Two Things To Remember When Investing In Property Development
What to consider when investing in property developments :: Part II
In part I of this series we covered the four different kinds of investments that are available in property developments.
Understanding the potential benefits and risks of these is your first step towards incorporating property development into your investment portfolio.
If you’ve decided that you would like to invest in a development, the next step is to choose the developer and project that you would like to work with.
When doing this, these are the main considerations:
The Developer
The success of a development depends on efficient assembly of three elements — capital, labour and land.
The role of the developer is to be the project manager of this entire process, from finding the site until selling the last unit — so you are looking for a developer or a development team who is savvy, prepared, and experienced (preferably in the area).
When assessing a property developer, look at their track record:
What developments have they worked on before?
Are they of similar size and function as the one being proposed to you, or is it entirely different?
Developers should have successful experience in similar projects and be able to show you the financial summaries of those projects, as well as the duration they took to complete.
All of this will help you assess if what’s being proposed is realistic.
Secondly, it’s important to consider their communication skills. A good property developer will be able to communicate with you well, from the beginning — showing you a prepared business plan and/or brochure that explains the project and investment opportunity well.
They’ll also be happy to sit down with you or take some time on the phone to run through the details with you and answer any questions you may have.
This quality of communication should continue through the duration of the project. It is normal for some parts of the development process to take shorter or longer than expected, as well as for costs to fluctuate slightly and this is part of the contingency plan that a good developer will have in place.
During the process, a good developer will keep investors posted.
Top Tip: Ask to speak to current or previous investors before making a commitment.
The Project
When assessing the project, it is important to look through the business plan carefully and make sure that it makes sense to you.
Are there other similar builds in the area and did they perform well?
Have nearby areas experienced growth or gentrification in the past few years?
If the project already has planning permission, you can also have the confidence that the local authorities believe there is a place for this project in the local community.
How much to invest?
How much to invest and in which way, will firstly depend on the necessities of the development.
It is likely that developers will be asking for specific kinds of investment at different stages — for example bridging finance at the beginning. If the investment being requested matches your appetite for risk, then it is up to you, your available funds and your overall investment strategy to decide how much you’d like to allocate to that specific project.
There is also an increasing trend in using what’s called a Small Self-Administered Scheme to invest in property developments. Qualified investors may be able to take their pension funds into their own hands and invest part in higher-yield opportunities such as property developments.
Especially when considering investing your pension fund, it is paramount to do your due diligence and take the above into account. Property development investments are not for everyone — but they very well may be for the discerning investor who can do a little research and stomach some risk in return for a higher reward.
This article doesn’t form any investment advice, it is general guidance built up over a number of years in the property development industry. Before making investment decisions please consult a specialist for advice specific to your unique situation.
