Look around you.
Wherever you go you are surrounded by real estate, whether houses, offices, shops, hotels, warehouses, or education or healthcare facilities. These buildings are all the products of real estate (i.e. property) development. Property developers quite literally build the world around us, creating and changing the environments we inhabit and use on a daily basis.
These are the places we call home, where we go to work, shop or eat.
In this article we’ll explore what property development is and how it works. As we do, we’ll define exactly what we mean by property development, and uncover what it is that a property developer actually does.
What is property development?
Property development, also called real estate development, is the process of developing buildings or land into a higher use value.
It’s a multi-faceted business which can encompass any of the following:
- Buying land and building property on it;
- Renovating, extending or improving property;
- Converting property from one use type to another.
Property developers are the entrepreneurs who carry out real estate development. There is a simple premise behind what a developer does; put quite simply:
A developer adds value to land or property.
By adding value, a developer can extract a profit from development. This is one of the main (but not only) aims in property development. The concept of developing property to its highest and best use value is fundamental to the property development process.
The advantage development offers in comparison to other avenues of preserving and generating wealth in property, such as property investment, is the potential for substantially higher returns.
However, where profit and a return can be made, risk always follows. Property development is no exception.
Many people will tell you that property development is complex and risky. Indeed, without the right knowledge, skills or planning it can be and as a result, developers often seek to reduce risk in as many ways as possible.
So what is ‘real estate’?
The term ‘real estate’ simply refers to both land and buildings. Real estate encompasses both residential and commercial property.
The different facets of property development
While profit is often a keen incentive behind property development, there can also be a pertinent social incentive to provide the housing, shops, offices, warehouses, and educational establishments needed to create a robust local community.
Property developers tend to focus either on residential development or commercial development, although there can often be significant overlap between the two.
Residential developers may integrate commercial properties into otherwise purely residential-led developments: a shop at the bottom of a block of flats for example. Likewise, commercial developers may integrate residential property into otherwise purely commercial developments. By doing so, developers can create mixed-use developments which better cater to the needs of the community, which fulfil various planning obligations, and diversify their risk or income stream within a development project.
Another distinction in property development is between developers who develop property to sell for capital gain and those who develop to hold property for its long-term rental income. The choice of strategy depends on the goals of the individual developer and / or investor. Both are perfectly viable strategies but produce different outcomes.
Let’s be honest though, property development can be daunting.
But it doesn’t have to be.
Many seasoned property developers will tell you that they are far (if ever) from knowing all there is to know about property development. However, rather than trying to do it all, most successful developers focus on becoming specialised in a particular type of development. By doing so, they become experts in a particular strategy or niche in the market, maximising their potential for success.
Why even homeowners can be developers
You might think that residential property development is just reserved just for the large housebuilders.
There are thousands of small-scale property developers who are refurbishing single properties or building a handful of properties at a time. And they are being rewarded handsomely for doing so, whether in the profits realised from the development, or by building a home for themselves and their family which caters to their specific needs or desires.
In fact, it is estimated that 12,500 people complete a self- or custom- built home in the UK each year.
Property development is not just for the large-scale housebuilders: the Barratt’s, the Taylor Wimpey’s or the Berkeley’s. Not everyone who gets into property development seeks to follow it as a full-time career or turn it into a full-time business. Many homeowners get involved in property development so they can:
- use it as a strategy for advancing up the housing ladder;
- extend their property to accommodate a growing family; or
- build the property of their dreams.
The development team
It is important to recognise the many components that may be needed for a successful property development. The process can require a plethora of different skills, professions and competencies.
You would need to be incredibly talented to embody all of the skills required; whether it is understanding the policies determining whether a development will achieve planning permission, learning how to lay bricks or plaster walls, or for that matter, knowing what materials you should be using in the first place. The majority of developers aim to bring together a team of people to assist in the process and help build their development.
For most individuals going into property development, it is unlikely they will possess the time or inclination to carry out each stage of the development themselves. In fact, the majority of people who decide to build their own home each year do so through a custom-build route i.e. by hiring a specialist team of professionals to carry out the build for them.
Further, carrying out each stage of the development yourself does not allow for a system which is scalable. Scalability will allow you to move from developing one property at a time, to developing multiple properties in multiple locations at the same time, increasing your ability to build a profitable property development company, if this is your aim.
So who do you need on your team to make the property development process as efficient and effective as possible?
A development team will comprise most, if not all, of the following individuals:
- A planning consultant: to advise on the planning process and submit any necessary planning application(s);
- An architect: to design the development and produce the plans;
- A quantity surveyor: to cost the development;
- A project manager: to oversee the development;
- Contractors: to build the development;
- An accountant: to organise the finances;
- A solicitor: to transact the initial purchase and final sale of the development.
In addition, if the development is being carried out for profit, i.e. the developer is not building his own residence to live in, the team may also include:
- A site finder: to identify sites for development;
- A marketing team: to produce marketing material for sale of the development;
- An agent: to sell the development.
The developer may carry out some of these roles, but will usually act as the organiser and coordinator of the entire process, providing the strategic direction and decision-making.
While the developer may not understand the specifics of each profession, he or she should have a high-level understanding of each discipline and the key issues to consider. The developer must ensure that important matters are not overlooked. This will include an understanding of: site finding, planning, valuation, development appraisals, financing, construction methods, agency, marketing, and property law.
As orchestrators of the entire process, developers take the greatest risk in property development but typically reap the greatest rewards.
This article was written by Vicky Bromley. Connect with Vicky on LinkedIn.