In very general terms a property developer is a person or company who ‘redevelops’ property. That sounds stupidly obvious but the term property developer describes those that ‘develop’; from a simple redecoration or refurbishment of a single property to companies that build tens of thousands of homes a year.
I often end up at a function dinner sat next to someone who describes themselves as a property developer. I am in the industry so rectify what others may consider disappointment, and learn that my new friend has just bought a terrace house in auction and is about to sell it having put in a new bathroom and kitchen. He may well have borrowed most of the money from the bank, invested a small amount of his own equity (cash into the deal) and is expecting a profit based more on luck than judgement. Despite the fact he may be new to his business can he genuinely describe himself as a property developer?
It is probable that, like a lot of people with little experience in the industry, he has been caught up by the aspiration of large profits which have largely been created by the soaring increase in house prices and easily available cheap debt. It is impossible to really categorise this type of property developer, or make a recommendation for one, because there are probably hundreds of them in every town in the country. They may well be local builders who have invested in a project themselves or a person who hires builders, at their own cost and risk, having bought a property with a view to turning a profit.
My personal judgement is that the above group can more accurately be described as ‘property renovators’ rather than property developers.
I think the true definition of a property developer is one that actually builds a new property on either greenfield or brownfield land. In simple terms brownfield land is land that has already had building treatment and greenfield is land that has never had any building treatment in the past.
So this group of proper ‘Property Developers’ can be further subdivided into different groups largely defined by the quantum of buildings they build, either in a given geographic location or by virtue of the amount of properties they build in any one year.
An individual or company that buys a back garden, either before or after a planning permission is granted and then builds a property on that land, is truly a property developer. The person or company may only ever build one house (with the intention of selling it for a profit) or may build a few houses each year. They are probably best described as small scale or local property developers and will usually develop few properties and more often specifically within one small geographic area.
The next group of property developers can be categorised as ‘regional house builders’. They will not have a national coverage but will be longer established, well-resourced and often know their chosen local markets very well. There are several companies of this type throughout the country who are almost always privately owned and have established themselves well within chosen regions. They will typically build around 200 – 400 homes a year and have good long standing relations with one or two large money lenders. They are very good at knowing their market and most build a decent product because they are connected and invested in their geographic areas and rely on reputation through quality design and development. I am speaking generally here there are always exceptions to the rule and it’s only an experienced judgement that identifies the bad from the good. This group will typically but not exclusively buy land that is defined as ‘within settlement’ or brownfield land. They typically do not extend into ‘strategic land’ or greenfield land unless it is a smaller site that has already been granted planning consent.
The next level are the national housebuilders. This group are usually large and have a national presence with several offices throughout the country. They will often be publicly owned and the handful of companies within this category are considered the biggest housebuilders in England. In most cases their land supply comes from large greenfield sites (strategic land) which often makes up more than half of their development turnover. These companies are economic engines. They not only are considered barometers for the economy but they also produce most of the countries new housing supply. They are run by experienced professionals but each have their characteristics which makes some more successful than others and some better to deal with than others.
You have probably read to this point of the article because you are a land owner and you are considering taking the plunge and doing a deal with a property developer or large house builder. In that case, there is a commonality between all the groups of property developers that I have defined – they all buy and sell land / property. (I consider land to be property so if you are a farmer reading this when I refer to property I am talking about land).
So having established that all property developers buy property the critical question (and probably the reason you are reading this article) is to understand how to best contract with one of these entities. How do you sell your land to a property developer without getting caught out, but at the same time maximising value and reducing your risk.
Unfortunately in such land transactions most of the time, risk goes up with value. For example if you are prepared to sell your property after a planning permission has been granted you are extremely likely to sell for a higher price when compared to selling before planning permission has been granted. When I talk of risk in this context I am not necessarily taking about immediate financial loss. So if you enter into a contract (either an Option, a Conditional Sale Contract, a Promotion Agreement or a Hybrid Agreement) where you have agreed to sell to a developer post planning permission, you should not expect to have to contribute towards the cost of securing a planning consent (that would be very unusual) but you risk contracting to sell at a future undetermined value (perhaps even an under market value) or over a time period that is unsuitably long. Money today is worth more than money tomorrow, otherwise known as Net Present Value.
If you are interested in selling your land/property, there are some useful land valuation tools online.
I was considering at this point writing in more detail the various forms of contractual arrangement that you could enter into with a developer but for most people that would be relatively boring. You probably just want to do a deal and you trust your local land agent to act for you in arriving at a suitable conclusion.
Unfortunately it is never that simple and I would always advise that you do get advice and guidance from a completely independent but suitably qualified expert who can at least help you understand the parameters and parties involved in the process.
I will say that the type of contract you decide to use to sell your land will very much depend on your aspiration and your criterion. If for example you are a farmer looking to sell land for development I would almost always recommend contracting with a Planning Promoter rather than contracting with a housebuilder directly. These contracts are usually Promotion Agreements where the ‘Promoter’ pays for and secures planning permission and then sells the land to a developer once planning consent has been granted. The Promoter takes a percentage of the sale price as their reward but the important points here is that the Promoter will work to secure as higher value as possible for your land (because they share in the sale price) and using this method of sale you will know that you are selling at true market value because you are selling your land after a planning consent has been achieved and the price has been established through a true marketing exercise.
The understanding of ‘value’ is also important. In simple terms the market value of a property is defined as the amount that a willing buyer and a willing seller is prepared to agree, in an arm’s length transaction where the parties are knowledgeable and act without compulsion.
Entering into an option agreement (often presented with a discount to market value) with a developer does not give you the comfort of establishing true market value. At the end of the planning process, usually in this type of transaction, the land is valued by an independent valuer which establishes the price – which critically is not through a marketing exercise. So based on the Royal Institute of Charted Surveyors (RICS) definition of value, an RICS (often referred to as Red Book Valuation) is actually not a true value but an estimate of future value because the parties are not actually knowledgeable (before a planning permission has been granted) of what they are selling.
There are of course occasions when Option Agreements are perfectly acceptable and this in my experience is when the parties agree from the outset the Price and the trajectory in terms of objectives and timescales.
Again, in my Opinion larger land transactions are much better agreed and contracted by way of a Promotion Agreement for the reasons I have hopefully conveyed above.
I have written this article in an attempt to give a very brief overview of the world of property development. You should not rely solely on this article to reach a conclusion when selling your property and I strongly advice that you seek the assistance and support of a specialist.
I am a Chartered Town Planner, Royal Institute of Chartered Town Planners (RTPI) and a Licensed Registered Valuer by the Royal Institute of Chartered Surveyors (RICS) and I have been in this industry for over 22 years. I don’t profess to know everything but I am happy to speak with people who have a question or need some guidance. In this instance feel free to email me.
James Sorrentino – copyright 2022
