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‘Challenge and change the mindset’

22 April 2016 • Mike Nuttall

DEVELOPMENT SEMINAR ROUNDUP: If you missed our Pitfalls and Possibilities of Diversification seminar this week here’s a quick round-up of what we covered. Please do get in touch with our team if you want to discuss any of these issues in detail.

Profit for purpose

With the housing agenda from government clearly focused on home-ownership, RPs are acting more like private developers that the social housing providers of old. Crofton’s Property Partner, Julie Loggenberg set the scene, stating that in order to compete with the big ‘spec builders’ housing providers needed to completely change their mind-set to think commercially at every stage, and develop (or bring in) the necessary skills to make commercial developments ‘stack up’ and make a profit to invest back into core activities.

Julie highlighted the many costs that need to be considered such a land ownership, S106 liability, abnormals, SDLT, procurement, consultants and marketing. But she also highlighted the many opportunities that come with increased commercial development and the changing sector, such as de-regulation giving the freedom to do more, taking advantage of Government initiatives such as Starter Homes, making better use of land holdings, pooling resources and services with other RPs, and increasing RP’s growth and profile.

Cementing viability and feasibility

Mark Edwards, Head of Development at Saffer Cooper, spoke about the importance of having a land buying strategy that was focused on commercial objectives, and how fundamental it is to ensure there is a market for your product, whether it’s PRS or outright sale. This requires detailed target audience profiling, market research and segmentation and tailoring the specification of homes to appeal to the target market (Retired couples? Aspiring families? etc), all well before a spade has hit the ground.

Mark went on to discuss financial feasibility, and particularly costs that RPs traditionally haven’t had to consider previously when developing for social rent, such as show homes, sales staff, branding, marketing and advertising.

Governance and structure

Croftons’ Head of Governance and Regulation, Jo Savage, emphasised the importance of getting the right structure, governance and decision-making process in place to develop commercially, whether that was through a trading subsidiary, joint venture, contractual partnering or other arrangement. Crucial to this, from a regulatory aspect, is ensuring the parent RP’s social housing assets are protected from any financial risks associated with a commercial development.

With development grants a thing of the past, getting the funding in place to develop for profit is a fundamental issue for RPs. Jo discussed some of the options such as on-lending (if current loans allow), investment policies and institutional investment. The key message was that while development cash isn’t quite as cheap and easy to come by as in the past, money was certainly out there if RPs look in the right place.

Tax implications

When undertaking charitable activities and developing for affordable rent RPs don’t need to be overly concerned about SDLT as they don’t have to pay it on land acquisitions, but when developing on a purely commercial basis SDLT could significantly increase development costs. Jacquie Adams, Tax Partner at Beever and Struthers, also discussed how SDLT needed to be considered alongside, not in isolation from, VAT and Corporation Tax as RPs look to utilise any reliefs or exemptions across the board and find ways to maximise VAT recovery and utilise tactics such as Gift Aid to reduce costs.

Maximising commercial assets

Lastly, Bob Agnew, Croftons’ Commercial Real Estate Partner, outlined tactics that can be used to maximise any commercial units that RPs may be looking to develop on mixed-use sites. The crucial consideration is to ascertain whether there is a local market for commercial units by using agents with good local knowledge. If, for example, there are lots of void commercial units locally it may be a none-starter from the off.

If viability is established getting the Heads of Terms right from the outset will be time well spent. RPs should look at addressing covenant strength issues, structuring incentives, and including user provisions and break options into commercial leases. Lastly, having an exit plan and strategy to sell the commercial units to investors is crucial. This requires a solid assessment of the investment market, and looking at pre-sales tweaks to bolster investment value such as re-gears or buying out tenant break options.

Our top tips for developing homes for profit

  1. Know your market
  2. Look before you leap
  3. Don’t waste money
  4. Use your consultants effectively
  5. Think flexibly
  6. Have an exit strategy

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Croftons is the trading name of Croftons Solicitors LLP, a limited liability partnership registered in England and Wales with number OC343375. The term ‘partner’, if used, denotes a member of Croftons Solicitors LLP or a senior solicitor of Croftons Solicitors LLP with equivalent standing and qualifications. A full list of members is open to inspection at the office. Croftons is authorised and regulated by The Solicitors Regulation Authority (SRA) number 508041. Croftons has its principal place of business at The Lexicon, Mount Street, Manchester, M2 5FA.

 

 

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