Module 1: Property Development and the Process

The term ‘property development’ evokes many feelings depending on the particular perspective. The definition adopted in this module is that property development is ‘a process that involves changing or intensifying the use of land to produce buildings for occupation’. It is not the buying and selling of land for a profit; land is only one of the raw materials used. Others include the building materials, infrastructure, labour, finance and professional services.

Property development is an exciting and occasionally frustrating, increasingly complex activity involving the use of scarce resources. It is a high-risk activity that often involves large sums of money tied up in the production process, providing a product that is relatively indivisible and illiquid. Furthermore, the performance of an economy at national and at local levels both directly influence the process. As the development process is frequently lengthy the assumptions made at the outset may have changed dramatically by completion. Success very often depends upon attention to the detail of the process and the quality of the judgement that guides it. Success, however, cannot be judged purely by the size of the profit or loss in financial terms. As a result, there are winners and losers whether measured in financial, aesthetic, emotional, social or other terms. For some it can represent an unwelcome change, replacing the familiar with heavily built-up areas fulfilling many functions. For many, however, property development is a worthwhile and very rewarding discipline.

The Process

There are a variety of views on, and descriptions of, the development process. At its most simple, property development can be likened to any other industrial production process that involves the combination of various inputs in order to achieve an output or product. In the case of property development, the product is a change of land use and/or a new or altered building in a process that combines land, labour, materials and finance. However, property development is complex, often taking place over a considerable time frame. The end product is unique, either in terms of its physical characteristics and/or its location. Furthermore, no other process operates under such constant public attention.

The development process may be divided into the following main stages:

1. Initiation
2. Evaluation
3. Acquisition
4. Design and costing
5. Permissions
6. Commitment
7. Implementation
8. Let/manage/dispose

However, property development is not an entirely sequential activity and the stages in the process often overlap or repeat. The sequence is typical of a speculative development where an occupier is not sought until the building has been completed. For example, if the development is pre-sold to an occupier, then stage 8 precedes stages 2–7.

Initiation

Development is initiated when either a parcel of land or site is considered suitable for a different or more intensive use, or if demand for a particular use leads to a search for a suitable site. For the purposes of this module, we will focus attention on the main uses such as shops (or retail), offices and industrial. Note many of the same principles also apply to residential developments including low or medium high-density housing in the form of a high-rise building. Often office and industrial uses are combined: buildings suitable for such uses are often defined as business space. The initiative may come from any of the actors or stakeholders in the development process seeking an appropriate site in anticipation of the demand or need for any of the above uses. Alternatively, the initiative may stem from stakeholders anticipating a potentially higher value use for an existing site due to changing demographic, economic, social, physical or other circumstances. In this case, in order to identify the most appropriate use, the initiator will seek to research the market and the potential to obtain the necessary statutory planning consent for the change of use. The roles of the various different stakeholders in initiating the process are examined under ‘Main actors’ later in this chapter. The initiator may not necessarily be involved in the rest of the development process, depending on their motive or objective.

Evaluation

One of the most important stages of the development process is evaluation as it influences the decision making of the developer throughout. Evaluation includes market research, both in general and specific terms and the financial appraisal of the proposal. The process of financial evaluation needs to ensure that the cost of the development is reasonable and viable. For private sector developments, the evaluation establishes the potential for profit in relation to the risks incurred. For the public sector and non-profitmaking organisations, it will attempt to ensure that the costs are recovered. An additional objective of the financial appraisal is to establish the value of the site. This stage of the process should be undertaken prior to any commitment and while the developer retains flexibility. Though the evaluation involves the combined advice of the developer’s professional team, the decision to proceed and bear the risk rests ultimately with the developer. It is a continuous process with constant monitoring, relating directly to all the other stages.

Acquisition

Once the decision to proceed is taken, there are many other decisions to be made and steps to be taken before the site can be acquired and the development started. These should include the following listed below.

Legal Investigation

Unless the developer is the existing site owner all legal issues concerning the site must be assessed: this includes ownership, existing planning permissions, and any rights of way, light or support. Careful preparation is required to establish who the existing owners of all the rights to the site actually are and what will be necessary to acquire them. Any error in establishing the extent of ownership and the cost or the time in acquiring the rights to the site can seriously affect the viability of the development. The public sector may become involved in the acquisition stage, to assemble a large site with many occupiers and landowners, since they can use their legal powers of compulsory purchase. However, the use of such powers can be both time-consuming and costly. The vast majority of development is undertaken through the co-operation of the original site owners, either by disposing of their interests through negotiation or by becoming partners in the development.

Ground Investigation

A thorough physical assessment of the capabilities of the site to accommodate the proposed use should be undertaken. Ground investigations involve the assessment of the site’s load-bearing capacity, access and drainage. All existing services (e.g. electricity, water, gas and telephone) should be surveyed to ascertain their capacity to serve the proposed development. If the services are inadequate then the developer needs to assess the cost of their provision or expansion. The investigation should highlight the existence of underground problems such as geological faults and made-up ground, together with the presence of any archaeological remains, contamination, underground services and storage tanks. A site survey must be undertaken to establish the measurement and configuration of the site.

Finance

The developer, unless using internal resources, must also obtain appropriate finance for the development project on the most favourable terms over the entire length of the scheme, before committing to a scheme. The subject of finance will be dealt with in Chapter 4. The developer will normally be concerned with arranging two sorts of finance. Firstly, short-term finance is needed to cover costs during the development process. Secondly, longterm finance (sometimes called ‘funding’) will be sought to cover the cost of holding the completed development as an investment or, alternatively, to secure a buyer for the completed scheme. The level of detailed information that is required by the providers of the finance varies, but all will require convincing evidence of the ability of the developer, and the soundness of the preparation and appraisal of the scheme.

Design and Costing

Design is an almost continuous process running in parallel with the various other stages, getting progressively more detailed as the development proposal increases in certainty. The developer may have detailed knowledge of what design is required if the likely occupier is known or has been secured. In the case of a speculative scheme, the developer may need to work on a number of initial ideas with the agents and the professional team before establishing a design brief for the project. The brief is particularly important for complex schemes as it sets the design parameters for the architect.

Initially, design work will be kept to the minimum to keep costs down prior to developer commitment to the scheme. However, there should be enough detail to enable the quantity surveyor to prepare an initial cost estimate; this, in turn, is what the developer needs to prepare the financial evaluation. In most cases, this means scaled layout plans showing the position of the proposed building(s) on the site, together with simple floor plans showing the internal arrangement of the building on each floor. Plans of the main elevations of the proposed building(s), together with an outline specification of the building materials and finishes, are often desirable. These plans along with the initial cost estimate should enable the developer to prepare the initial evaluation. By the time a decision has been made to submit a detailed planning application for the proposed scheme, the initial plans will be in much greater detail. There will be a full set of plans showing the layout, elevations and section of the building, together with a detailed specification. The developer requires increasing certainty over the cost estimates to improve the quality of the financial appraisal. The quantity surveyor should be able to make a detailed estimate of the building cost at this stage to enable negotiations to commence with building contractors. Care in this preliminary work can save precious time and avoid unnecessary expenses at later stages of the development process.

The design and costing stages include all members of the professional team and continues throughout the construction of the scheme. The developer has to ensure that at each appropriate stage the design and cost estimates are complete to avoid delays to the process. In most cases, the final product is very different to the initial design concept and undergoes many design changes before the final drawings are completed. The developer has to ensure, where possible, significant, and potentially costly, design changes are minimised when the commitment stage is reached.

Permissions

Any development (with a few minor exceptions), which by statutory definition involves a change of use or a building operation, requires planning permission from the local planning authority prior to its commencement.

In many instances the developer may, where a building operation is involved, apply for an outline application before full approval is obtained. An outline planning consent establishes the approved use of the site and the permitted size or density of the proposed scheme. The developer only needs to provide sufficient information to describe adequately the type, size and form of the scheme. However, an outline planning consent, on its own, does not allow the developer to proceed with the development scheme; a further detailed planning consent is still required.

A detailed application typically involves the submission to the planning authority of detailed drawings and information on siting, means of access, design, external appearance and landscaping. It is not possible to apply for outline consent for a change of use. There may be a number of outline applications made on a particular site if circumstances change before a developer acquires the site. If the scheme changes, after detailed consent has been obtained, then further approval is required from the local planning authority.

The developer needs to make realistic initial estimates of the likely time and cost of obtaining the appropriate permission during the evaluation stage. The acquisition of planning permission can become complex, requiring detailed knowledge of the appropriate legislation and policies, as well as local knowledge of how a particular planning authority operates. The employment of ‘in-house’ planners by a developer or the use of planning consultants may be necessary and cost-effective where planning problems are envisaged or encountered.

In addition, the developer may be required to enter into a contract with the local planning authority where a ‘planning agreement’ is negotiated as part of the planning approval. These agreements, which used to be referred to as ‘planning gains’, deal with matters that cannot be covered as conditions to the planning approval: the provision and maintenance of a public facilities as part of a scheme. For example, there may be improvements to adjacent roads to the site to provide safe access to the site after completion of the development. Planning agreements must be signed before approval is granted and often impose additional development costs, therefore affecting the overall evaluation of the scheme.

In some circumstances, there are a variety of other legal consents that may be required prior to commencement of a development. These include listed building consent (the right to alter or demolish a ‘protected’ or landmark building); the diversion or closure of a right of way; agreements to secure the provision of the necessary services and infrastructure; and, in all cases where building operations are involved, building regulation approval. The prudent developer must clear all legal permission hurdles before making a commitment to the development.

Commitment

A developer must be satisfied that all the necessary preliminary work has been undertaken before any substantial commitment is made in relation to the development. Ideally, all the appropriate inputs of land, finance, labour and materials, and the acquisition of statutory permissions must be satisfactorily negotiated before any agreements are signed making the developer liable for any major outlay of money. When the preliminary work has been completed as far as possible, the project must be evaluated once again. This is because it may be that the preparation of the scheme has taken some time and the economic circumstances that determine the success of the development have changed. It is vital, therefore, that the developer pauses for thought until absolutely satisfied that the evaluation is based on the best possible information and the scheme is still viable.

Until the land is acquired, the developer must keep costs to a minimum. The likely costs up to this stage are professional fees and staff time. Depending on individual circumstances some of the professional team may be willing to work on a speculative basis or at reduced fee in order to secure full appointment once the scheme commences. In some cases the developer may be acquiring the land without the benefit of planning permission and, therefore, the contract may be made subject to obtaining the necessary planning approval. In addition, conditional contracts to acquire a site are often entered into when either the developer has had insufficient time to carry out all the important preliminary investigations, or alternatively, the developer is yet to secure the necessary finance.

At some point in time, all of the contracts to acquire the land, secure the finance and appoint the building contractor together with the professional team will be signed. These contracts may not necessarily be signed together; the developer must aim to achieve this as profits will be maximised. In the case of a non-profit development, ensuring that the commitment is held back until all the resources are in place will minimise cost and risk.

Implementation

The implementation stage can commence once all the raw materials of the development process are in place. At this point, there is a commitment to a particular site and to particular buildings at a particular cost spread over a particular time. However, the flexibility, which was previously possible in the earlier phases, has gone. What needs to be emphasised is the importance of careful evaluation and of maintaining flexibility as long as possible.

Throughout this stage the underlying goal and this aspect is often challenging, is to make certain the development is completed within both the time and budget stated in the evaluation, without comprising quality. Depending on the experience of the developer and the complexity of the scheme, this may best be achieved by employing a project manager to coordinate the design and building process. The project manager and/or developer must anticipate problems and make prompt informed decisions to minimise delays and extra costs. Furthermore, the developer must take as much interest in the running of the project as in its promotion and the market must be monitored continuously to ensure that the product is right, which may result in amendments to the specification. Where a nonprofit development is concerned, the developer must aim to contain costs, while maximising the benefits of occupation.

Let/manage/dispose

Although this phase of development occurs often at the latter stages, it must be at the forefront of the developer’s thoughts from the initiation of the scheme. In some cases, the occupier may have been secured at the start or during the development process. The development’s success will depend on the ability to secure a willing occupier at the estimated rent or price, as well as within the period originally forecast in the evaluation. The disposal may take the form of a letting or it may be the outright sale of the freehold interest. In the case of a major retail development, there are many lettings, while in that of a single office building the property may be disposed of in one major letting.

It is at the evaluation stage that the letting and/or sales strategy should be thought out, and then subsequently updated, where possible and appropriate, during the course of the development. As such any agent or a member of staff employed by the developer to secure lettings/sales should be included in the development from the beginning of the process. In addition, a decision must be made at what point it would be sensible to let or sell the scheme. In many cases, it is necessary to complete or virtually complete the development before seeking an occupier. This decision may not be the developer’s alone and may be heavily influenced by other actors in the process such as the financiers or the landowner (if they have remained a partner in the development).

At the start of the process, the developer has to decide whether the property investment created is to be held as such or sold to realise any profit, unless it has been pre-sold to the long-term financier of the scheme. Such a decision is dependent on the motivation of the developer as well as the prevailing property investment market conditions at the time. However, developers have to be flexible to accommodate any changes in the investment market prior to completion of the scheme. This means that careful thought needs to be given to the investment value at the initial evaluation and design stages. Therefore, if the decision is made to sell the investment to an investor, then the developer needs to fully research their requirements. The location, specification and financial strength of the tenant(s) will be critical in achieving the best price for the investment. The developer may employ an agent to secure a sale of the property to an investor. The agent should be employed as early as possible to advise on the optimal specification and design of the property development scheme.

In accordance with best practice, the development process and the developer’s responsibility should not cease with the occupation of the building. There is still a need for the developer to maintain contact with the occupier, even though no direct landlord/tenant relationship may exist. This is because developers can learn more about occupiers’ requirements in general and, in particular, the shortcomings of the completed building from a management point of view. Therefore, management needs to be considered as part of the design process at an early stage if the final product is to benefit the occupier and earn the developer a good reputation. The financial success of the development cannot be assessed until the building is complete, let and, where appropriate, sold. Often it may not be until the first rent review under the terms of the letting (typically 5 years after occupation) that the overall picture will become clear.