An Honest Review of a Project Proposal
A care-home to flat conversion that just didn’t make the cut.
People often ask what sort of analysis our projects go through and we have a rather high filter, so we do go through a lot of proposals.
Here’s a deal for a care-home conversion sent through from one of our partners.
Ultimately the project didn’t stack up and I wanted to share our thought process with you.
I am rejecting this project after further research and multiple conversations with the selling agent, a local developer and several other local agents yesterday (18 December 2018).
Please see my comments below.
- Property is currently operating as a care home leased to the NHS. The NHS have chosen to not renew their lease which implied that the property was not performing well as a care home.
This was confirmed by the agent (and when they don’t want to sugar coat it, it’s worth taking notice). Therefore an exit as a care property is unrealistic without doing work to improve it’s value. Which would then lead to a singular exit, which in the current market is a risk we aren’t willing to take.
- Although ‘comparable’ statistical data is good for the sales value as flats on a £/m² bases, my concern is that this was due to properties on the high street and not this particular street.
This street is dominated by large detached dwellings and there is no precedent for flats which in general doesn’t mean there isn’t an opportunity, it just makes it a little trickier.
Luckily this property is at the very entrance to the street, so one could argue it is essentially on the main street and the main reason I progressed to further due diligence.
So there is an opportunity for flats conversion…in principle.
So why aren’t we doing it?
Ultimately the values are not inspiring enough, making the margins questionable.
When there is a lack of statistical data (only ~4 listings within 0.25miles of this particular site) it’s best to pick up the phone. Property development is strange in the fact that the micro-economy plays a huge role in the viability, just a street or two’s difference can make a property undesirable.
Knowing this, I spent the afternoon back and forth with agents in the area (primarily the ones that have listings on Rightmove).
As a result I was able to speak to x2 commercial agents (who specialise in new build and one of whom is also an active developer in the general area), x1 developer from the South East that completed a deal in the area a few years back but isn’t active there now and x2 residential agents.
Feedback was wide ranging (interesting point in itself) but there was a lack of confidence on viable values —which is always a concern, combined with the uncertainty in the market it’s better to take the lower end of feedback.
Conservatism might leave ‘money on the table’ but it’s a better way to preserve your capital and avoid extinction level events. In an investment activity as long term as property development, constantly avoiding stupid things is a very sensible operating memorandum.
You may use statistical analysis to work out the average ‘m² rates’ for properties but ultimately you want to engage local agents (who think in terms of rooms not m²) to determine if the sales rates you have on the accommodation schedule are reasonable and what is optimal for the local area.
In this case values (depending on who you speak to, values ranged from £225k (one bed) to £350k (2 bed projected values).
Remember when you analyse a project it’s best to base your results on today’s values not future expected values, as that’s a level of prediction that is hard (read impossible) to get right.
Computing with relatively optimistic values based on this feedback, you end up with a below par return on cost (<25%) after factoring in all the other relevant changes.
General Appraisal Comments
- Good work splitting up the current layout into a flat style layout. Another way to optimise the value here would be a one story extension at the rear of the property under permitted development rights, once approval for C3 use had been agreed
- Note: The planning process would go something like this -> Change of use to C3 -> Permission for Flats -> Permitted Development Rights For Extension
- This extension would be the width of the property (roughly 15m) and would likely (depending on plot size) come out about 4m, adding 60m² to the site. This could either be an extra unit or allow the downstairs to become 4 2 bed sites (may be a good exercise to run this assumption.
- Feedback from local agents is that 600ft²-650ft² was sensible for one beds and 750ft² is best for 2 beds in the area. The floor space available in this property and it’s layout makes these sizes difficult to achieve. So you would need to price in this uncertainty.
- Always best to adjust the selling prices in your appraisal to market realistic figures, but as a bare minimum always check none of the properties are topping out the market.
- Contingency of 20% is reasonable on conversion projects (learnt from bitter experience) and if a listed building (grade 2) then allow another 5–10% on top of this. I advise steering clear of grade 1, especially in the current economic climate.
- Planning fees should be at least £50k-£60k (for this scale of property that’s typically around 15% of construction costs, depending on the level of construction work needed).
Question: What if it had stacked up?
For reference on a project like this that requires planning permission.
- Confirm client would accept an offer subject to planning
- Seek some level of security (lock out agreement) to take through a pre-app (note this is unlikely, but worth seeking anyway).
- Do a pre-app with the local council to judge worthiness
- If seems positive agree a price subject to planning with the agent
- Progress through planning
Note: if at stage 3 the pre-app does not look positive then walk away
If our partners come back with more convincing evidence that this will work then we may reconsider it. But ultimately I think vendors are yet to adjust their expectations to the market conditions. In 6 months they may be open to a more realistic acquisition price…we shall see.