Property Development’s Magic Ingredient
I recently attended a dinner function where I was asked to give a short speech, one in which I’d chosen to sprinkle a few quotes. As I reclined in my seat post-performance, contentedly contemplating a second helping of a surprisingly good tiramisu, one of my dining companions asked, ‘What’s your all-time favourite quote?’. Most people relish a good quote, so this led to a rather entertaining discussion involving the entire table. But there’s a problem with being asked to pick a favourite. It’s like being asked to name your favourite meal, book, or film. Or preferred offspring, come to that. They’re each so different that, quality-wise, it’s hard to make a meaningful comparison.
That said, while most quotes are instantly forgettable, some have enough pedigree to make the shortlist. And, of course, they come in many different flavours and from across the ages. Some are designed to raise a chuckle. “Time flies like an arrow; fruit flies like a banana” is a favourite, courtesy of one Groucho Marx. Other quotes are intended to deliver a stinging put-down, of which Sir Winston Churchill was a keen protagonist. Once, on being disturbed by a call from Lord Privy Seal while on the toilet, he retorted, “Tell him I can only deal with one s*** at a time.” Classic. Another memorable one came from the ever-acerbic Mark Twain, who, when asked to describe J. M. W. Turner’s iconic painting, ‘The Slave Ship’, memorably replied, “it resembles a tortoiseshell cat having a fit in a platter of tomatoes”. If you look at the painting and squint a bit, you can just about make out Mr Tibbles.
Some quotes, however, have loftier aspirations, their authors looking to inspire us or make us think. Henry Ford, who mass-produced quotes as well as cars, came up with a couple of my favourites. One is, “Whether you think you can or you think you can’t, you’re right”. The other is, “The only thing worse than training your employees and seeing them leave is not training them and seeing them stay”. And for another thought-inducing quote, this time from George Carlin, I quite like, “Trying to be happy by accumulating possessions is like trying to satisfy hunger by taping sandwiches all over your body”. It’s unlikely to become the motto of your credit card provider, but it’s an enlightening reminder of what really determines our happiness.
So, which quote was my favourite? My answer turned out to be surprisingly dull. It’s not a funny quote, nor is it a put-down. And on face value, you’d struggle to argue that it was particularly clever or thought-provoking, either. Yet, despite these apparent drawbacks, my favourite quote is simply the one I find myself using the most often, as well as it always being undeniably true. And, if you embrace its truth, you are all but guaranteed the humility you’ll need in life to be successful. I fear I may have bigged it up a bit, so prepare yourself for disappointment. My favourite quote is simply, “You don’t know what you don’t know”.
Now, the thrust of the quote is not simply to point out that there’s some stuff you don’t know. That would be a case of stating the bleeding obvious. Of course, you know what you know (e.g., the capital of France, how to make toast, etc.), and you know what you don’t know (e.g., the capital of French Guiana, what a blockchain does, etc.). But there’s also a third category of knowledge, which is stuff you don’t know that you didn’t even know existed.
So, the quote’s point goes a little deeper. It could alternatively be written as “you are unaware that you have gaps in your knowledge”, but that wouldn’t be quite as catchy. But the warning is a stark one.
After all, it’s all too easy to embark on a task in the belief that you have the skills and knowledge to be able to complete it successfully, only to later discover that there was some additional information you needed to complete it or that would have allowed you to complete it better. I’m always amazed at how often people fail to recognise this fact. I’ve trained lots of property developers over the years, including some very experienced ones. Many had learned the hard way that they didn’t know what they didn’t know. They arrive in a right pickle, needing help to find a way to climb out of whatever hole they’ve fallen into. And no surprise, after they’ve been trained, it’s a case of, “if only I’d known then what I know now”.
Property development has many moving parts, yet, at its heart, it’s a straightforward process. We’re essentially sticking some stuff together to build homes. And human nature being what it is, we tend to have an inflated opinion of our own knowledge and abilities. After all, how difficult can it be? So we often find out the hard way that the answer to that question turns out to be, ‘it’s a bit more difficult than we first thought…’. I recall a student who unnecessarily paid a small fortune in additional tax on their profits on a previous project, all because they failed to set up their business structure in the most tax-efficient way. A simple piece of information that could have been imparted in one sentence would have saved them the money, yet it hadn’t occurred to them to ask anyone. They hadn’t realised that it was possible to set up their company structure differently or, put another way, they didn’t know what they didn’t know.
One of the things I like best about the quote is that its principle applies not just to avoiding pitfalls but also to finding opportunities. In other words, it can both make you money and save it. Again, property development can provide many a good case study. For example, imagine you’re presented with a small commercial building that you want to convert into flats. You’ve looked at the floorplan and reckon you could build five one-bedroom apartments. As a developer, you’ll typically target a 20% profit margin, which means all your profit is in that fifth unit. Now, imagine I showed you a way of cleverly reconfiguring your floorplan so you can squeeze in a sixth flat. Your profit hasn’t just increased by a sixth; it’s practically doubled. And all because I had a way of looking at the problem differently to you.
Sadly, as you grow older, the benefits attributed to being in your current age group tend to diminish. But one of the standout situations where experience invariably triumphs over youth is the ability to solve problems. How often have you been presented with work done by a junior where you can instantly spot an error or a challenging problem where you can immediately see a solution? To them, it seems like magic; to you, it’s simply experience and common sense. You may not be able to touch your toes quite so easily these days, but when it comes to wisdom, you’re (equally) untouchable.
When we set up our property development training business, propertyCEO, some time ago, we quickly realised that one of the key differentiators was our experience. With forty years in the industry, when a student presents me with a potential project, I can instantly see its plus points, drawbacks, what is and isn’t possible, and, critically, the best way of cutting and carving the building to maximise its value. Our main mentorship programme has a day a month dedicated to doing precisely that. As a result, our students don’t need to build up the same length of experience that we have. They simply need to learn from us the things that they don’t know. They can then apply that knowledge to every deal they look at and steal a march on the competition.
Whereas residential property has a broadly fixed value, commercial property doesn’t. A run-down old shop with uppers will have a value to someone looking to buy a shop. But its value to a property developer could be significantly greater since they know how to convert the building to maximise its value. And if you know how to do that, you’ll not only be able to pay more for it, but you should also be able to make more profit. So, if you want to get the most out of a commercial property, let me share what I believe to be the biggest magic ingredient. And that, my friends, is planning.
The planning system in the UK is broken. On paper, you can apply for planning permission from the local council and expect to get a response within a fixed timeframe. The reality is usually very different. Planning teams are massively under-resourced, and many experienced planners have long since left, leaving juniors to run the shop. As a result, getting stuff through planning can be a nightmare. The chances of it happening within short timescales are slim to remote, and there is a real risk you may never get permission at all. It would take a separate article to fully explain why planning is such a problem, but for the purposes of this piece, please take my word for it.
Fortunately, help is at hand in the form of something called permitted development rights (PDRs). The government decided some time ago that there were instances where requiring someone to apply for full planning permission would be overkill. An example of this includes building an extension to your house. Subject to several parameters and restrictions, you can extend your home without applying for planning permission. You can just go ahead and do it. The restrictions are there to ensure you don’t double the size of your house or intrude on your neighbours, etc., but otherwise, you have a green light under PDRs. The government also found that there were many unused commercial properties out there that could be repurposed, either as residential or perhaps as some other type of commercial use. So it decided to create some PDRs that would allow developers to change the use of these buildings without full planning permission. To ensure that it avoided some unwanted outcomes (e.g., you convert a building into flats that are surrounded by noisy heavy industry or that are liable to flooding), the government created a sign-off process called Prior Approval. You must apply to the council for approval for your PDR, but the number of criteria they can reject you on is minimal, unlike a full planning application. Also, the prior approval process should take a maximum of eight weeks, which speeds things up considerably. To be clear, if you’re talking new build, you will always need full planning permission. But to change the use of an existing commercial building to residential, very often you won’t.
Because there are lots of different types of commercial property types and scenarios out there, the government has created a lot of PDRs. And that is where the magic ingredient can be found. The best analogy I can give you is having a good tax advisor. We’ve all heard that large corporations and billionaires somehow pay less tax than ordinary folk. And that’s because they hire the best tax advisors to work out ways of working the system to their advantage. Regardless of what you may think of the morality of it, the point is that an in-depth knowledge of the highly complex tax rules allows people to pay less tax legitimately.
In the same way, having an in-depth understanding of the PDR rules allows you to make more profit as a developer. Bizarrely many experienced developers know diddly squat about PDRs; some because they can’t be bothered to learn the rules, and others because they don’t know what they don’t know. And their loss can certainly be your gain.
So, how do you get this knowledge? Am I advocating that you immerse yourself in planning law and become a planning nerd? Not quite. Luckily, help is at hand in the form of some wonderful people called Planning Consultants. They are already nerded up on the subject of planning, and they are the guns you need to hire to advise you. However, a word of caution. Not all planning consultants are created equal. Like accountants, some are more bread-and-butter types, while others can think outside the box. Then there’s a much smaller group who see it as their personal mission to get as much past the planners as possible. That’s the type you should be looking for, but even an outside-the-box thinker will still serve you well.
What exactly is possible when you’ve got a good planning consultant on board? Frankly, you’d be amazed. I’m lucky enough to work with one of the best consultants in the country, and between us, we’ve created projects using PDRs that you would have sworn would have required planning permission. Imagine turning a dilapidated old barn, with just four posts and a tin roof, into five detached luxury houses in an idyllic rural enclave. What about the tiny one-bed bungalow on a largeish plot that became a five-bed detached luxury house? Perhaps I could tempt you with the small empty shop with uppers that became seven luxury apartments? There’s a long list. But the point is this. Knowing how to do this stuff means you can pay more for the property than your competitors and make more money at the back end. Where everyone else can only see the ‘vanilla’ conversion, you’ll be able to see tutti frutti.
So, as a developer, is the phone number of a decent planning consultant all you need to know? Not quite. Ideally, you’ll want to know the art of the possible. You don’t need to know the technical details, but you do need to know which PDRs can do what. That’s because your planning consultant isn’t going to find deals for you – that’s your job. So, on the one hand, you need to know what type of building to look for. On the other, you need to know what tutti frutti solutions you could potentially deploy with any given building. That way, you can find great opportunities yourself and only pay your planning consultant when you’ve unearthed something that has true potential. Hopefully, with a little help, you can now find out what you don’t know and get a massive jump on the competition, whatever type of development you’re considering.
And as for the favourite quotes of my aforementioned dining companions, I’m afraid there were far too many to mention here. However, I shall leave you with one quote that I couldn’t help but notice had been attributed to each of Confucius, Albert Einstein, and Yogi Berra. And that is, “I never said half the things people said I did”. It may not be the best quote, but it might just be the most accurate.