Occasionally The Numbers Do Lie…

This month I have been busy working on a development site whilst the HMO portfolio ticks over. Whenever an offer is accepted it’s always a frantic time as you try to get everybody working together. As we continue to look at so many sites with various potential exits, it’s necessary to do a deep dive when an offer is accepted and we move to the next stage. But that is only the start of a very long journey and there are still multiple hurdles to cross.

This month I have had a few hats to wear; raising the cash for the project and discussing it with potential investors, verifying all the numbers (i.e. is the current opportunity exactly what we think it is), getting the team (such as the builder, planning consultant etc.) to confirm they can execute our plan for the site, and to make sure the legal process goes smoothly and the seller is kept in the loop and is happy. A lot of these roles are happening simultaneously, which makes things difficult and whenever it is a site that is available on the open market, as this one was, it is always a race against time.

This month I have learned a lot about the various stages outlined above and been reminded that no matter how many details there are to deal with, never forget to double and triple-check everything. As Ed Fowkes says in our ‘investor interview’ this month (page x) when moving onto bigger projects you are not laying the bricks etc. so you need to rely on the experts and pay for a decent team around you.

For this particular project, we were working out of our local area. I am based in Northamptonshire, which was a deliberate choice some years ago as it allowed me to build a high-yielding property portfolio that I wanted to hold for the long term. For those of you that read my ‘investor interview’ here three years ago with Richard Bowser, you’ll remember that was why I moved to the area. However, for potential developments, it’s a much more challenging market because in lower-value areas it’s often tough to get the GDV to a value that allows for the margins necessary.

For that reason this project was out of the area and as such you really can’t substitute local knowledge and rely on desktop analysis and numbers. In this instance we were working off a GDV that was supported by sold comparables in the area. However, we also went to the local agents to get their feel for the market in the short and long term. This proved a valuable exercise as they didn’t support the sold comparables we were working off, particularly as most agents are usually bullish. Whenever there is a discrepancy I am always inclined to get a third, fourth and fifth opinion, which is what we did in this case. To my surprise, most of the agents agreed that this particular scheme wouldn’t attract the comparables in the area which then put pressure on the GDV.

At the same time, the project manager and builder visited the site and had some concerns about the basement element of the build. The site already had planning so their only concern was related to extra contingency costs for the basement. After factoring in both pieces of news it made the site a lot less attractive and when there is pressure on margins before you’ve even bought a site you are in real danger of trying to make the figures work when they don’t. So despite spending a lot of time,
cost and energy on the site we had to step back. It’s extremely frustrating however development is about the long game so you have to be patient.

Anyway, we have a few other potential projects in the pipeline so I’ll keep you posted.

This article has been reproduced from the March 2018 issue of Property Investor News.

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