05/06/2007

So you want to be a property developer?

Most of Yorkshire’s cities are enjoying sustained regeneration and development. With Leeds at the forefront we see new offices, retail outlets and apartment schemes appearing at pace with seemingly no apparent possibility of a slow-down.

However, if you talk to some of the region’s property developers there is a genuine concern that ever increasing costs caused by over legislation, increased bureaucracy and professional fees are putting serious pressure on this level of development.

The fact is that property development is becoming more and more difficult. It was not easy 20 years ago; but now it is more costly and time consuming and beset with hidden traps. Much of this is due to red tape, some of it is due to lawyers and some arises simply because developable land is in very short supply.

Firstly, there has been VAT which created another layer of paperwork and procedure. In relation to mixed-use developments it requires developers to take a careful approach to avoid irrecoverable VAT. This is also true of let schemes where VAT must be correctly waived to avoid possible clawback by the revenue. Then there is the nightmare of Stamp Duty Land Tax which provides a new – and in my view illogical – raft of means to avoid or mitigate.

Lawyers then invented collateral warranties and insurers have since tried to do away with them. The principle that a user or owner of a property should have recourse against its designers or constructers when the developer standing in the middle has disappeared is a good one. Unusually, it was even was helped on its way by legislation – The Contracts Rights (Third Parties) Act 1999.

Unfortunately, the market has seen fit largely to ignore the benefits of this Act. Instead it continues to require a three-dimensional spider’s web of contractual liability from everybody who played any part at all in the creation of a property to everybody who could possibly now, or in the future, have any interest in the property.

And this brings us to the planning process – the single most complex time-consuming and far-reaching element of any development now requiring a truly frightening array of reports and investigations. Remember also that any site now coming forward will probably have been used in the past for something undiscoverable or unmentionable. Seeing the planning application through all the necessary processes and consultations to a successful start on site requires a strong stomach and a long pocket.

It is at this point that you will need serious money. Your bank is keen to lend, and your lawyers ship the entire paperwork to the bank’s lawyers. Unless every piece of paper is correct, then the bank seems not so keen after all.

This process highlights genuine conflict between the interests of the developer, who will take a view and can accept a less than perfect world, and the position of the bank, whose lawyers require no risk at all.

Assuming that a developer has enough pre-lets or sales and a signed building contract and fully appointed professionals they are now finally able to start building. Spending, running high to date, goes into overdrive as does the maze of controls, inspection and health & safety requirements.

This job is more difficult and a full grasp of all pitfalls is essential. While the rewards are still the same if not greater, there is a real danger that if the Yorkshire property market softens, weaker development returns will not cover the increasing cost burden and the rate of development will begin to slow.