requires instinct ,time , energy focus and strategy. The Developer will need some instinct as to what makes a potential residential development site. I suspect that it is precisely this that has inspired your interest to undertake a residential development project. If you have no instinct for it, you will no doubt have no wish to do it. It will need time allocated to the search. You cannot merely turn up at an Estate Agent and be handed a list of development projects available to purchase. Sourcing sites takes a great deal of time. Housebuilders employ full time professionals to do this who are often qualified chartered surveyors or town planners with huge experience in site sourcing. If a developer is not prepared to spend some time and energy on this activity what chance does he have in competition with these professionals?
Search area
To source projects you first need to decide where to focus your efforts. It serves no purpose spreading the net widely. It generally makes more sense to select a geographical area that you are to operate in. Clearly it is best to select somewhere that you are familiar with. The local area, where you are known will no doubt be best. Working in a local area may allow you to hear of opportunities from acquaintances and friends. Working locally will help build up knowledge of an area and perhaps you will become someone who local people contact when they are considering selling property.
A useful boundary for a geographical area is a local authority boundary. Say you decide to focus on just three London boroughs or district councils. This will enable you to understand the planning policies in certain Boroughs or district council areas and even get to understand the preferences of certain councillors on the planning committees if you take the trouble to attend them. Local developers may even be invited by the planning authority to attend planning forums that create policy. Not all planners work in ivory towers and many welcome the views of local developers. Attempting to buy sites in unknown areas where values are not understood, where you are not in touch with local demand and have no knowledge of local planning policy can be a recipe for disaster.
The developer will always keep a look out for potential development projects. Altering your route each time you drive to familiar places to get a feel of side roads. It is amazing what is revealed when driving in a quieter ‘road not taken’ regularly and Google earth is there to reveal further information.
Seeing potential in property sometimes takes experience. The dilapidated building on a good sized plot has an obvious potential. Often however, a great many letters have been posted through that door already over the years from developers who have also identified that potential.
Economic obsolescence is less obvious. It occurs when a building for reasons of its design or use, simply does not command a high value not withstanding its condition. The land value can in such cases be more than the value of the existing building and as such might subject to achieving planning permission, be a development project. Such buildings are less likely to have been identified by developers.
Contacts
Let us then talk of strategy. Professional Contacts are essential and the developer must be prepared to reach out to Estate Agents, Architects, Surveyors and Town Planners and keep in touch with them. He must be in the market to acquire projects consistently. As the ex chairman of Berkley Homes said to me ‘This business is often about being in the right place at the right time. It helps to be in all the places all of the time’.
Responding to contacts is essential. He should follow up leads and make offers where he can. He should not be afraid to say ‘ No‘ so long as he does so swiftly. If a developer is recognised as a ‘player’ he will have agents contacting him.
Networking
It is important to build up contacts and network as much as possible.
Estate agents, surveyors and architects will be the developer’s first contacts. You will find that the more you are visible in an area the more estate agents and others will come to you with development opportunities. A board on a site stating that ‘further sites are required in this area’ is the very best, and cheapest, way of getting further sites. Of course, a glamourous website is a benefit . It does not require too much detail but photographs of past and current projects will create credibility and interest. Property Network events are a good way of spreading the word. Many attendees may not be developers themselves and may wish to collaborate or recommend introductions.
Site finders
I have mixed feelings about introducing agents. If you are introduced to a highly profitable deal then why should you not pay the introducing agent? I have often found however that introducing agents have the impression that the mere advising of the availability of a project is enough to warrant a substantial fee. I do not agree. To my mind an introducing agent should be prepared to put together information about the project and to handle the acquisition negotiation on behalf of the developer . He is then worth his fee and I would never resent that. When I say a fee, I mean 2% to 2.5% of the purchase price of the site paid upon completion of the purchase. I do not mean a share of the profit of the project which is to be created by the multiple and complex activities of development team. There is so much more to a successful project than its acquisition, notwithstanding the importance of the identification and negotiation involved in the acquisition process. However, there are times when, conscious of the sensitivity of a negotiation the involvement of an intermediary introducing agent can be very beneficial.
So you have sourced an exciting opportunity. Read my next blog to see what I have to say about the acquisition of the development site.