Whether you have already purchased a piece of land or you are exploring how purchasing land for property development works, this article can help provide some useful tips, especially if you may need to secure development finance to help achieve your land development goal.
Property Development Location
If you plan on selling the units you build on the land, what are the agents saying about the appetite and sale prices for the type of property in the area? Speak to more than one agent to get a comparable view.
There are two common types of land to attempt to build on:
Greenfield is typically rural or urban area that has not been built on in the past, such as fields or parks.
This type of land on the other hand has been built on before, usually disused plots found in urban areas.
Brownfield land is usually the preferred option because planning permission is more easy to obtain and the supply of services such as gas, water and electric may already be in place or at least more accessible.
Key considerations when buying land to develop
No doubt you will already have an idea in mind what you plan to do with the land. It may already have planning permission which you plan to follow, or you may want to adapt the planning to suit your needs.
Ultimately the factors that are likely to affect your decisions are:
Do you have enough cashflow to support your plans, and if necessary can you get the development finance to support it? This article explores finance options in more detail below, or speak to one of our property finance experts who can chat through your situation.
The grander the plan the more experienced you should be. Too often people get carried away and bite off more than they can chew relative to their development background. If you’re excited by the challenge and the potential profits of a ground up development then be sure to take time to research as much as possible so that your heart doesn’t entirely rule your head! Even the most experienced developers will have to tackle unexpected problems that they haven’t budgeted for on a big project.
Can you find a way to fit more units on the land? If you can vary the planning permission to feasibly squeeze more property on the site what will that do to your profit margins? You don’t want to be kicking yourself for not adapting plans that could have yielded better returns. Conversely, are you prepared for the greater cost and risk that may come with the greater reward?
Consider mapping a timeline for how long each element of your development might take, from the legal and finance purchase process; the planning permission times; each stage of the build; as well as the time to agree and complete any sale of property.
Construction Loan & Development Finance
In simple terms lenders will often lend against the value of the land as well as up to 100% of the construction costs. Funds for the development works are normally paid in arrears so it’s prudent to have a percentage of the build costs in hand.
As an example, a £1m building project might need 10 ‘drawdowns’ of finance from the lender, so you would need to be fronting the £100k of costs until the lender releases the next tranch to you.
If you’ve only got £200k worth of total build costs then it’s not viable for the lender to offer 10 drawdowns of £20k, so you will need more than the standard 10-15% of construction costs as cashflow.
Experience is a big factor when lenders assess a construction finance application, particularly if you’re buying land that doesn’t already have planning permission. If you have been turned down by a lender don’t be disheartened, our development finance experts have unique relationships with property development lenders and experience sourcing construction loans for first time developers. If you are a first time developer you may want to read our guide designed to provide guidance to inexperienced developers looking to embark on their first project.
Consider a contingency, a realistic one, because a lot of the time a small 2.5-5% contingency will be looked upon unfavorably by a lender. Especially at present where materials and labour have jumped in price. Ultimately, if you don’t have enough cash or materials the project would take longer which will increase your overall costs.