Investing in property development

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Investing of any sort essentially boils down to two things: prediction and risk. When you invest time or money in any endeavour, you're making a prediction about a potential future outcome and in the process, trying to calculate whether or not the risk you take is going to be worth it at the end of the process.

We believe a fundamental element of this process is the management of such risk and we see property development not as a primarily physically-driven, construction activity, but rather as a process-driven activity where one of the main focuses should be risk management.

While our core values are centered on building properties with soul: beautiful, desirable homes that fit into the local community and stand the test of time, we think the 'boring bit' i.e. managing risk, underpins the entire development process, which in turn allows us to focus on the exciting stuff: architecture, finishes, gadgets, how the light falls across the garden on a summer evening. None of that can be delivered with soul or sophistication without first aiming to control risk. 

Measure it, then mitigate

As developers, we build in risk control measures into every step of the process. This can be anything from forensic style analysis of an opportunity where we investigate discrepancies or inaccuracies in our financial appraisal at the very start of a project, to in-depth considerations of how a show home might be decorated at the end of a project, ensuring an efficient sales process. When investors help fund a development project, they must first manage the risk in their own portfolio, while being confident that an investment in one of our developments is backed by a detailed analysis, and mitigation, of risk. 

Things to think about from an investment perspective

Risk in property development terms is largely centered on three elements:

• Construction cost
• Time taken to deliver a project
• 'Exit' or sale values

There are mitigation strategies that can, if properly implemented, be applied in each case to substantially reduce the associated risks. While nobody predicted the emergence of Covid-19 and its subsequent effects on the global economy, it is still possible to control the effects of other unforeseen events that might impact on a development. Examples include fixing construction costs at the outset to avoid price increases in materials mid-project, mapping out a project in terms of days (even hours) to ensure we can work to recover delays, or securing end buyers of our homes before the first brick is even laid. Anything that can remove the element of prediction, will lower risk and increase the return after accounting for risk.

Risk and return

No matter what, risk and return should move in the same direction: higher risk means higher return. If you find something that breaks this rule - let us know! The trick is to find a 'skewed' risk profile, where return outweighs risk and downside is protected, if possible.

Returns from investment in property development are either fixed or variable. Fixed returns carry a relatively lower risk and are structured as a loan with a fixed interest rate over a given period of time. The variable returns we offer are open to investors that fulfil criteria set out by the Financial Conduct Authority (FCA) due to such investments carrying higher levels of risk since they are an equity share in the project, allowing investors to capture a share of profits. 

Once risk and return has been measured, analysed, questioned and 'stressed' (i.e. if there is a change in one of the risks, what effect does this have on the return), you should then consider the experience of the team involved, any guarantees or collateral held as security against your investment and how you will realise or exit the investment. Closely linked to exit is the project timetable and exactly which events will trigger the ability for an investor to exit. Property development investments are illiquid, meaning money is tied up for extended periods, so it is crucial to understand when you can liquidate and capture returns. 

Turning an old building or bare piece of land into a stunning new development can be hugely exciting, but it does come with less exciting background work. In investment terms and armed with the framework for thinking discussed above, you can gain higher levels of confidence in your decision making, increasing your chance of achieving the outcome that had initially been predicted.