A property development project’s success is dependent on how well prepared the investor behind it is. In the current economic climate, this is of the utmost importance.
A successful project requires a thoroughly researched and well-crafted exit plan. As such, this blog will outline everything that developers and investors need to know about optimising their profits during the exit stage of a project, as well as some of the ways in which lenders can help.
Defining a property development project and the development exit stage
Firstly, let us define what we mean by a property development project. In short, a property development project can be defined as a way of making money by creating or improving a property or properties and, in turn, increasing its value. There are various ways in which this can be done.
For example, some developers will buy vacant land or demolish an existing property to build new homes from scratch. Others may choose to renovate a derelict building or convert an existing property from one use to another.
As the developer of a project, you’ll be required to make sure it’s completed on time, within budget, and can attract the best possible return on your investment.
This final phase of a project is referred to as the development exit stage. This can be defined as the transition from the construction and development phase, to the monetisation of the property that has been built or refurbished.
In other words, it refers to the point at which developers begin selling or letting the property they have developed to tenants, buyers, investors, or other parties. But how can developers try and maximise their profits?
Planning an exit strategy
During this stage, you will want to have a plan for how you can generate returns. Typically, you have three options: selling all or some of the property to a new owner, renting it out to tenants, or maintaining ownership of the property over a longer period, which could result in the capital appreciation of the asset.
Once you have a specific strategy in mind, you’ll want to turn your attention to actual steps you’ll need to take to reach your end goal. Firstly, it is important to get a valuation of your property.
This will form the basis for any pricing negotiations further down the line, and allow you to realistically price your new development. If you set the bar too high, you’ll risk alienating your potential buyers.
On the flipside of this, if you price your units too low, you may undersell what you have. Ultimately, any returns you could generate will need to fit in with your budget, and wider market’s priorities.
Carrying out a thorough analysis of the market will give you a greater insight into how your property can be best used to maximise your return. Areas with high rental yields may incentivise development projects where units will be targeted towards tenants, for example. Or, where house prices may be on the rise, a property flipping strategy may be more appropriate.
Please remember though, we are not financial or mortgage advisors. If you want to review your options, you’ll want to seek guidance from qualified professionals.
Finally, with your valuation and market analysis in mind, creating financial projections can provide useful insights into the potential returns and risks that the development exit stage may bring.
By assessing the expenses that have accrued throughout the project, for example, it becomes much easier to see how losses can be minimised in the final stages of construction.
Cost management techniques to consider
A lot of the time, however, market conditions and the subsequent impact that they will have on your market timing will be out of your control. So, it is important to manage the things you can control – like building costs and operational expenses – in order to optimise profits.
Cutting back on building and operational expenses
Trimming building costs can help to maintain profits, but it is equally important to maintain quality. Fortunately, there are some ways in which this can be done.
Engaging with architects, engineers, and construction professionals to identify opportunities for a cost-effective design that can maintain functionality and safety is a good first step at the beginning of the project. This could include optimising floor plans and layouts to make the most of the available space to reduce waste, or using alternative lower-cost materials that achieve the same usability and aesthetic.
Elsewhere, receiving quotes from multiple contractors and suppliers for the work that needs doing or the materials that are needed will help you choose the most cost-efficient options, while employing or buying from local businesses could also cut down on transport costs.
Similarly, by implementing industry benchmarks at the start of a project, you can regularly review and compare project costs against typical spending on similar projects to help identify areas for improvement.
Moreover, you could also consider a phased construction process. By breaking the project into phases, you can better manage your cash flow and help to reduce the upfront financial cost of a project.
Related to this, ensuring all planning permission has been approved ahead of time will cut down on costly delays during the project, which will help to maximise profit in the development exit stage.
Finally, maintaining constant communication among contractors and stakeholders can accelerate the building process. This should make it much easier to identify cost-saving opportunities and address any challenges in real-time.
By adopting a holistic approach to developing a property that encompasses design, materials, labour, technology, and project management, you may be able to effectively reduce building and operational costs without compromising quality.
The risks of the development exit phase and ways to mitigate them
In the current economic climate, maximising profits require you to minimise and mitigate risk as effectively as possible. So, what are the common risks to developers and investors during the development exit phase, and how can they be mitigated?
One of the biggest risks of this final stage of a development is unforeseen expenses. These can include construction delays or maintenance issues, both of which can eat into the potential profits of your project.
Meanwhile, many developers often have significant capital tied up in a project that may face liquidity challenges, particularly if the economic conditions change throughout the duration of the development project.
To mitigate these risks, it is important to conduct thorough due diligence from the outset of the project and maintain a contingency fund should a significant expense or liquidity issue arise. You could also take on the services of a broker or alternative lender who could help supply the finance and breathing space you need to get the project finished.
Once the property has come to market, another risk to be aware of is competition and buyer demand. While this may not be particularly relevant in today’s market, an oversupply of properties in the market can make it harder to attract buyers.
One way of mitigating this risk is to differentiate the property through unique features that may attract a wider range of buyers or employ more innovative marketing (more on this below) and pricing techniques that align with buyer demand.
By identifying these risks early on, developing contingency plans, and staying agile in response to changing conditions, it becomes a lot easier to navigate the exit phase more effectively. In turn, this may increase your chances of achieving a successful exit from a development project.
How to maximise property value in the development exit stage
The best way of maximising property value in the development exit stage may sound obvious, but you must ensure that your property is presented in the best possible light to potential buyers, renters, or investors. This can be done in various ways.
For example, by investing in landscaping and eye-catching exterior design for a property, you will be able to make a better first impression on any potential buyers. Similarly, high-quality finishes and materials will add a sense of luxury to your property, which could attract wealthier buyers that could boost the profitability of your project.
Elsewhere, ensuring your property aligns with buyer demand is key. For instance, many buyers in today’s market are looking for more sustainable housing, so incorporating features like insulation and double- or triple-glazed windows could increase the demand – and therefore price – of your property.
Finally, professionally staging the property to showcase its potential can help buyers envision themselves living or investing there, while investing in high-quality photographs and virtual tours can make a huge difference in how the property is perceived online and can attract more potential buyers.
Source: Estate Agent Today
At MFS, our Development Exit bridging loans can help repay the initial development finance on your project, providing you with extra time to finalise your plans.
These loans are short-term, specialised products designed to cover original development finance, and you can borrow between £100,000 and £30,000,000 for this type of loan.
You can use this funding to secure extra time to finish works, figure out long-term finance solutions, and find the right buyers for your development. This breathing space may prevent you from needing to sell off individual units at a reduced price to hit a looming deadline, allowing you to potentially boost the profitability of your project in the long run.
We take loan applications on a case-by-case basis, which means we can be incredibly flexible with the funding we provide, as well as the clients and cases we take on. We can also deliver our products in as little as 3 days to help you hit that deadline, which means that where unexpected development delays and deadlines emerge, we’ll be able to adapt at pace.
Find out more about our bridging products for your development project.