For years, redeveloping a property for profit seemed like a one-way street. However, the credit crunch, recession and property price falls have put paid to this once sure-fire bet. But with a little stability returning to the UK housing market, developers who are careful with their calculations – and can get their hands on the right amount of cash – may be able once again to turn a healthy profit from their bricks and mortar projects.
Things have been reasonably quiet on the property market front for the past few months, with the Halifax and Nationwide house price surveys showing modest falls. Increased optimism within the economy and a limited supply of property have buoyed the market and stabilised prices. Although this comeback could be short lived, current conditions do offer opportunities to prospective developers. "You're much better off developing now than right at the top as at that point it can only go one way and that's down," says Sarah Beeny, presenter of Channel 4's Property Ladder and founder of website tepilo.com. "Starting at the bottom means things can only get better."
The current property market offers many opportunities to buy well and at a fair price, key to any development. Auction prices are low, as are the cost of materials and contractors, which will lower the price of building works to improve the property. The dip in property values has led many to delay selling in order to achieve a higher sale price. This has produced a shortage of stock which should facilitate a sale once the property is ready.
However, there is more at risk in property development today. "In markets in the past, people have always been confident of rising prices," says Charlie Noel-Buxton, a partner at estate agents Cluttons. "That's different now: they don't have capital growth to cancel out any losses." Overspending on finishings and projects taking longer than scheduled will eat into profits far quicker than they would have before the credit crunch began.
One of the biggest hurdles to overcome will be getting the finance. "For the past six months, residential development is probably the hardest sector of all of them, with regards to lending, as there are just so few players out there," says Calum Kerr from broker Savills. High street banks no longer offer residential development loans, limiting options open to those hoping to buy and redevelop. Where finance is available, lending criteria are incredibly stringent and loans will be granted only to those with proven development experience. There are specialist lenders that will lend on self-build and large renovation projects. However, these will often be stage payment loans lending on the present value of the property and then revaluing once some work has been completed with a view to releasing an additional stage payment. These are slightly more expensive than standard mortgages.
If you plan to live in the property while developing it, or the works are more cosmetic, you can apply for standard mortgage finance. However, you will not want to tie yourself in for too long if you plan to sell relatively soon. "It is hard not to get locked in these days," says Andrew Hollingworth, the head of communications at broker London & Country. "HSBC has some penalty-free trackers and Coventry BS has some flexible deals, but that's not to say it would be particularly welcoming of a renovation project." The bottom line is cash. Wherever you get your finance from, you'll need a hefty deposit, often above 25 per cent, as well as extra cash for mortgage arrangement charges, stamp duty and solicitors' fees.
Focus on who will ultimately end up buying your property and designing it to suit that buyer. If you can buy a house in a quiet road, near a good school with a garden and ample parking, alter the layout to include a kitchen diner and finish it to a good standard, there is no reason why a family would not want to buy it. Deck it out as a bachelor pad, and you've got problems. "The safest properties are Victorian terraces in quiet streets, close to schools and with a good garden," says Ms Beeny. "But these will be the ones that have the least potential profit because they are safe bets."
The easiest way to add value is by adding space. House extensions increase the square footage of a property and allow you to sell on for a higher price. Finding a property where there is a problem to overcome should also ensure a good return. If the layout of the house is awkward you can add value by rectifying it to open up the space. Ugly façades of Sixties and Seventies buildings can be improved quite easily and will boost sale prices. If renovations have previously been executed poorly and period features hidden, revealing them will boost resale value.
It also pays to be creative. If the property has a flat roof for example, you can turn it into a roof garden and create an extra selling point. Using online services such as zoopla.co.uk to keep track of property prices in the local area will give you a realistic idea of the kind of return you can expect to achieve on a property and give a clear basis for budget calculations.
If you are willing to take a bigger risk, unique properties like converted lofts and mews properties can be incredibly popular and prices for truly individual offerings are unaffected by the financial crisis as buyers have to grab them for the asking price or wait a considerable time until something similar comes on to the market. However, unusual properties can be too different. "Unusual properties are always a risk," says Ms Beeny. "If everything goes well you could make a lot, but you might make nothing. The greater the risk, the greater the profit."
Another issue with buying unique property is you may not have the fallback on the rental market offered by other properties. "It's an astonishingly challenging market," says Simon Harris, the managing director of uniquepropertycompany.co.uk. "From a rental point of view, even unique properties are difficult to let. Unless you're incredibly lucky, you're looking at probably only getting 3.5-4 per cent yield."
More standard homes should, however, be possible to rent if a sale is difficult. "You need to be aware of what the rental yield will be on the property before you buy it as renting is a great fallback if for any reason you can't, or decide not to sell it," says Dominic Toller, managing director of property website Propertyearth.net. But again, during the recession rental yields have fallen as much as 20 per cent, so although you will see a return, there's no guarantee it will be a strong one.
'We hope to walk away with a tidy profit'
Tom Urpeth, 26, from Hornchurch in Essex has bought a two-bedroom maisonette with a garden in Leyton, east London, with his girlfriend with the intention of doing it up and selling it on.
"We had a big enough deposit and felt that we had a good chance to make a bit of money on it and get a bigger deposit to re-invest later on. So we decided to go for it.
"We bought the property for £155,000, and got a 90 per cent mortgage at a fixed rate of 5.5 per cent for two years."
Tom has budgeted £15,000 for renovations. "The interior was extremely dated but structurally the property was sound and many of the original Victorian features had been preserved which we believe will be a major selling point.
"We do have builders in the family and are saving money because of that. We are also living with relations and so are paying minimal rent as the house is still not habitable."
Tom already has an idea of what his newly renovated property will fetch. "We hope to have the works finished by January, and as completed houses in the area are selling for £60,000 more than we originally paid, we hope to walk away with a tidy profit."