A widening gulf exists between the complexity and sophistication of the property development environment and some of the often well-intentioned but poorly crafted public policy interventions. So in this post I am going to have a go at explaining a few nuances and principles of property development in my own words. I very much welcome comments.
What is the difference between a house builder and a developer?
They are different beasts but the distinctions can be subtle to someone not working in the sector. Often a developer is a smaller organisation focused on early stages of the development cycle. They may also seek to build but their expertise is often centred on master planning, place making and land assembly.
A house builder by comparison often has a more complete skills set within its organisation. Their expertise is usually centred on build and how to exit – ie the latter stages. They will possess far higher headcounts, and they cannot afford to wait for land to be promoted; a housebuilder needs immediate pipeline.
House builders and developers will often work together. Traditionally a developer will take front end risk, and a house builder will acquire land when it is ready to build. House builders will often shy away from land opportunities which have high planning risk and leave it to the developers to invest at the early stage when they have no guarantee when the site might become shovel ready. It’s all part of the complex ecosystem of housing delivery, different organisations are good at different kinds of sites and opportunities.
Do developers land bank?
Land banking is a bit of a British political obsession. It comes around every twelve months and gives politicians an opportunity to score a few political points against the development sector.
In simple terms, the accusation goes that housebuilders and developers sit on shovel ready land to control pricing and benefit from land value uplifts. Planning data is really poor but there is significant research to show that on large and small sites, the planning process can take years which suggests that rather than land banking, there is a land logjam. Hence the difference between developers and housebuilders being those who are focused on construction and delivery versus those who have the patience and capital to promote an opportunity which may not have a planning permission.
Last year the Competition and Markets Authority debunked the myth that housebuilders and developers horde land for price fixing. That isn’t a business model that works when everyone has a cost of capital. Moreover, it is not true that land simply goes up in value over time. Yes it can go up, but it can also plumet. For example, brownfield sites which are capable of high-density development are perhaps worth 40% less than they were five years ago due to changes in regulation and other external factors.
So what we consider as land banking is simply developers and housebuilders managing their businesses with limited resources and a need to plan pipeline around a world full of external and often times, uncontrollable variables.
Why profit matters in development?
Development viability is extremely sensitive and must chart a course over as much as 5 years in duration, longer with bigger schemes. That’s why profit matters. Profit margins need to be significant to withstand the tests of time – build costs increases or contractor insolvency, poorly conceived public policy changes or a change in demand drivers – like the loss of Help to Buy.
Traditionally developers would target between 15-20 % on costs. In today’s climate with so much risk and instability it’s closer to 30% and that’s why many have stopped building in cities like London – the opportunities no longer work against the risks. Margins also increasingly need to be chunky to reflect the need to refinance during the developer cycle with higher interest rates and more costly finance.
Profit has become a dirty word in politics which is in itself is a reason to remove party politics from development decisions. If an investor chooses to put its capital at risk to improve the built environment then the rules should be fair and simple. The reason much investment has left the living sector is because the balance has tipped too far and profit margins are not sustainable compared to other sectors.
Do developers buy sites to appeal?
No or at least not often. Appeals take time and are expensive. Time is not a friend in property development as the last few years have displayed and appeals can often elongate the process and lead a development into a negative position. Policies can change leading to a tougher determination criteria whilst a scheme awaits an appeal determination. They are no guarantee of success. Given the choice, a developer will almost always opt for an early decision via the standard planning process. Appeals are a sign of wider disfunction in the development process and no one’s primary business plan.
