All investment has an element of risk attached and Property investment is no different, which is why detailed and accurate investment analysis should always be carried out.
At Bishops Gate Developments our own rigorous deal analysis includes but is not limited to a number of basic but highly effective risk assessment processes, which help us present investment cases in a clear and transparent manner.
Here’s an overview of some of the ways we mitigate risk associated with our developments at an early stage:
Risk Mitigation 1: Planning Review
Typically, we will only consider land if it has the minimum of outline planning permission attached. Without any permission, the value of the land is questionable and the risk associated with any investment required to purchase it increases dramatically as future planning cannot be guaranteed.
Risk Mitigation 2: Development size
Ideally, we like to look at deals that have more than six dwellings as this spreads any risk associated with future revenue over a number of units. Image if you had just one dwelling on the land and struggled to sell it quickly. That’s 100% of your future revenue at risk. So by having more units, the risk is spread lowering the overall risk exposure for both our investors and us.
It’s important to note, there is also risk associated with developments with a large number of units. We mitigate risk here by building out our developments in phases.
Once we have identified a development that meets the above criteria, we turn our attention to 3 primary KPIs that help to further validate a site and it’s potential, mitigate risk and determine the potential profit:
Risk Mitigation 3: The GDV (Gross Development Value)
This is the potential future value once a site is developed and sold; the GDV is relevant even where you intend to ‘Build to Rent’.
You can ascertain the potential GDV of a site by identifying the sold value of comparable properties in the area, by speaking to agents, by having an understanding of the area itself and by commissioning a RICS survey.
The accuracy of this process can be increased by breaking down comparable sold values into individual types of dwellings i.e. 2B/4P semi compared with a 4B/6P detached house.
Risk Mitigation 4: The Build Costs
These include costs such as acquisition of the site, taxes, professional fees, surveys, searches, external works, contingencies and any fees associated with marketing and selling the dwellings.
Not forgetting the cost of any finance, which for accuracy should always include monthly interest payments and any fees associated with the setting up of a lending facility.
We use a detailed proprietary analysis tool, which breaks down all aspects of a development and apportions costs to a number of metrics critical to a successful development..
Risk Mitigation 5: The Purchase Price
The last of the three KPIs necessary for accurate deal analysis.
A common mistake amongst inexperienced developers is to begin their analysis with this number first. This creates an inaccurate view of the investment and it’s profitability.
By understanding the GDV we can work out at what purchase price a development becomes profitable.
A quick calculation would look like this:
GDV – Build Costs – Desired Percentage Profit = Preferred Purchase Price
Having a profit range i.e. 20 – 30% allows you to negotiate the purchase price in with the agent or vendor in an informed manner, saving both time and money.
The above steps form a small part of the analysis and risk mitigation processes we conduct on every development opportunity prior to presenting a case to our Investors and Stakeholders.