Entrepreneurial investors snap up development opportunities at auction

14th May 2024

Originally published in the EG 14.05.24

Development is the engine of the property sector. It produces the product which creates the space for occupiers and fuels the investment market. Without it, the sector is not refreshed, and new opportunities are not created. As a result, a vital driving force for activity will be diminished.

All projects require financing. In recent times a standard development margin of, say, 20% has come under pressure from both increasing construction costs and more expensive finance. Since the Bank of England began its hike in interest rates towards the back end of 2021, the convergence of expensive debt and higher build costs has brought many areas of the development sector to a halt.

Recent data shows that the cost of development has increased by nearly 25%, while the cost of funding development has nearly doubled. To make matters worse, beleaguered planning authorities are routinely taking 18-24 months to arrive at a decision, which even then might be negative. Accordingly, having an asset on which there is an existing planning consent or a non-contentious change of use has become a valuable commodity.

New uses

The notable exceptions to these seemingly intractable barriers are the development opportunities that are appearing in our auction sales. They can be modest in their scope – the conversion of upper parts to residential or the development of a service yard or car park – but they are often underpinned by the “meantime” income generated by the component of the asset which remains let.

They attract entrepreneurial owners with local market knowledge who have the resource to convert vacant or surplus properties into new uses.

What we may now be seeing is the start of a new wave of development opportunities, which have been appearing at commercial property auctions. At our most recent auction, we sold nine properties with development angles. These included retail parades, former public houses and logistics/industrial land.

In the case of our larger investment management clients, there are a number of reasons that they may wish to divest themselves of development opportunities through our auctions. This is usually due to a strategic reappraisal of their portfolios, where enhanced performance can be achieved by selling out of the unviable smaller schemes. The speed and certainty of execution can be in stark contrast to the interminable toing and froing of previous long-winded campaigns.

However, from the point of view of the private property companies and high-net-worth Investors, some of whom put together schemes three or four years ago, these self-same higher costs of development are now compelling those who cannot afford the carrying costs to sell now – especially if they have not yet commenced the planning process.

Removing uncertainty

The assets which may have been earmarked for development have – or will soon – become too expensive for current owners to hold on to, meaning that they need to find a speedy sale. The good news is that there is now a growing pool of buyers for them to tap into. There is a growing entrepreneurial class of private investors who are able to finance development with their own funds and can wait to refinance once borrowing becomes cheaper.

Private investors currently seeking opportunities in the development market are turning to the auction process to benefit from a ready supply of assets and the speed of the transaction process, which removes the uncertainty associated with prolonged negotiations.

Meanwhile, it will be interesting to see if the supply of development opportunities accelerates as owners consider their narrowing options or as distressed loans are traded on.