New Build Investment Property Masterclass: Chapter 11 - What is residential development?
What is residential development?
It is important to have a broad definition of what development is, as this will give you a much better idea of what drives value in the residential development process.
Development is not simply just the process of building something. You need to think of development as improving a parcel of land so it can be better utilised for residential use. This is an important distinction, because many companies obtain planning consent for residential development but do not physically build anything. These developers simply sell the parcel of land with the benefit of this work having been undertaken.
The reason it is important to think of this as 'residential development' is that value has been created through this process, and the developer will realise a profit for these activities. The value of the house or apartment being built has not changed, and therefore neither has the total available 'profit' which is achievable through the development process. In simple terms, the profit is being split between this developer and the next developer who physically undertakes the construction works.
I define development as:
The process by which an individual or company undertakes improvements to a parcel of land to generate profit from residential users who will utilise the improvements which have been made to the land.
What is a developer?
You need to think of a developer as a company that produces something for sale. Like any other company, they simply create products, like Toyota makes cars or Apple makes computers. They take assets, land, and building materials, and employ human resources to build a building, which they then market to potential buyers and sell at the highest price possible. In this process, they seek to minimise their costs and maximise the sale price to increase their profits.
Think of development in terms of Figure 2.1.
Figure 2.1: Commercial considerations for developers
Types of residential developers
It is important to understand who the different types of developers are, and what each of them does, to help you to develop your buying strategy when negotiating with them. If you understand what drives them, you will understand what is important to them - and what is not.
Developers are categorised by the role they undertake, the type of product they develop, and the scale of development they undertake:
- Land promoters take large parcels of land through the planning process to get the locations considered for residential development. They do not build on the land; instead, they sell it with the added benefit of planning consent.
- Estate developers purchase large parcels of land and sub-divide them into more manageable parcels of land. They sell these smaller serviced parcels of land to other developers.
- Institutional developers undertake large-scale developments, usually in city centres or large urban areas. Generally, they develop tall and complex buildings which have multiple uses, not just residential.
- Residential developers develop sites within inner cities and prime central locations. They generally do not develop other types of property, focusing solely on residential development. Residential developers typically outsource construction work. I characterise a residential developer as a company that produces more than 2,000 properties p.a.
- Small and medium sized developers are nimble and will generally try to offer clever deal structures to landowners to encourage them to sell to them rather than another developer. These may include joint venture arrangements, or a share in the profit generated by the development. Small to medium developers ordinarily build more than 500 but less than 2,000 properties annually.
- Housebuilders build houses as their primary function. They may build other forms of development, but most of their income is derived from the sale and development of houses. Housebuilders build high volumes of housing, and derive their competitive advantage by developing large parcels of land, using a limited number of different designs, and creating economies of scale through the volume of housing they develop.
- Small builders typically have specific types of development which they specialise in. These are generally focused on small geographic areas. Small builders generally build developments themselves, rather than sub-contracting construction. Small builders do not have the capital or internal resources to undertake multiple developments at once.
- Housing authorities & not for profit developers are specific types of developers who receive their authority from the government. They go by a variety of different names; however, regardless of their name, they all exist for the same purpose, which is to provide low-cost housing to residents and act as a form of 'wealth sharing' across economies. To occupy, rent, or own this type of property, residents need to meet specific requirements which vary from country to country.
- Development managers (DMs) are not strictly developers as such. DMs facilitate development on behalf of their client. A DM is a company or person with specific skills and knowledge of development which they will employ on behalf of their client to undertake development. A DM is employed either by a landowner or an investor to facilitate a new project for them.
- Build to Rent (BtR)/multifamily developers: BtR is relatively new in many cities around the world, but has existed for many years in the United States, where it is called multifamily housing. The difference between BtR and other residential investment properties is that they are owned by a single investor. Some developers build for the BtR market and sell developments to investors, while others develop property specifically for their use.