Developers construct, redevelop or refurbish buildings in order to make a profit. They are not the same as a property investors, who purchase completed buildings and sell them or rent them for profit, however, there is clearly considerable overlap. Smaller developers will generally sell developments once they are completed (trader developers), whilst larger developers may be able to retain developments, building up large portfolios of property, in effect acting as a property investor (investor developers).
A developer is distinguished from a contractor in that a contractor is appointed by a client (who may be a developer) to carry out construction works. Contractor’s profit from the process of carrying out the works, not from the property itself. Developers may undertake construction themselves (for example house-builders) or may appoint contractors to carry out the works.
Developers may fund development directly themselves, or seek investors. ‘Development finance’ may be sought to cover the immediate costs of completing a development, whilst ‘funding’ can be sought to cover the ongoing cost of holding a completed development. Developers may also seek ‘forward funding’ where a funder agrees to purchase the completed development. Funding is largely provided by financial institutions or by banks.
Developers may specialise in a particular area or a particular type of development, or may spread their risk by operating across a number of different areas and building types. Development may be speculative, or may be undertaken for a specific occupant.
The key phase in property development is deciding the nature of the development to be undertaken and whether or not to proceed with the development. These decisions are based on an evaluation of the market, and financial appraisal of the proposed development, including the likely constraints, risks and profit. The development process can be summarised as:
- Initiation and evaluation.
- Land and property acquisition.
- Design and permissions.
- Management or disposal.
Development is a very complex process. Development evaluation requires assessment of a great number of criteria, funding can be difficult to secure, purchases and sales can take considerable time, and developments can require a great deal of management. As a result, developers require a great deal of expert knowledge in subjects such as:
- Property and land valuation.
- Building pathology.
- Investment appraisal.
- Funding mechanisms.
- Property law and planning.
- Design and construction.
- Project management
- Estate management.
The decision to invest in property is taken within the wider context of the global investment market, and an investor may include property as a part of a wider investment portfolio. However, unlike many other investments, property involves long-term commitment to unique, large, high-value assets, that can be created from scratch or can be improved to increase their value, and that require ongoing investment for management and maintenance. Depending on the condition of the global investment market, property can be seen either as a safe haven, or can seem too expensive for the risk profile; illiquid, inflexible and too long term compared to higher-returning assets.
NB Private Finance Initiatives (PFI) are one of the three procurement routes preferred by the government (the other two being prime contracting (or prime-type contracting) and design and build). On PFI projects, a single integrated supply team is appointed with design, construction and facilities management expertise to design and build a development and then to operate it for a period of time. A special purpose vehicle (SPV), of which the integrated supply team is a part, finances the project and leases it to the government for an agreed period (perhaps 30 years) after which the development reverts to government ownership.
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