present the scheme may still fail, at least in the short term, if the economy is weak
and firms cannot expand.
This introduction provides a resume of a typical development and the process can
now be considered in more detail.
The Developer
The developer is the instigator of the scheme. He provides the entrepreneurial flair
to identify the development opportunity and bring it to a successful conclusion. In
doing so he will make use of established relationships with commercial estate
agents and his knowledge of the occupier market. Most large development
companies specialise in particular areas of the market. Slough Estates for
example, built its reputation in the development of industrial and warehouse property
whereas Hammersons developed the first shopping mall in the United Kingdom at
Brent Cross.
Some life assurance funds act as their own developer and one example is Norwich
Union in the development of the Bentalls centre in Kingston on Thames. Various
government agencies also act as developers such as District and Regional Health
Authorities with hospital building. Increasingly, the newly privatised utilities will carry
out their own developments.
There are many types of developers. Some are ‘developer traders’ who build with a
view to selling the scheme when it is complete. Others will develop and hold the
completed investment in their investment portfolio. Some developers are quoted on
the stock exchange and others are little more than one man bands.
Throughout the development process, but crucially at the start before funds are
committed, the commercial developer will carry out an appraisal which will predict
the eventual profits to be earned from the scheme. A considerable amount of work
has to be done to produce a full appraisal as all the costs of the scheme have to be
considered. The site itself will have to be fully investigated and this will involve bore
hole surveys to enable the structural engineer to estimate the cost of the
foundations. An environmental impact study may be required before planning
consent is forthcoming.
With the assistance of his agent, the developer will also predict the rent which the
scheme will produce and (if the investment is to be sold), the investment value. If a
scheme is to be successful the investment value less all capital and interest costs
will have to leave an acceptable profit. If a developer has used rents in the
appraisal which are too high, perhaps in expectation of rent rises in the
development period, he may eventually make no profit at all and the scheme (from
the developer’s viewpoint) will have failed.
To avoid risk and to attract other tenants to a development, a developer will often
seek a pre-let tenant for a scheme. Before construction starts, a tenant will sign an
agreement to lease all or part of the scheme at an agreed rent. This is particularly
valuable in shopping centre development where an anchor tenant such as a
department store will make a commitment before development commenced,
thereby giving confidence to other lessees to take shop units.
A developer who borrows money to buy a site, construct a building, and seek
lessees will have no appreciable earnings until the scheme is let. It would be difficult
therefore, for any interest on capital borrowed to be repaid during the development
period. It is usually the case that interest is repaid as a lump sum when the fully let
investment is eventually sold. Interest in these circumstances is said to be ‘rolled
up’ until the end of the development period.
In arranging finance, the developer will often have a short term interest in the
scheme, whereas the fund purchasing the investment when fully let, has a long term
interest. Funds are, therefore, particularly interested in tenant quality in the longer
term and building flexibility which may not be of primary importance to the
developer.
Local Authorities may initiate development, particularly retail, by making town centre
sites available on ground leases to developers. The Authority will have a long term
interest in the scheme’s success, as they will receive a grounds rent, probably
geared to the full rental value of the development.
Not all developers have a short term interest in a development. Major developers
may hold completed investments in a portfolio rather than arrange long term finance
by selling the investment to a fund.
Planning
In the words of Clara Green ‘planning applications (like prayers) receive one of
three answers – yes, no or yes but.’ The process can be one of great frustration and
difficulty for developers and for a major scheme it is usual for a specialist planning
consultant to be employed to negotiate a consent with the Local Authority.
Planning law is complicated but in general terms, planning consent is required for
most major building in the United Kingdom.
The department of the Environment is responsible for planning and the Secretary of
State for the Environment is advised by teams of professional planners, surveyors
and architects. All applications are made to local councils and it is only the most
important or controversial applications which will be of interest to the higher tier of
government. Most applications are, therefore, decided locally although the
Secretary of State may decide to call in any application at his or her discretion.
To obtain planning permission, an application will be made to the District Council
although applications in the future also may be considered by the new unitary
authorities. The developer can choose the type of application he wishes to make.
If he wishes to seek approval to the principle of development, he can make an
outline application. This is sometimes referred to as a red line application, as a red
line is drawn around the site plan supporting the application. If consent is granted,
this will be subject to reserved matters and the developer will have to seek a
subsequent consent for these detailed matters later. Alternatively a full application
may be made which will include all detailed matters as well as the basic principles.
The Local Authority will decide the application in the context of plans which will have
been previously published and approved by the Secretary of State. Under the
present two tier system of Local Government, the County Councils produce structure
plans for their area which show in strategic terms the type and location of
development which will be permitted during the period of the plan. The District
Councils produce local plans which deal with detailed matters related to specific
areas of land. If the planning application does not accord with the local plan, the
Local Authority will be justified in refusing the application but obviously a developer
would be unwise to make an application of this type.
Structure plans have a life of between 5 and 15 years and comprise a lengthy
written statement supported by explanatory diagrams. The important matters dealt
with in the structure plan are strategic matters such as tourism and leisure, waste
disposal, new housing, employment and transport.
The Authority has a two month period in which to decide an application but it can
ask the applicant for more time.
If the application is refused the applicant can appeal to the Secretary of state and
the matter in the majority of cases, will be decided by a Government Inspector. In
major cases, the Inspector will make recommendations to the Secretary of State
who will, after advice, take a decision. There may also be a Public Local Enquiry
where evidence is heard by the Inspector over a number of days from all interested
parties.
In producing their structure and local plans as well as deciding applications,
Councils have to take into account policy statement produced by the government.
These are called Planning Policy Guidance Notes (PPGs) and they are published or
amended from time to time. Two of the most important are PPG 6 which relates to
out of town retail development and PPG 13 which deals with transport. There are a
total of 25 PPGs and many are frequently revised. For example a new PPG 12 was
produced in April 1999. This revision emphasised the importance of regional
planning which now has it own PPG (PPG 11) and also stressed the government’s
commitment to a plan led system. Any developer seeking to build against
government guidance as stated in the PPGs faces a long, expensive and uncertain
battle and therefore is well advised to tailor development proposals to accord with
published guidance. The government is at pains to demonstrate that the plan led
system is sensitive to demographic changes and this is seen in the revisions to
PPG 3 (Housing) which take account of the prediction that ‘7 out of ten new
households forming over the next 20 years are likely to be single person
households’ (Nick Raynsford, Housing and Planning Minister). A topical revision
PPG 25 (Flood Risk) which aims to avoid development in flood risk areas and
emphasises a precautionary approach in marginal areas with flood defences to be
shown to be in place (and paid for by the developer) before development is
approved.
The Development Team
The team will be employed by the developer at the start of a project and it role will
encompass design, costing, funding and marketing. In summary its functions are as
follows:
Architect
The Architect is the leader and coordinator of the design team who has a major role
in interpreting his client’s requirements and producing a design brief. The brief
establishes the client’s basic requirements and from this the Architect and other
members of the design team will produce detailed design drawings. These will
eventually be given to selected building contractors who will tender for the job of
constructing the building. During construction, the Architect will inspect the work as
it proceeds on behalf of his client. Because the Architect’s work is so important he
will be paid a fee based on a percentage of the total cost of the building work. For a
new building this will normally be between 4% and 5% of the cost of the work.
Quantity Surveyor
The Quantity Surveyor estimates the eventual cost of the new building and will
produce regular cost checks as the design is developed. Before tenders are invited
from building contractors, he will inform the client of the estimated cost of the works
(the pre-tender estimate) and the client can then proceed to tender with confidence.
Services and Structural Engineers
In some instances the engineers will be responsible for producing design drawings
and specifications of the building services (air-conditioning, electrical installation
etc) and the structure (foundations, structural frame). Increasingly however, the
services engineer will only produce a statement of how the services will perform (a
performance specification) rather than a full design. In these circumstances, design
becomes the responsibility of the contractor.
Estate Agents
Developers usually have established relationships with firms of estate agents who
will be aware of development opportunities. The agent will also provide marketing
advice and will be responsible for letting the building.
Other Consultants
Other consultants include solicitors, landscape architects and planning consultants.
With some complicated and large schemes, a project manager may oversee the
project on behalf of the client. Specialist noise or environmental consultants may be
required where development will take place in environmentally sensitive areas
where special planning conditions have been imposed.
Successful Schemes
A scheme will be successful if its location and design has attracted a number of first
class tenants and will continue to do so in the future should any tenants vacate. A
successful scheme will provide a secure and growing investment for the eventual
long term investor as well as an adequate monetary profit for the developer.
There are many reasons why development schemes are unsuccessful, some of
which are discussed below:
Poor Location
This is the most obvious but nevertheless very common reason for failure. A
shopping scheme may be located where there is a lack of pedestrian flow. An
office building may be located where vehicular access is difficult or the chosen site
does not provide the required image and identity for the tenant/s. On a wider scale,
the development may be located in a city which is in decline, to the detriment of long
term investment quality. Some commentators are casting doubt on the future quality
of fringe of town retail warehousing schemes which do not have the support of an
established town centre.
Poor Design
A shopping centre must be designed to maximise pedestrian flow and enable
shoppers to both park and gain easy access. If the design fails to do this, the public
may avoid the centre and tenants will be hard to find. Also shopping centres must
allow frequent changes of image and must provide the correct ambience for the
public. Attention to detail with the internal design will allow this to benefit the
investment.
Thee are many examples of office buildings constructed in the 1960’s and 1970’s
which do not provide the necessary ducting and image for modern tenants using
today’s technology. These developments may have been regarded as successful
when they were first constructed, but in terms of a long term investment are of
dubious quality.
Lack of flexibility with many buildings means that where occupier requirements
change the buildings cannot and voids are the result.
Increased Costs during Design or Construction
If a developer allows costs to increase, he will eventually make no profit whatsoever
from the scheme. If costs increase beyond those used in the appraisal the
developers profit will be eroded. The expertise of the design team to contain costs
whilst, at the same time, producing a quality building is of vital importance but
sometimes mistakes are made. A lack of coordination between building work and
services is a typical example leading to redesign, delay and increased costs.
Planning Errors
When a contract is awarded to a contractor, it is important that the site of the
development is firstly in the legal control of the developer and secondly the same
site for which planning consent has been granted. There have been many examples
of mistakes in this area to the detriment of the project.
Empty Property
A newly built shopping centre with few tenants is clear evidence of a scheme which
falls short of success. There are many examples amongst those centres completed
during the recession. As with office and warehousing property pre-let tenants are
particularly valuable in recessionary periods.
Public Sector Development
The Private Finance Initiative
In the past public sector development such as roads, hospitals and bridges were
built by government contracting with the private sector for the design and
construction works. Civil servants and their consultants would work to precise
specifications of what was required to be built. When the development was
complete the government would then be responsible for running the completed
hospital, road or whatever to the benefit of the public.
The Private ~Finance Initiative (or PFI) is intended to revolutionise the traditional
method of producing public facilities described above. It was conceived in 1992
during Norman Lamont’s troubled chancellorship and was vigorously supported by
his successor Kenneth Clarke. In essence PFI only required the government to
state how the building is to be used and the performance it must achieve. The
private sector is then invited to tender for the design, construction and running of the
new facility. The reward for doing this is negotiated with the government agency
responsible for the facility and will usually take the form of a regular monetary
payment so long as the facilities provided continue to meet the agreed criteria.
Kenneth Clarke stated that PFI is ‘a radical and far reaching change in capital
investment in public services which will break down further barriers between the
public and private sectors’.
The central argument in favour of PFI is that the private sector is more capable of
promoting efficiency than government and will provide business solutions to public
sector requirements. It is also argued that the risks of increased construction and
running costs, which appears to be a feature of public sector schemes, will
disappear with PFI where all the risks are borne by the private sector.
Critics of PFI point out that it is extremely difficult to produce a performance
specification for, say, a highly complex building such as a hospital and this will lead
to private sector contractors being allowed to cut corners to the detriment of the
public. It is also pointed out that the government can always borrow money more
cheaply than the private sector and that this will inevitably lead to increased costs
which will be passed on to the public.
The change of government in May 1997 led to a thorough review of the experience
gained from using PFI in the previous five years. Malcolm Bates was appointed to
carry out a review which resulted in 29 recommendations aimed at rationalising and
reinvigorating the PFI process. The ‘Treasury Taskforce’ was the government’s
response to the review and this body consisted mainly of city financiers who were
charged with building up PFI expertise in government. The taskforce had a life of
three years and is replaced by ‘Partnerships UK’ which will operate as a joint
private/public consultancy to assist with the PFI process. There are currently
hundreds of PFI schemes in the process of completion and the present government
is wedded to this form of procurement for public sector projects.
Among the leading PFI projects are the following:
? Northern Underground Lind
? Bridgend and Fazakerley prisons
? Scottish Air Traffic Centre
? Channel Tunnel rail link
? Docklands railway
? Post Office Counters automation.
SUCCESSFUL PROPERTY DEVELOPMENT
Nigel Dubben, Kingston University
