Property development is an extremely rewarding and profitable venture, however it also comes with a whole host of moving parts, and a whole host of frustrations along the way. In my experience, one of the most challenging is the amount of time spent sourcing, appraising and financing new projects, which should be the simple first step in the game.
I have spent a number of years as MD of a development company building sites around the UK, and a number of years advising developers large and small as to site profitability and fund raising, having raised over £250m for them along the way, and there are key trends that come up time and again.
A familiar story, that I have both experienced personally and seen in many clients, is the following. The developer’s team are constantly being sent, and are searching for, potential sites to purchase, all of which are presented as being hugely profitable. The team then spends significant man hours sifting through these to throw out the vast majority, settling on a handful to take to the next level of due diligence. Sites are analysed and appraised, meetings are had, and after most are thrown out, one is selected as being viable. The team get excited, senior management approves, and negotiations start with the vendor. Another significant number of man hours are spent, reputations are now involved as they negotiate with vendors and a price is agreed. Everyone now wants to go at warp speed to complete the purchase. At this point the developer then goes to a broker, or direct to lenders, to finance the project. The lenders seem much less enthusiastic about the project than the developer, a battle ensues, lenders either refuse to lend or do so on aggressive terms, and the project falls down. All of the above cost and time is wasted and the process starts again, the developer now angry with lenders, and lenders in all honesty not really caring and moving onto the next project as there are plenty out there.
This process, aside from being highly frustrating, is an incredibly costly and inefficient use of time and resources for all involved. It is even more strange, as in reality all parties in the above on all sides benefit from exactly the same thing, a good site with strong profitability that is bought quickly and built to schedule creating profit for all concerned.
Fundamentally, I believe the problem is that the majority of developers do not understand and therefore build into their sourcing process what a lender wants to see in order to lend on a project. It may be as many developers argue that lenders do not understand certain aspects of building, and this may be true, but if they won’t lend the money then it’s a moot point as the project can’t be progressed. If a key part of appraising new potential sites includes analysis of metrics that will make it attractive to lenders, then once a developer decides to progress on a scheme then he can be certain of funding, and not wasting time and resource. I would say the majority of sites brought to me for financing fall down within an hour of appraisal as they do not meet key hurdles that the developer was not aware of.
The solution, in my opinion, is to bring in a specialist on appraising and funding at an early stage. Developers outsource a number of functions, and as with these the key is to decide if you bring someone in house or contract them. At Vantage we have created the ultimate, simple solution. We work our clients long term, and have set ourselves up with the experience and systems to give us access to real market data at the click of a button; sales data, construction data, planning, sourcing and all aspects of appraisal. We have carefully pulled this together to create appraisals specifically designed to meet lenders criteria. If a client comes to us with a potential site we can therefore tell them true site profitability, key risks, and whether or not finance is available within hours of an enquiry. It is time to take frustration and time out of sourcing potential projects, and guarantee funding from the outset.
Of course, I would always advocate bringing in an advisor as that is my role, however I believe the majority would agree with the above issues, and are ready for a simple solution saving time and money. Of course we are always on hand to discuss any requirements you may have and see how we can help.
Pat McCreesh, Partner, Vantage