Property development is an undoubtably enticing proposition. Commercial real estate contributes over £100 billion to the UK economy every year alone, while popular television shows such as Channel 4’s Grand Designs and Netflix’s Selling Sunset have highlighted the creative and financial rewards it offers to different parties. But as with most investments, property development isn’t without its risks.
Whether purchasing existing property or taking over land, a significant initial outlay puts pressure on securing acceptable returns within as quick a timeframe as possible. Hiccups along the way can cause frustration for investors, developers, contractors and lenders alike – making the research stage vital in increasing the chances of securing a desirable outcome.
First off, location is always key. Proximity to a target audience’s ideal facilities – transport links, schools, other businesses and so on – will determine a development’s viability and market value. The scope to increase or maximise the current value of a development is then crucial in turning a profit.
But what about the factors that are more difficult to predict and control once a project is underway? Below we highlight common risks and discuss some of the different ways to protect a property development project.
The common risks of property development
There are several outside forces that can pose a threat to a property development project, including:
- Changes in the economic environment, such as a new political party coming into power or rising interest rates
- Rising material and labour costs, often influenced by geopolitical developments
- New local regulatory requirements around planning permission or environmental standards
- Contractors facing financial difficulties mid-way through a project or raising disputes
- Bad weather, delivery delays or other factors holding up the construction process
- Unexpected expenses, whether due to construction errors, altered plans or unforeseen circumstances
- National, local or industry market drops reducing a development’s potential resale value
How to protect a property project
Thankfully, there are several tactics that can reduce the likelihood or lasting impact of these nasty surprises.
If a property developer lacks experience, hiring an experienced project manager will help a project run smoothly while providing opportunity to learn for next time. Even with their guidance however, it remains essential for developers to conduct in-depth research into factors such as location, regulatory requirements, suppliers and contractors before getting a project underway.
Building healthy long-term relationships is another smart way to ensure success in property development. Creating a positive and open line of communication with builders in particular will help avoid many common delays.
But what about legal assurances? Legal indemnity insurance from Gallagher can protect property owners, developers and lenders alike from a variety of risks including known title defects discovered during the evaluation process. Other potential issues covered by a legal indemnity insurance policy include:
- If a development encroaches on a neighbouring property owner’s right to light
- If a third party enforces a covenant restricting the ways in which a property can be developed
- If planning permission is challenged by a third party and put to judicial review
Property development may be a risky business, but the returns can be spectacular. De-risking property development projects as much as possible is the best way to ensure consistent success.