The demand for housing in the city significantly exceeds the supply, with only 28.79% of the required properties being completed in 2022. With London having one of the most significant shortfalls in supply and demand across the UK, could 1st time property developers seize the opportunity?
Despite various challenges and regulations, London remains an attractive market for property developers due to its high demand for housing and potential for capital appreciation. The city’s dynamic property market offers opportunities for various development projects, including new builds, refurbishments, conversions, and renovations, opening opportunities for a new generation of property developers in 2023.
According to research commissioned by the Mayor of London, the city needs at least 66,000 new homes a year to meet the current demand. However, the government and developers could only manage 18,960 completions in 2022, 71.27% less than needed in the city.
In 2022, the desire for urban living witnessed a remarkable surge, particularly in London, where the city observed the largest net additions since the Brexit referendum. The post-pandemic resurgence of city dwellers has resulted in a population growth that surpasses the rate of new housing supply, amplifying the persistent issue of undersupply.
With nearly a third of London’s 9 million households opting for rental accommodations, this imbalance has immensely strained the city’s rental market. According to JLL’s projections, this pressure is expected to persist, with a forecasted shortfall of over 100,000 rental homes in the next decade.
However, the emerging build-to-rent (BTR) sector presents promising prospects.
In 2022, the London build-to-rent sector experienced an extraordinary influx of investment, reaching a record-breaking £2.7 billion. The financial support from investors targeting London led to the development of over 10,000 homes within this sector. The year witnessed a remarkable 46% surge in transaction volumes, reflecting the growing confidence and interest in the build-to-rent market.
Notable transactions in 2022 included Long Harbour’s joint venture funding of a £260 million build-to-rent scheme in Walthamstow, exemplifying the commitment towards expanding housing options in the area. Additionally, Greystar’s acquisition of Grosvenor’s Biscuit Factory site in Bermondsey garnered attention, with planning consent secured for an impressive 1,548 homes. These significant deals underscore the ongoing momentum and investment opportunities in the London build-to-rent sector.
Furthermore, there has been a notable upsurge in recognition of refurbishing and renovating existing properties as a viable strategy. This approach has gained traction as an effective means of reintroducing these properties to the market. Notably, in London alone, a substantial inventory of nearly 30,000 properties is currently labelled as ’empty’.
The prospect of a new tax law further amplifies the potential for renovating and refurbishing these properties.
If accepted, this legislation would impose double the rate for second homes, potentially incentivising owners to sell up and make their properties available on the market. This confluence of factors holds the promise of unlocking more properties for revitalisation, providing increased opportunities for renovation projects and contributing to the overall regeneration of the housing market.
According to a recent survey conducted by Finbri, a UK bridging and development finance company, over 1,000 property investors were interviewed, revealing that London accounted for the highest number of property flips in the UK, with a share of 25.27%. This statistic highlights the significant potential to ‘flip’ properties and reintroduce valuable housing stock into circulation. By breathing new life into these properties, investors contribute to meeting housing demands and revitalising the market.
The London property market holds promising opportunities for developers, and investors prepared to embrace the challenge. Whether it involves constructing new properties for rental purposes or for sale or revitalising older properties through conversion, restoration, or renovation, there is scope for growth in the market.
Joining the ranks of the 2.5 million property investors in the UK presents a favourable opportunity to tap into a market that has consistently generated stable profits over the past two decades. Property development holds immense allure for those seeking a solid return on investment as the demand from prospective homeowners and property investors surpasses the available supply.
Investing in property offers two key advantages. Firstly, there’s the potential for capital appreciation. Over time, the value of your property holdings can increase, allowing you to realise substantial financial gains. Follow a property development strategy that involves purchasing properties for renovation or refurbishment and reselling them for a profit. You may not have to wait long for your capital to appreciate. This practice, known as property flipping, can be lucrative. Bridging Market’s 2022 survey shows over 50% of property flippers generated profits ranging from £10K to £50K, while only a mere 1% incurred losses.
Secondly, there’s the aspect of income generation. Opting to retain ownership of your properties and leasing them to tenants can provide you with a reliable source of revenue. Recent research by Finbri indicates that rental rates are rising across the United Kingdom. Certain regions experienced an impressive surge of 14.6% in rental rates in the year leading up to September 2022. Notably, this growth was observed outside London, specifically in Northern Ireland. This data suggests strong potential for generating rental income and a thriving market beyond the capital city.
How can you venture into property development for the first time?
The most effective approach to ensure a solid profit margin on your initial property development project is to keep it simple.
Engaging in a straightforward property development project offers numerous advantages:
One of the simplest forms of property development is purchasing a property for renovation, either for selling or renting out. First-time investors are often attracted to run-down properties that require quick fixes and cosmetic makeovers. If these opportunities sound appealing, consider consulting Whybrow, a reputable commercial property consultancy and surveyor firm that specializes in guiding clients through the intricacies of property enhancement.
Residential properties are an excellent starting point for those new to property development. They leverage your existing expertise in home-buying and renovation without requiring specialised knowledge of commercial, storage, office, or student housing markets.
Aim for a profit margin of at least 20% when engaging in a fix-and-flip project. If the margin falls short, be prepared to walk away. Your purchase price determines your initial profit, as you control how much you pay, while the market determines the sale price.
Experts offer the following advice for novice developers:
In property development, every asset possesses a “ceiling value,” representing the utmost price it can attain in an open market sale.
A rental of your investment property
When considering rental options for your investment property, there are different approaches. If you have no intention of retaining the property, obtaining a buy-to-let mortgage is a common choice to finance the purchase unless extensive structural renovations are necessary. The property’s location and the expected rental income play crucial roles in influencing your development decisions. For instance, you need to assess whether the property has adequate bedrooms suitable for families, young professionals, or students.
Just one tenant, a couple or renting to a family
For novice investors, pursuing a single lease agreement with either one tenant, a couple, or a family is a popular choice. This approach allows your monthly rental income to cover your buy-to-let mortgage payments and any additional administrative and maintenance expenses, resulting in a profitable outcome for you. Managing a property with only one tenant minimises management costs, and there is a higher likelihood that the tenant will stay for an extended period, providing stability for your property.
However, it’s essential to be aware of the potential risk of vacancy periods, as they can significantly impact your annual profitability when the property remains unoccupied, generating no income.
HMOs – homes of multiple occupants
An alternative approach to renting out a property to a single tenant, which is particularly popular for conversions, is to create a House in Multiple Occupations (HMO). This involves renting out individual rooms in a house where tenants share communal kitchen, living, and bathroom facilities.
Familiarising yourself with these regulations will help you navigate the process more effectively.
You can also sell the property after renovation
Selling the property after renovation is a viable option. However, knowing the potential implications of long-term mortgage funding if you plan to sell the property is a must. Early repayment fees (ERFs) can significantly impact your overall profit, so you need to understand the potential impact of these fees before deciding to pay off your mortgage early.
You may explore short-term capital options such as bridge financing or bridging loans if you require immediate project funding. These loans offer repayment flexibility, allowing you to repay the loan as soon as your projects are completed.
Critical components to your success – here are the three key phases.
To achieve success as a property developer, you need to have a thorough understanding of three fundamental phases: sourcing, feasibility and planning; financing and exit strategy; and construction, scheduling, and project management.
Sourcing, feasibility and planning.
During the sourcing phase, it’s a good idea to find a property at the best possible price and assess its potential critically. Conduct extensive market research on local house price ceilings, rental rates, and emerging locations to become familiar with the area you’re considering investing in. Instead of buying the worst property on the nicest street, it’s advisable to look for a more affordable house on an adjacent street that would appeal to potential buyers or renters.
Feasibility involves determining the financial and practical viability of your proposal. It’s beneficial to test the viability of multiple hypothetical projects in advance so you’re prepared to act promptly when an opportunity arises. Set budgets for each component of the development project and explore how to finance them. Consider factors such as:
A word of advice, tax planning considerations vary when purchasing a property as an individual versus a property development company. Consulting with a financial expert, such as a financial advisor or accountant, who understands each approach’s current tax and cost implications is advisable.
Financing and exit strategy
Securing financing and developing an exit strategy are both fundamental aspects of any property development project. Traditional banks may not offer the flexibility and favourable rates required for such projects, so engaging the services of a proficient finance broker is recommended. To raise the necessary capital, a broker can explore various funding options, including buy-to-let mortgages, bridging finance, development finance, or second charges. Understanding the available financing options, associated costs, and lending criteria helps avoid problems in the long-term. The Association of Bridging Loan Brokers & Lenders can provide a reliable directory of reputable bridge finance brokers and lenders.
Establishing a well-defined exit strategy is essential to recover your investment and realise a profit. This strategy may involve selling or retaining the property as a rental asset while repaying the initial finance through a long-term mortgage.
Effective management and adherence to the schedule are necessary during the construction phase. Delays can lead to increased financing costs, so be sure to maintain careful planning and diligent project management during the process. Depending on the scale of the project and your expertise in relevant trades, you can determine whether to hire a principal contractor, engage a project manager, or undertake self-management.
It’s wise to take on only what you can handle effectively. Thorough planning, considering the required trades, potential scheduling conflicts, and the possibility of acquiring additional skills, will help you manage costs within the established budget.
By considering these factors and implementing a comprehensive strategy, you can effectively navigate the property development process and contribute to addressing the housing demand while maximising your investment opportunities.
Construction, scheduling and project management
Construction, scheduling, and project management are critical aspects that require your attention.
First and foremost, you must effectively manage the construction process to ensure it stays on track and is completed within the scheduled time frame. You should be aware that any delays will directly impact the financing costs you have budgeted for. Consider whether hiring a principal contractor to oversee the various trades is the right choice or if a project manager would be more suitable.
Alternatively, depending on the scale of the project and your expertise in the relevant trades, you can manage the work yourself. Whichever option you choose, meticulous planning and diligent project management are indispensable to keep costs within the allocated budget.
Thorough planning for every aspect of your development project can make or break a project. Assess which trades will be involved and evaluate the potential for scheduling conflicts arising from on-site overlapping tasks. Additionally, consider if there are any simple trades that you can upskill yourself to handle, thus reducing the need for external contractors. By breaking down each type of project into a detailed schedule, you can estimate the duration required for each phase.
By incorporating these considerations when establishing your property development project, you can develop an effective strategy to contribute towards meeting the urgent demand for housing in London, bridging the gap of the missing 71.27% of required homes.
