Solve the housing crisis — and make money
Property developers are not flavour of the month. The government warned last week that, as part of a review into land banking and a “muscular” approach to driving up the supply of new homes, Britain’s biggest housebuilders could be stripped of planning permission if they fail to hit construction targets. At the other end of the scale, however, increasing numbers of buy-to-let (BTL) investors are turning into housebuilders, helping to boost their nest eggs and tackle the country’s chronic housing shortage at the same time.
Rob Bence, 34, co-hosts the Property Podcast, which has 100,000 listeners a month (thepropertyhub.net), sources buy-to-lets for hundreds of investors and owns a rental portfolio “in the double digits”. Now his firm stands to make a £450,000 profit on its first development, near the future HS2 rail station in Crewe, Cheshire (rmpproperty.com). All 14 houses, due for completion in late summer, have been sold off plan to investors for a total of £2.3m, yet Bence warns: “Development is a whole different challenge to investment. It’s still property — but in the same way badminton and darts are both sports.”
Could building like Bence be your best bet for a property earner now that traditional BTL has become tougher? Taxes and costs are up, mortgages are scarcer and red tape is more abundant as the government tries to tip the scales from landlords to first-time buyers. Yet the autumn budget pledged billions to boost small builders: an additional £1.5bn in loans through the government’s Home Building Fund (HBF); a slice of £8bn in loan guarantees; £630m to clear contamination and add infrastructure on stalled small sites.
Small firms (those that build less than 100 homes a year) accounted for 10% of new homes registered last year, according to NHBC, the body that sets industry standards and insures 80% of new-builds. That’s a long way short of the 39% they built in 1988, but numbers are creeping up. In 2017, Savills estate agency sold a third more plots to small builders than in 2012, though it warns that medium-size firms are increasingly competing for smaller “oven-ready” sites.
Buy-to-let investors who build homes become “part of the solution, not part of the problem”, says Stuart Law, founder of Assetz, which markets BTL property and lends to small developers. “The government is trying to disincentivise people buying existing housing and incentivise delivering housing.” Yet this is a move best suited to full-time portfolio landlords, he adds. “Development is a tough gig. It’s not a hands-off investment in the same way buy-to-let can be.”
How do I start?
“Cut your teeth on a simple project,” Law says. Buy a property with development potential, such as a house you could subdivide into flats. Or buy a plot with planning permission, then order the building at a fixed price from a package home supplier. At the cheaper end of the scale, Potton and Dan-Wood both start at about £1,200 sq metre, and Hanse Haus at £1,400 (potton.co.uk; dan-wood.co.uk; hanse-haus.co.uk).
Alternatively, consider a joint venture with one of the thousands of experienced building contractors who renovate existing homes, but lack the funds to build from scratch, suggests Michael Holmes, property expert for the National Homebuilding & Renovating Show. Thanks to such a joint venture, Andries Stricker, 60, switched from investing in a south London student BTL to converting stables in Kingswood, Surrey, into 10 homes in 2010. Now his firm, Zestan, builds 50 homes a year and has featured as a best-practice example in The Parliamentary Review. His advice? “Surround yourself with a professional team prior to embarking on anything.”
“It’s all about the team,” agrees Will Herrmann, 39, who started by investing in his student house at university in Bristol, and is about to build 39 flats in Battersea, southwest London — his biggest project yet (westelevenlimited.com). To establish your network, pick a location and integrate yourself into that community. “Follow up every introduction,” he says.
The Property Hub has more than 30 free get-togethers each month for “everyone from the greenest newbies to the grizzliest tycoons”, while the lender LendInvest offers free one-day courses (developmentacademy.lendinvest.com).
Where do I find a site?
Bence says sites end up in Rightmove’s commercial section only once they’ve “done the rounds”. Searching for the keyword “acres” on Zoopla can yield large properties with room to build, and plotfinder.net lists plots (£5 a month).
“The best way of securing a good deal is to find an interesting-looking site and contact the owner directly,” says Andrew Moist, who co-founded the land search app LandInsight after struggling to find a plot to build his own home. His software maps ownership, planning applications and comparable values (from £50 a month; landinsight.io). Or look for gaps in the street scene on Google Maps, then check ownership on the Land Registry. Some developers comb recently approved planning applications to approach the landowners before the plot goes on sale. “Beware — you’ll be paying top price for these,” Moist says.
Look at the council’s local plan to see which small sites have been earmarked for development, and ask local-authority planners if they know of “windfall sites” unexpectedly becoming available, advises Brian Berry, chief executive of the Federation of Master Builders (FMB).
Ben Wigg, 34, and his brother Oliver, 36, founders of the Cambridge-based Bowson Leeway Homes, bought most of their 12 projects via estate agents. “You’ll get the best deals on problem sites,” Ben says. When a pedestrian right of way over one front garden blocked their build, they paid the user to release it.
Ian Kitson, director of Cheffins estate agency, sees many small developers at its auctions, where single building plots in tertiary towns can go under the hammer for as little as £50,000.
How do I fund it?
Brace yourself: this is much harder than paying for a buy-to-let. Almost half of small builders said progress on sites they were interested in had stalled because of a lack of lending last year, according to the FMB.
Exact details of the government’s new funding are yet to be announced. Gary Middleton, who oversees the HBF’s existing £1bn pot for small housebuilders, says the £750m approved so far has helped more than 150 small or medium firms — including 30 newcomers. One of them is Skye Homes, which borrowed £714,000 for its first scheme, building five three-bedroom houses in Chester on land it had already bought and gained full planning consent for (skyehomes.co.uk).
“Our mission is to get houses built, so by definition we will do things that are riskier than the banks,” Middleton says. “But we won’t let individuals take on risks that are too far up the spectrum.”
The fund refused to lend on nine Nottinghamshire new-builds by Swallow Hill Homes. “They took my lowest valuation and highest cost estimate,” says its director, Rob Bailey, who has built about 50 properties since purchasing his first buy-to-let in 2000 with a deposit on a credit card. He funded his latest scheme by remortgaging his home and borrowing from friends and former clients at 6% a year. The HBF typically lends at 7%-8% a year, compared to as much as 15% through specialist lenders. Be as careful about those lending you money as they are about you.
About one in five applications to LendInvest fails for being too optimistic, says Steve Larkin, its development finance director. They’re usually beginners who pay too much for a site, then try to make things stack up by estimating construction cost too low and end values too high.
Any top tips?
When the Wigg brothers replaced a bungalow in Barton, Cambridgeshire, with two five-bedroom houses, they opted for polished concrete floors, oak frames and structural glass to target execs in Cambridge’s tech industry. One has sold with a guide price of £2.25m, the other is on sale for £1.95m (struttandparker.com).
“Furnish developments — make buyers see that double beds can fit,” says Hannah Woodley, 37, a former stockbroker who made a 71% return on the capital she used to create a £290,000 studio in the loft of a two-bedroom flat in Mitcham, southwest London (victoriawoodley.co.uk).
If you build to let, pick durable finishes, says Alan Ward, 70, chairman of the Residential Landlords Association, who is campaigning to have the 20% VAT rebate that applies to homes built for sale extended to properties built for rent.
Bence kitted out his houses in Crewe with washable paint, boilers guaranteed for 10 years and shower valves that are easy to access for repairs. “Don’t build for yourself,” he advises. Instead, ask local agents what would sell or let quickly. “That could be the difference between quick and slow sales.”