Mainly for Students: Making sense of the development process

The development process is essentially the act of combining the various factors of production (land, capital, labour and entrepreneurial skills) in the right quantity and quality to produce real estate assets that people wish to buy, lease and – most fundamentally – use. It’s a means to an end. It is important to say, of course, that many variations will inevitably occur dependent on the type of project, the custom and practice of the developer and the particular locality in which a scheme is being undertaken. Given this, there is no definitive development process, however it is hoped that students will find the following overview helpful. Getting things right If a developer decides that general market conditions are appropriate, the process will begin with the identification of suitable search areas and the formulation of a marketing plan, alongside a broad analysis of supply and demand factors. This will be judged against potential site availability, as well as relevant national and local planning-related policies. Whatever the situation, it is important that the overall strategy should be about getting the right land, in the right place, at the right time, for the right market. When the search areas have been chosen, land may be identified by one, or a combination, of four basic methods: comprehensive desktop and fieldwork; land coming up for sale on the open market; sites being introduced directly to developers; and advertising for land. Comprehensive area-wide surveys involve the identification and examination of most, if not every, possible site in a particular area, along with scrutiny of local and neighbourhood plans. Sites for sale on the open market or introduced directly to developers will first need to be broadly evaluated as to their suitability. This is likely to include desktop studies, a site visit and possible preliminary discussions with owners, agents and planners. Sites with potential Where this is the case, a range of more detailed feasibility studies and discussions would follow, including: a) Site evaluation Covering physical location attributes, size, ownership, method of sale, legal tenure/easements/covenants etc, planning history and current policies and guidance, flood risk, ground conditions, utilities connections, and the requirements of highway and drainage authorities etc. b) Market and sales report  Identifying market location attributes, second-hand market prices, competitors’ schemes, property types favoured by the market, sale/letting values and rates of sales/lettings. c) Use and design possibilities and concepts Exploring possible building uses, site coverage, massing, design styles, floor areas, densities, possible access points and road layout. d) Development appraisal This begins with an exploration of the gross development value (GDV), ie what a prospective scheme might be worth based on (a) to (c) when complete. From this, the appraisal would test whether a proposed scheme is financially viable via a residual valuation to establish what sum of money might be bid for a site given the expected profit levels required. This involves estimating the overall costs of a scheme and will include the costs of getting planning consent, architectural design, finance, site preparation (including demolition where necessary), construction and contingencies, site acquisition (costs), marketing and sales/letting costs and all other legal and professional fees. If, however, the asking price is known or otherwise fixed as an input, an appraisal can be used to test whether acceptable levels of profit can be met by deducting all costs plus the price of the land from the GDV. The business case Taken together, these studies will underpin what will be the “business case” for a proposed development opportunity. In essence, it is about whether or not it meets three tests: feasibility, desirability and viability. Increasingly and importantly embedded in this are the three pillars of sustainability: social, economic and environmental. The bottom line for most developments, however, is viability: will it produce an acceptable level of profit or return on capital – and do so in a socially acceptable, environmentally favourable way? The business case evaluation is of course not an entirely static event: it is ongoing and has to be revisited as schemes are worked up. Purchasing development sites not on the market This may happen by negotiating: an outright purchase; an option; or a conditional contract. The first would be negotiated via a normal private treaty process. An option might be sought where the land is not purchased straight away, but where landowners are asked to enter into a contract giving developers the right to purchase (outright), at any time up to an agreed date in the future. Alternatively, a conditional contract might be sought where a developer is only happy to proceed to purchase if some condition has been fulfilled, eg the grant of planning consent or a prelet to a key tenant. Acquiring sites advertised on the open market This could again be via private treaty, but also by tender or auction. If a sale is by tender, then a sealed offer will have to be made before a given date, fixed by the seller. If a sale is to be by auction, then a property will go to the highest bidder on the day of auction, as long as it meets its reserve. For both tenders and auctions, it will be important that all appraisal, evaluation and due diligence work is carried out before making an offer. Finance Either before or immediately after the purchase of a site, finance will normally be sought. Development finance is required on one or two fronts: short-term debt finance to acquire a site and undertake the construction work and associated costs; and long-term if the completed scheme is to be retained by the developer as an investment. Debt finance will typically not cover the full costs of development and maybe only up to 70% of needs. Unless the developer is using its own capital, additional funds may need to be sought, referred to as mezzanine finance. Planning and design Dependent on whether a planning application is intended to be outline or full, design proposals will have to be worked up to an appropriate degree before submission. Outline planning applications essentially determine the principle of development in terms of use, scale and density. They may also include proposals regarding key access points to a site. There will also, however, be a range of so-called reserved matters that would form part of a full application. Section 106 (planning) and section 278 (highways) agreements may also have to be negotiated and paid for as part of a planning application in addition to the fee. A community infrastructure levy may also be required by a local authority, which will add to costs. In terms of scheme design, the developer will fundamentally look to the architectural team to work up a scheme that meets its requirements as best as possible, with buildings that function well, are constructed well (meeting sustainability targets) and look good. For large or otherwise sensitive schemes, a developer may be required to carry out an environmental impact assessment. This typically requires an examination of landscape value, geology, water features, air quality, traffic, etc, and assesses what impacts are likely to result from a development as well as how they might be mitigated and managed. Marketing Following a successful consent, a more full-on marketing campaign can be rolled out. In good market conditions it may be possible to sell or prelet properties or parts of properties before anything is built. Marketing via all digital media and analogue means will be employed to target particular sectors of the market, with one-to-one approaches to individual companies or persons where appropriate. Construction procurement A developer will have to decide what construction procurement method is to be used. While there are many variants, the two most common choices are: a) the so-called traditional approach, where the design and costing of work is undertaken directly under the direction and control of the client before the physical building work is carried out by a building contractor; or b) a design and build contract, where, subject to a detailed design brief and price, both the design and building work is undertaken by a building contractor as part of an overall package. In the first, the risks of a project are fundamentally carried by the developer, whereas in the second a lot of more risk is passed to the contractor. In very simple terms, the first might be more generally used where a client wants or needs more control or because of the complexity of a project, and the second where design needs and specification are more straightforward. Whatever the route, the key set of parameters that developers must have regard to in their choice of approach is whether it will meet cost, time and quality criteria. Building through to completion and use When the building is complete, a full inspection and any snagging/remedial work will take place before it is handed over to a client for use, letting or sale at some later point. It is always good practice to carry out some form of post-occupancy evaluation, some months or a year after occupation has taken place – to fix things if necessary and learn from it. The recipe for success An important thing to re-emphasise is that development is only a means to an end. The prime objective of the process – for an appropriate return on capital – is to produce buildings and places that people want to use and occupy that are as environmentally and socially sustainable as possible. Getting things right at the outset – through thorough research, properly determining the opportunity and identifying and solving problems before they arise – is key to success. The process at a glance Development generally entails the following broad stages: market research/demand and supply evaluation search for and identification of suitable areas and sites evaluation and financial vetting of suitable sites business case to proceed sourcing and structuring of finance purchase of suitable sites design of schemes planning approval scheme marketing construction procurement sale/letting and use Further reading RICS guidance note, Valuation of development property Property development finance Environmental impact assessment RICS guidance note, Developing a construction procurement strategy and selecting an appropriate route Paul Collins is a senior lecturer at Nottingham Trent University and Mainly for Students editor. He welcomes suggestions for the column and can be contacted at paul.collins@ntu.ac.uk Photo by Pixabay from Pexels