Commercial property development can be very lucrative but it takes a certain set of skills and knowledge to become successful in this field, as well as the necessary finance. If you do not have a well-planned strategy then you can risk losing money and you could face some very challenging times.
To succeed in commercial property development, you require astute financial and project management skills, in addition to a strong understanding of the commercial property market. Having the right connections within the construction industry will also be very beneficial to agree rates that maximise your profits.
Read on for expert advice to help you to decide if commercial property development is right for you and to find out more about the considerations to make before entering into this type of property investment.
What does commercial property development entail?
Commercial property development involves investing in land to build new property on or buying an existing property and enhancing it to increase its value. It can apply to any type of commercial property, from office space and industrial property to shops and cafes.
Typically, a commercial property developer will acquire a suitable property, plan and project manage improvements to the property and sell it on for a worthwhile profit margin.
Do you need to have a property development company?
While it is not a legal requirement to set up a limited company for property development, this option tends to be the more tax efficient way to operate.
The reason for this is that with a limited company, corporation tax usually works out to be less than a sole trader would have to pay in income tax. Limited companies are taxed on business profits minus any allowable expenses and salaries.
Another benefit of setting up as a limited company is that the company will be a separate legal entity, so you are protected from liability for debts that the company could accrue.
What finance options are there to start commercial property development?
There are a few different types of finance options available to commercial property development start-ups. In an ideal world, the investor already has the capital that will allow them to purchase land or property and the funds to pay for the work that is required.
However, you can still get into property development even if you do not have a large sum of money to invest. These are some of the commercial development finance solutions that are available:
A commercial buy-to-let is an option if the property developer is intending on keeping the property and letting it out to businesses, rather than selling it on once the work is carried out.
These types of mortgage are usually interest-only and have higher interest rates than standard mortgages. They can be more difficult to have approved compared to other finance options, especially for the first property.
Bridging loans are a popular choice of finance for property investors as it allows a short-term loan that ‘bridges’ the finance between buying and selling the property. A bridge loan term will usually be for no more than 12 months and the loan acceptance period is generally much faster than for mortgages.
A commercial mortgage provides another finance option that will enable an investor to purchase a property, but they will need to pay a large deposit in most cases.
Second charge loan
A second charge loan secures finance against another property that there is equity in. For example, a second charge loan could be taken out against the investor’s existing home but there is considerable risk in choosing this option.
What are the advantages of being a commercial property developer?
The main advantage of being a commercial property developer is the potential profit that can be made.
Most developers are able to make enough profits to make a good income and some can even get to a point where they can step back and employ project managers and estate agents to deliver the majority of the work.
Finding the right opportunities for purchasing land and investment property is not easy, but the more experience that developers and investors build up, the more they will be capable of identifying the most lucrative opportunities.
Developers will start to understand the market more, and may get better at negotiating purchase price or agreeing construction contracts at lower fees.
What are the disadvantages of being a commercial property developer?
There are some downsides to developing commercial properties, such as the risk of financial loss. The property market can fluctuate, which could result in property value falling and local companies can go out of business, reducing the demand for commercial properties in the area.
There are also a lot of legal and tax obligations that must be complied with, from capital gains tax to meeting building regulations. There can be a lot of work involved in applying for planning permission, developing business plans to be approved for finance and handling all the financial processes of real estate development.
Commercial property developers on a salary usually earn somewhere between £40,000 and £60,000 according to the top recruitment agencies such as Indeed.
However, as a director of a commercial property development company, profits will usually be minimal to start with, but later down the line profits can be unlimited as you start to sell more and more renovated property.
Developers will usually work towards a profit margin of around 20%, so if you have multiple projects delivering this level of profit, your business will be generating a very attractive profit.
Yes, in many cases developers will buy properties to improve and sell on at a profit. Some developers make their money through buying land and building new properties on the land to sell or let.
Although it is not essential to have qualifications to become a property developer, there are many benefits to having related qualifications, such as to build trust within the industry, understand the legalities and to ensure regulatory compliance. There are a wide range of courses, including a BSc Property Development degree and RICS training courses that you can undertake.
Becoming a commercial property developer can be a very lucrative investment strategy, but there is a lot of work required and there are some risks involved. Before you consider applying for any finance or searching for properties to put in offers for, you should develop a comprehensive business plan.
This should include research-based financial forecasts, which type of properties you will be buying and which sort of buyers or tenants you will target – for example you may want to specialise in student accommodation or multiple occupancy.
You should also have an exit strategy prepared for when you want to retire or get out of the development sector.
If you are planning on approaching investors or a lender, they will usually expect to see a high-quality business plan before they decide whether to invest or approve a loan.
A bridging loan is ideal for property developers, as this offers a short-term solution with more flexible repayment options. If you would like any advice, then please call us and speak to a finance expert who will be happy to help.
If you want to learn more about the fundamentals of developmental finance, read our blog.