Expert View: Navigating property development in a Brexit world
PUBLISHED: 11:18 24 June 2019 | UPDATED: 15:05 24 June 2019
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Steven Haynes, senior associate solicitor at HRJ Foreman Laws Solicitors, sets out two ways to navigate Brexit's choppy waters.
As the Brexit debate continues, property developers and landowners alike are concerned about what it could mean for the value of land and its development costs.
Development prices are generally valued in reverse, the key considerations being: what will the development sell for? Minus, what it will cost to build? Minus the developer's profit.
The remainder will then be what the developer is prepared to pay. But how will the housing market react to a No Deal scenario and what will materials cost?
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Some developers are reducing their offers to give more cost flexibility, but deals won't be secured if the landowner expects a higher price, possibly based on an earlier land valuation.
There are two possible routes to consider:
Promotion Agreements - The landowner agrees to work with an experienced developer, or 'promoter', who will usually fund the cost of obtaining planning permission in return for a fee or profit share when the land is sold. For the landowner, planning value is created without the landowner having to pay for it, which is helpful in an uncertain market. The land can then be sold with the benefit of planning, generating a higher price for the owner and with the developer taking a profit for a relatively low investment.
Overage Agreements - The landowner might want to sell but believes that market conditions will improve post-Brexit. In this instance, the solution might be to sell with the benefit of an 'overage agreement'. This will typically say that if the developer is able to sell the developed land for more than the parties expect, then the developer will pay further sums to the landowner, normally calculated as a percentage of the sales price. In basic terms, if the developer makes a higher than expected profit, it's acknowledged that the landowner, in selling at the lower price, then receives a proportion of those higher profits.
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