Proper Wealth – S2 Episode 7: Finding a Good Development Site - Joe Billingham - Nova

Proper Wealth – S2 Episode 7: Finding a Good Development Site – Joe Billingham

Paul Mahoney:

Welcome to Proper Wealth with me, Paul Mahoney. The show where we discuss all things wealth creation, with a focus on property. Joining me today is Joe Billingham from Prosperity Wealth. So Joe, as a property developer, if you could just tell me a bit about yourself.

Joe Billingham:

Okay. Been in property 25 years, from original buy-to-let refurbishing sort of old terraces in my local area. Through to now, where I’ve got schemes of up to 800 units currently in planning in Birmingham City Center.

Paul Mahoney:

Okay, great. Through that progression, because I’m sure a lot of our viewers are interested in how you go from renovating terrace houses to being a large scale developer, what’s been involved in that process? What have you learned? What are the key things for people to understand and expect?

Joe Billingham:

Okay.

Paul Mahoney:

In a nutshell.

Joe Billingham:

In a nutshell. Well, obviously you’re always learning and I think the fundamentals of property remain the same, there are obviously all the different aspects and the different skill sets that are required for, as I say, the sort of early buy-to-let, which I still believe is a great fundamental investment, through to where we are now. As I say, from the planning perspective, working through larger schemes, certainly what comes with that is a bigger team. So you can’t know it all, but you need to understand the professionals that you need both internally in the team and externally working with the business to obviously be able to deliver those larger schemes.

Paul Mahoney:

Okay. Yeah. Well look, that’s fundamental to any businesses and it’s surrounding yourself with knowledgeable people that ideally a better than you-

Joe Billingham:

Yup, that’s right.

Paul Mahoney:

… To help you build your business. Excellent. So talking about appraising development sites. I suppose if we start simple and talk about some of the key points that goes into finding a good development site.

Joe Billingham:

Sure. Okay. Well, I think there’s a difference between new build and PDR. So the office conversion that we also do. On the new build side the fundamentals are good location. It’s got to be viable as a development. As a sales business, obviously it needs to be a saleable product and a product in a location, a desirable location with the right demographics. We need to obviously look at the viability. But a lot of it I think is driven from the fundamentals in market. So if you’re looking in locations where there’s high employment, so thus high demand for rentals or high demand for owner occupiers, and then the viability is a spectrum of obviously funding the price points, the build points and understanding that there’s nothing contaminated in the site. That would be the primary basis of an appraisal for a new build project.

Paul Mahoney:

Okay. All right. So you start off kind of trying to tick those boxes so it stacks up initially. I suppose once you do find a site, what kind of happens from there?

Joe Billingham:

Well, there’s a lot of front-end work that goes into buying sites. I think certainly if we’re looking to offer on a site, you need to do all your appraisal work. So you’re ultimately starting with the sales values, working back from that, with what the build cost is going to be, what any professional fees are going to be. Then obviously talking to your funders, because you’ve got to make sure that it can be funded. Then again, I think it just comes back to making sure that it’s viable for the company, but in a location and an area of desirable product at the end. We like to design sustainable apartments for a mid-range market and some of those buyers are owner occupiers, some of those buyers, a buy-to-let investors.

Paul Mahoney:

Yeah.

Joe Billingham:

So again, it’s about thinking about the cost point, the target product that you produce and is that the right location for the site, and can you make it viable?

Paul Mahoney:

Okay. All right. It seems it’s quite important that it’s fairly mutually beneficial, both to the end user and to you as the developer.

Joe Billingham:

Sure. Yeah. I mean, certainly the end user is the most important part of the equation if you’re going to acquire a site, you’ve got to be able to sell it. Or if it’s a PRS project, obviously you got to be able to rent it.

Paul Mahoney:

Yeah. Okay. I suppose it doesn’t stack up unless it works both ways.

Joe Billingham:

Sure. Yeah. Sure.

Paul Mahoney:

Okay. All right. So once you’ve ticked some of those boxes, I suppose something that I assume a lot of people would be thinking is what are some of the deal breakers? What are some of the things you most look to avoid that you might have solid boxes tick, but if it’s got this, probably not a goer?

Joe Billingham:

Yeah. Buying sites is fundamentally very difficult. The key challenge being landowners obviously have an aspirational value and maybe don’t really appreciate all the costs involved in development. So a lot of landowners do believe the sites are worth more than they actually are.

Paul Mahoney:

Right.

Joe Billingham:

So one of the big challenges actually secure insights has been able to find sites where one, you’ve got a vendor that will sell at a level that makes it viable, combine that with the fact that you’d have to have early discussions with the city council that would be granting the planning permission for that site, and understanding from them again, you might have aspirations to build a 20 story tower. The city might want to see a six story tower. So engagement with the city’s key, obviously at an early stage really where you need to ascertain heights, densities, the type of landmass that is required to produce the type of product you want to produce. Is that in line with the city’s view for that location?

Paul Mahoney:

Yeah. Okay. I think that’s an interesting point that you raised there so far as finding the right vendor, because you hear a lot of people talk about trying to find distressed properties or sites and getting things cheap. I suppose, in my experience when we’re talking to a lot of people in the industry, it’s not always about that, because sometimes you might even pay above rates for a good site, if it still stacks up. What’s your take on that?

Joe Billingham:

Yeah. I think it’s like anything in life, really. You’ll pay the price that you need to pay, that obviously you need to be able to pay a price that it still makes it viable. So finding a vendor that is in line with your thoughts on values, as you say sometimes you can overpay for sites if you’ve got a view that that site is… It could be worth more than what the vendor believes or where you can maximize that scheme. You could look at buying an existing scheme, as long as you know you can replan it, get better density, better height, you could make the scheme more efficient. For example, the gross to net of a building might be that it’s been designed by an architect where you’re achieving around 80% gross to net i.e. The saleable space is around 80% of the overall bill. That’s not overly efficient. If you can produce a building that provides a better gross to net efficiency, you might have an angle there that maybe another developer’s either not seen or another architect has not produced in the plans.

Paul Mahoney:

Okay. I think that’s good advice. You mentioned about councils and cities, any tips there so far as making sure you’re in the right councils or cities or dealing with the right people?

Joe Billingham:

Yeah. I mean, I think it’s always worth taking a step back and looking at the political landscape, because cities aspirations change. Birmingham, where we’re a key developer, we are seeing big shift there from ideas around what their initial ideas about heights and densities were certainly on the height point. Birmingham’s not got the height that Manchester and London has until now, but Birmingham city council recognized that to get the density they require to fulfill those housing needs, they do need to go higher. So that’s a shift, whereas maybe if you’re looking at sites two, three, five years ago, you’d have been working off relatively low height levels, but now there are some pretty punchy aspirational schemes in the system, certainly up to 40 stories now in Birmingham, which we’ve never seen before.

Paul Mahoney:

So I suppose if you can see a counselor that is moving in that direction, that creates an opportunity?

Joe Billingham:

Yeah, for sure. Yeah.

Paul Mahoney:

Okay.

Joe Billingham:

I mean, infrastructure is key. I mean, certainly for Birmingham, we’ve got the metro line, which is connecting the city up. So again, an opportunity to see what areas now, such as Digbeth, that aren’t connected, that will be. Obviously the new train station, Paradise is the new commercial hub. So again, locations that will need housing for housing professional workers in the city, that maybe there wasn’t that demand for before. We’ve got HS2. Again, anything around that HS2 location will obviously be a big growth area.

Paul Mahoney:

Digbeth’s an interesting area, isn’t it, in Birmingham, when you look at that compared to the opposite side of the city, like the jewelry quarter, the price differences there. I think part of that’s due to the Smithfield Markets, that previously was a bit of a blockage to that area. Now it’s gone.

Joe Billingham:

Yup.

Paul Mahoney:

I think that’s an area that has quite a lot of potential.

Joe Billingham:

Yeah, yeah. I mean, that’s a huge opportunity. I think if you look at the opportunity there both from a developer’s perspective, infrastructure, the local community, we’re seeing huge regeneration plays around Digbeth, but again, as you say, I mean, you’ve got HS2, you’ve got Smithfield, we’re a large landholder in Smithfield. So we’ve got a aspirational scheme there, but certainly the whole area’s changing and a lot of that’s connectability, the fact that the council in Birmingham have driven employment, and that was their kind of key driver. Bring the employers to Birmingham, provide them with a great office space, and then obviously they need housing. Smithfield sort of cements that circle really.

Paul Mahoney:

Yeah, yeah. I think so far is that sort of ripple effect or the regeneration effect that we’ve seen happen time and time again, in various different towns close to a city center, it’s hard to ignore Digbeth on that basis, you know?

Joe Billingham:

Yeah.

Paul Mahoney:

Okay. So we spoke a bit about sort of development sites there in general, which I assume, probably applies mostly to new builds. If we can talk a little bit about permitted development rights or PDR, you know what that is, and I know that you’ve done some of it. What’s involved in that?

Joe Billingham:

Okay. We’re a big fan of PDR. Delivered just over a 1000 units over the last four years. From our side it’s a great way of fast tracking developments through the system, because permitted development rights, i.e. PDR is a default planning consent. So if you can find a local unloved office in your local area, you can convert it without a planning consent or the need for a planning process into residential apartments.

Paul Mahoney:

Okay. Why do they do that? Why do they allow you to do that?

Joe Billingham:

Around five years ago now the government, obviously with a big drive to provide more housing, recognized that there was a lot of unloved 60s, 70s, office buildings around major cities and towns, prime locations. They’re typically either right in the high street or right in the middle of towns and cities. So bringing those forward as residential opportunities was a kind of obvious play really. Then the opportunity for the developer, as you’ve got the fundamental fabric of a building, it’s really around where the location of the building is and viability, is more around the conversion of the space. So it’s getting efficiencies. Even though you’ve got the fabric of a building, can you convert that with efficiencies into residential apartments?

Paul Mahoney:

Okay. Well, I think we’ll talk more about that after the break, but we’ll come back to that.

Joe Billingham:

Sure.

Paul Mahoney:

Join us after the break for more on appraising property developments.

Paul Mahoney:

Welcome back to Proper Wealth with me, Paul Mahoney. With me still is Joe Billingham for Prosperity Wealth. We’re continuing the conversation that we had before the break with regards to permitted development rights.

Joe Billingham:

Sure.

Paul Mahoney:

I understand what you’re saying so far as why councils and the government have put this in place. Obviously there’s a massive shortage of housing in the UK at the moment, in most major cities across the country, so it does make sense to better utilize these centrally located office buildings. I know some of the points that have been raised with regards to permitted development rights or PDR sort of schemes, and especially those that are in more sort of industrial or predominantly office type spaces, is making sure that they will be actually attractive to the end user. That they’ll rent and that people will want to buy them.

Paul Mahoney:

How do you get that balancing act? Because obviously you are taking something that’s a commercial property and turning it into a residential property. What goes into the appraisal from that perspective?

Joe Billingham:

You’ve got to look at the fundamentals, which doesn’t change in property across the spectrum. PDR is the opportunity, but sure you’ve got to understand that there’s a real market there for it. I think that is where, as you pointed out, PDR has got its challenges. I think the market, and I say the market, the mortgage market, primarily accepting PDR, they are very conscious of the location and the desirability for resales, which it’s got to be fundamentally sound for resales. People fundamentally got to want to live there.

Paul Mahoney:

Yeah. Yeah. Lenders can be a bit cautious of that sort of thing can’t they? So far as actually making sure they’re going to rent well.

Joe Billingham:

Yeah, I think that’s a combination of location. They can be, in some cases, investor led sales, because they buy-to-let opportunities. But on that point, they do produce very good yields. So the basis of a PDR building means that you can provide the development to the market at a lower cost point than maybe a traditional new build, because you’ve not got the same level of costs involved. That comes at a discounted rate for an equivalent property in an equivalent area. They can be good size units. So they’re very desirable to rent, achieve strong rentals, thus be able to provide a strong rental yield.

Paul Mahoney:

Yeah. So I assume you’re getting them at a lower price per square foot than any residential properties in the area, you convert it over, and that’s why generally they’re able to be offered to the resell market at a lower price as well?

Joe Billingham:

Yeah, certainly that was the case. The market’s moved on.

Paul Mahoney:

Right.

Joe Billingham:

There’s a lot more players in the market now and less buildings. So finding buildings in the right location that you can convert well and get the good efficiencies on the conversion to make it work has become more challenging over the last few years.

Paul Mahoney:

Right. Okay. I assume that means that a lot of cases, those buildings have become more expensive, because there’s less of them. There’s more people wanting to buy them, and therefore, I suppose it’d be quite important to make sure you’re not just buying one for the sake of it. But you’re getting it at the right price, and therefore, as we mentioned before, that it can be mutually beneficial that obviously the development needs to make some money and the end user needs to get a good product at the right price.

Joe Billingham:

Yeah. I think that’s the challenge, and I think, whereas my view has always been that PDR and an office conversion or any conversion really should be underpriced in the market compared to new build. It’s a lovely product, but I always believe that the price point… There should be some differential there. I think as PDR has matured, the acceptance of PDR is now more obvious and prevalent in the market. I think that people are buying PDR conversion projects at a rate that means that they’re looking to retail them at open market, new bill prices. That’s where we would step away from that market.

Paul Mahoney:

Yeah. Okay. Okay. Well, I think that leads quite well into the next point so far as, we spoke about making sure that they’re good buildings in good locations, but I assume what’s also quite important to that is what locations within the country they are? What cities that they’re associated with or what towns they’re in? What particular locations have you seen as being most suitable for that type of property development recently?

Joe Billingham:

Okay. Well, I think there are different segments of the market. So we look to facilitate investors in some cases that are very yield driven. Whereas Birmingham City Center is in a sweet spot at the moment, because we were able to provide strong yields, not as strong as they were, because the markets obviously moved up. But also the ability to make some capital appreciation gain over the next five to 10 years. Outside of Birmingham, there is a very strong yield play. So in areas such as Darby, Dudley, we’re in Walsall, and these are all locations that maybe an investor doesn’t wake up in the morning and think, “I want to buy an apartment in Walsall or in Dudley.” But certainly if you look at the fundamentals of those locations, the connectability, the city connecting on the tram lines or the metro systems to these locations. That’s bringing it closer into Birmingham City Center.

Joe Billingham:

There’s a lot of infrastructure, there’s a lot of investment going on in the West Midlands, generally, particularly following this recent election. There’s a big driver to investment in the Midlands Birmingham, but in a lot of the periphery areas of the city. So we’re seeing a lot of growth there, a lot of demand for housing, very, very strong rentals. They can be great yield plays for certain segments of the market, if that’s what you’re looking to achieve. If it’s pure capital appreciation, we would always advise kind of getting close to or within a city center. So your obvious kind of key centers of the country really. Birmingham is where we are, but Manchester, London, maybe not so much at the moment. That way you can gain some capital appreciation over the longer term. We’re talking very kind of investor led here, which is kind of part of what we do, but we’ve also got desirable homes for first-time buyers, working professionals, people who want to actually own and live in those properties long-term.

Paul Mahoney:

Okay. So you try to offer a bit of a spread. You mentioned sort of secondary cities and towns, lower price point, higher yields. I assume a lot of those people would be kind of cash buyers just seeking yield or maybe leverage as well?

Joe Billingham:

Yeah, not always. I think across the spectrum, there’s a mix of cash buyers, mortgage buyers. I think there’s not a kind of one property fits all. I think as an investor and for your clients, maybe thinking about exactly what they’re looking to achieve, whether it just be primarily yield with some capital appreciation. The London market, I think it’s obviously produced very low yields over the last 10 years, but people have bought into the London market on a capital appreciation play. That’s one of the fundamental questions you need to ask as an investor, what is it you’re looking for? Is it a long-term capital appreciation play or primarily yield driven? Are you looking to use it as a second home? It’s obviously sort of an individual choice.

Paul Mahoney:

Yeah, no, I agree. Yeah. Everyone’s situation is different. Everyone’s at a different stage of life, different level of wealth and therefore different goals. Okay. A point you mentioned there so far as, for example, Birmingham doing quite well from a growth perspective, London, perhaps struggling, not struggling, but probably plateaued a little bit after having a very good run for the past decade. A question that everyone’s always asking is where the market’s at at the moment and what’s happening in the market. What’s your view on that for, if we were to say perhaps the last six months and what we foresee coming?

Joe Billingham:

Okay. Well, so we’ve seen really strong capital appreciation and growth in Birmingham, as well as the surrounding areas. Manchester continues to do well. London’s tailed off as you say, but I think that’s a combination of local buyers holding back because they’re not quite sure on where the values are going, as well as the foreign money, maybe look into other parts of the country in a lot of cases driven by yield and the opportunities to gain capital appreciation.

Paul Mahoney:

Certainly something that we’ve seen is Section 24, the tax changes for buy-to-let, and the stamp duty changes. Then thirdly, the change with regards to mortgage serviceability. All three of those things have hurt high value, low yield properties being London and the Southeast. And are probably if anything, benefiting places like Birmingham and Manchester, where obviously you’ve got lower values and higher yields relative to London where those three changes don’t hurt those properties anywhere near as much. It’s caused a bit of a shift, I think, in people’s strategy. I think that will continue to happen especially as Section 24 continues to get rolled out up to 2021.

Joe Billingham:

Yup. It’s similar percentages, but obviously you’re working off lower base numbers, so investors are more liable to absorb a stamp duty level of a couple of £1000 then into the sort of tens and £20,000. Obviously they’re looking to recoup that over maybe many years on a rental.

Paul Mahoney:

Or yeah. You look at a £1 million plus property, you’re paying £150,000 stamp duty.

Joe Billingham:

Yeah. [crosstalk 00:21:22]. Exactly.

Paul Mahoney:

Yeah. Okay. All right. They’re the areas predominantly you been looking at, Birmingham predominantly, and then a spread so far as your higher cashflow, lower value locations. Do you think that your focus moving forward will be on those locations as well? Or do you see any changes on the horizon?

Joe Billingham:

I think it’d be interesting to see how Birmingham plays out over the next five years. If you look at where we are in the market from a pound per square foot perspective, London’s its own market. But if you look at where we’re kind of currently against Manchester at say maybe 550 and sort of prime locations, we’re kind of still in the fours. So I still think there’s plenty of growth there. Certainly we should be pricing off against Manchester at a sort of similar level. Particularly when you look at the infrastructure that’s coming. We’re at a pre-infrastructure price point at the moment, and that will change over the next sort of two, three, five years as the infrastructure is embedded in the city.

Paul Mahoney:

Yeah, no, it’s a good point, especially Manchester I’d say. We’ve noticed massive price growth in central Manchester, especially in that Deansgate area, where five years ago, prices were sub £300 a square foot. Now they’re £500 pounds plus a square foot. When I look at that, it’s hard to see that happening again over the next five years or even the next 10 years. We’ve definitely moved our focus a bit out from those very central locations. I know you mentioned about focusing more on the value pockets, like Smithfield and Digbeth. I suppose that gives you that area. But I suppose eventually that will probably end up all the same won’t it? That gives a short-term growth opportunity?

Joe Billingham:

Yeah. You’ve got the short-term proposition where infrastructure is coming in. There’s locations that will come into the city by default, because they become more connected or the city kind of grows around them and brings them in. Then as you say, the ripple effect is that we’ll look for value propositions ultimately. Again, if you’re looking for yield you may be not looking for key city center locations that maybe you were looking at sort of five, six years ago. You’ve got to look at what you’re looking to achieve, and then that might mean being slightly out of the city, but getting a better yield. Then you may be compromising a capital appreciation or maybe you get both.

Paul Mahoney:

Yeah. I talk with a lot of experienced landlords that have big portfolios and their main focus now is yield, but they seem to forget that how they grew their portfolio was through growth.

Joe Billingham:

Yeah. Yeah, yeah.

Paul Mahoney:

They’re very focused on, we’ll no yield, yield, yield, and well actually, how did you get this 20 property portfolio? It was through the growth. So I suppose it all depends on the individual’s situation.

Joe Billingham:

Yeah, definitely. From a yield perspective, we’re finding a lot of landlords now are bringing in higher yielding properties to top up areas in their portfolio that are obviously very low yielding.

Paul Mahoney:

Well, thanks very much for that, Joe. I think that was very informative. Thanks for coming down from Birmingham for the show.

Joe Billingham:

You’re welcome.

Paul Mahoney:

And thank you very much for joining us, and I look forward to seeing you next time on Proper Wealth.

 

Proper Wealth

Proper Wealth – S2 Episode 7: Finding a Good Development Site – Joe Billingham
Proper Wealth – S2 Episode 7: Finding a Good Development Site – Joe Billingham
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Proper Wealth – S2 Episode 6: The General Election and 2020 and Beyond – Tomer Aboody
Proper Wealth – S2 Episode 6: The General Election and 2020 and Beyond – Tomer Aboody
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Proper Wealth – S2 Episode 5: Property as a Secure Asset Class – John Howard (Property Developer)
Proper Wealth – S2 Episode 5: Property as a Secure Asset Class – John Howard (Property Developer)
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Proper Wealth – S2 Episode 4: Innovation in Property Management – Jess Ford (Herddle)
Proper Wealth – S2 Episode 4: Innovation in Property Management – Jess Ford (Herddle)
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Proper Wealth – S2 Episode 3: High Networth Private Banking – Peter Izard (Investec)
Proper Wealth – S2 Episode 3: High Networth Private Banking – Peter Izard (Investec)
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