Why consider...the Property & Construction sector?

The residential property market undoubtedly has its ups and downs, yet factors such as a rising population and social change (such as a trend towards single occupancy homes) have ensured that demand for housing remains strong. Indeed, in a great many areas demand outstrips supply, keeping prices buoyant.

This clearly creates opportunities, particularly in terms of small construction projects or the refurbishment of existing buildings for re-sale or possibly letting.

For those with the necessary skills – which could range from business planning and project management through to hands-on building experience – Property & Construction (P&C) ventures allow you to take advantage of local knowledge. For example, if you live in an area where demand exists for starter homes, flats or student accommodation, you can apply this intelligence to your business plan.

However, working in the P&C sector does require a significant outlay. For example, if you buy a house at auction with the intention to refurbish and re-sell at a profit, you clearly need to have the finance in place both to buy the property itself and to cover all the associated costs of purchase and refurbishment. That said, the property itself represents a significant asset and, when the market is stable, raising your investment in the project will be more or less protected by the value locked up in bricks and mortar.

In brief

• The pros and cons
• Business models
• Money matters
• Common pitfalls
• The moneysense top five: managing your money
• How I did it: Property and Construction
• Useful contacts

As with any venture, the positives and negatives will depend on personal as well as business matters. Here are a few points to consider if you’re thinking of launching in the P&C sector:

Pros

• Using existing skills. For instance, if you have building or refurbishment skills these can be put to good use in a development project.
• Taking advantage of local market knowledge. For instance, you can use any knowledge you have about demand for certain types of property as the basis for your business plan.
• Demand for property – particularly residential property – remains strong, which means house prices should rise over the long term.
• Investing in assets, such as property or land, which can be re-sold if problems arise with the project.
• Developing property enables you to secure profits even if house prices are static.

Cons

• The market for residential property may fall. In this sector, the price-raising effect of demand outstripping supply may be offset by wider economic problems.
• Requires significant outlay and any significant downturn in the market could make it difficult for you to cover your costs.

The P&C sector offers a range of business models, which include:

• Buying a residential or commercial property (or properties) for refurbishment and resale. The refurbishment adds value, allowing the developer to make a profit.
• Purchasing and refurbishing residential or commercial property with the intention of renting it out. This option offers a long-term income rather than a one-off profit. Buying-to-rent on the residential market is often a fall-back for developers unable to sell at the right price. However, the buy-to-let market remains substantial as many people buy with a view to retaining the property as an investment while renting out for income. Latest figures from the Residential Landlords Association suggest that around 3.1 million properties are owned by 1.2 million landlords.
• Buying a plot of land on which to build one or more properties. This is commonly regarded as the domain of major house builders such as Wimpey, yet this market is by no means limited to the big players. Many building and property companies start out buying small plots of land and build either one home or a small housing complex. Beneath this umbrella, the business models vary. Some firms specialise in standard two or three bedroom homes designed to appeal to a broad range of house buyers. Other firms specialise in specific types of building, such as barns or timber-framed houses. These specialist homes can fetch a premium but appeal only to a limited market.
• Buying new-build houses from a developer for re-sale. This practice was widespread prior to the recession, but less so in the common market. When a major building firm completes a new-build development it may sell some of its properties at a discount to speculative developers in order to bolster the building firm’s cashflow. The speculator then takes responsibility for marketing and selling the properties at a profit.

When you embark on a property development project, it’s vital to construct a business plan with a clear target for the return you expect to achieve. Bear in mind that costs will not only include both the price you paid for the property and its refurbishment (labour, materials, etc), but also the fees charged by professionals such as solicitors, surveyors and estate agents. You should also factor in finance charges, such as interest.

In the case of a riskier development, such as a new-build home, you should aim for at least 30% above costs. Again, remember to factor in all relevant outlay.

The arrangements for financing your property development will depend on the nature of the venture. If it’s a building project, you will need one loan to buy the land as well as a development loan to cover the building work. For a refurbishment project, you will need a development loan that covers all costs. You should expect to pay at least 35% of these costs yourself, as banks are unlikely at present to extend credit to cover more than 65% of the project. The percentage that the bank will cover is known as the LTV (Loan to Value) ratio.

If your plan is to refurbish and rent, the development loan will have to be converted into a longer-term investment loan. These are generally on a fixed rate while short term loans tend to be on a floating rate.

Here are some of the most common pitfalls you may encounter in the P&C sector:

• Costs Inexperienced developers often underestimate the costs associated with their project. Building projects can be notoriously complex and each new problem that arises often incurs additional expense. Even if you’ve carefully analysed the work and costs from the outset, you should still allow yourself financial headroom should complications arise.
• Changing specifications Developers who change their specifications mid-project can cause spiralling costs. This often happens because the developer gets too emotionally attached to their project and gets carried away adding luxury or premium features that weren’t in the original plan.
• Realistic evaluation of sale price or rental value It’s vital to have a thorough understanding of the local market before you buy land or property for building or redevelopment work. Put simply, if you buy or build an expensive property in the hope of selling or renting as premium priced or luxury accommodation, you must be absolutely sure the market will sustain your expected price. For example, developing luxury flats in an area where the main demand is for student accommodation or social housing could leave you with an unprofitable white elephant. Local estate agents will advise on sale and rental values. You can also obtain information on rental values from so-called ‘BMRAs’ (Broad Rental Market Areas). According to the Residential Landlords Association, these figures are used for Local Housing Allowance (‘Housing Benefit’) and can be used as a basis for research. However, do bear in mind that BMRAs sometimes bear little resemblance to real values. Comparative figures can be obtained from local authorities.

1. Try to agree fixed-price contracts with your key contractors.

2. Get a range of quotes – find out who offers the best deal in terms of quality and price.

3. Carefully assess your costs and give yourself some headroom in case of emergency. It also helps to take a pessimistic view of the selling price or rental value and build these estimates into your business plan.

4. Don’t overstretch yourself. Before you begin the project make sure you have the funds available to bring it to completion.

5. Plan for a margin – at least 20% – that will compensate you for the hard work and risk involved.

Construction: 'Taking advantage of the downturn'
Kerrie Hanafin started her first business at the age of 28. After working in the male-dominated arena of investment banking, she decided to go for something completely different by creating A Woman’s Touch, a Wimbledon-based construction company that specialises in building, refurbishment and maintenance work throughout the country.

Kerrie is one of the many entrepreneurs who have actually benefited from the economic slowdown. "I saw that with the economy starting to go downhill and many of our competitors going out of business, there was a plethora of cheap properties and buildings that needed to be sold fast," she says. "Whilst everyone else seems to be talking doom and gloom, we’ve spotted a very real opportunity for those with some money to make a lot more."

Together with her friend and housemate, estate agent Rose Lock, they spotted a gap in the market. To fill that gap they set up Vision Board Properties, a company that buys properties at cheap rates and develops them on behalf of clients. "We looked at property prices around Spain and, with my contacts from investment banking, we had lots of clients who had the money to invest in the property that we found for them," says Kerrie. "A lot of the time the buildings are half built and abandoned, so we choose developments that we know our investors will make money on. The content of our book varies hugely from a derelict farmhouse at 60,000 Euros, to an equestrian centre at 8.5 million Euros and even an apartment hotel at around the 25 million Euro-mark."

Although experienced in the property market, Kerrie and Rose sought expert advice ahead of launching the venture, with Business Link being their first port of call.

Estate agency: 'How I made a profit by adding value'
Charles White, founder of Badgers Estate Agents, bought and developed his first property in London back in 2002. "I bought a one bedroom flat, converted it to two bedrooms and sold for a profit," he recalls.
Charles saw the project as the starting point for a sustainable property development business and had a strategy worked out ahead of making his first acquisition. "I targeted London and I wanted to work in areas where I could get the best value," he says. "I decided to the focus on the Vauxhall, Oval and Kennington area. It was close to the centre so I felt I could get good prices, but there were bargains to be had in terms of the property available."

Charles stresses the importance of choosing properties that will provide the best possible return. "I spend a lot of time researching the market," he says.

Badgers makes a profit from conversions and refurbishments, although Charles stresses that no one should rely on a rising market for their income. "By adding value you can make a profit in most housing markets," he says. "The exception is probably when you buy as the market is at a peak, just before a sharp reduction in prices. That can make it difficult to sell."

MoneySense for Business is about helping you understand and manage your business finances. If you're thinking of starting out on your own, or already have a small business, MoneySense for Business provides helpful guides and information on managing the financial side of your business, plus useful links and tips to give you the guidance you need.

Links: Property & Construction
Cluttons LLP
Residential Landlords Association
The Regulatory Reform (Fire Safety) Order 2005
HMO Licensing
A Woman's Touch
Vision Board Properties

Links: Business
Business Link 
Department for Business, Innovation & Skills
Office for National Statistics
SkillsActive
Property Development Guide (131KB pdf)
Also visit your local authority website.

Sources
Business link: Provides a broad range of support for start-up businesses in all sectors
Health and Safety Executive (131KB pdf): Provides a guide for property developers
Residential Landlords Association: Membership organisation offering advice and information for landlords
Government Statistics Office
Olga Dixon Brown, Property Finance Group at RBS
Data from estate agencies Savills and Cluttons

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