2. can be as high (sometimes higher) than
the equity that my investors put in, though
I do intend to start phasing these out
from the end of this year. As potentially the
best operator in this space we have now
started attracting offers from major funders
to develop their existing offices/portfolios
in return for a slightly smaller share of
the profits and with a Development
Management Fee. The efficiency, scale
and low risk nature (relative to big PG's)
of working this way with existing owners
is attractive so I'm keen to follow
this through."
Regular readers will be aware of the
government's changes to Permitted
Developments for office conversions (see
page41)whichwerebroughtinfromJanuary
2013 and there have been many applications
put forward to local councils by developers,
but they have not always been received with
enthusiasm, so I asked Martin what are the
mainissuestoconsiderwithPDprojects.
"Article 4 can be implemented to remove
Permitted Development Rights though this
takes a year if the Local Authority wants to
avoid potentially expensive litigation and it
can and typically is overruled by the
Secretary of State.
"There is currently an expiry date for
office to residential Permitted Development
Rights (PDR) which is the 30th of May 2016
and depending on your interpretation of the
rather vague rules you need to have the
property converted and occupied by this
date rather than just having started work on
the conversion, which is more common
with developments. However, it now looks
as if this deadline is likely to be extended by
at least three years."
Manycouncils,particularlyinLondonhave
sought to challenge the PDR for developers
as we have commented on previously over
the last year here in PIN magazine, often on
the grounds of councils not wanting to see
employment 'space' in their borough being
lost, irrespective of the obvious need for
more residential accommodation with ever
increasingoccupierdemand.
I ask Martin to explain how he got
through the first PD application and what
has been the implication.
"Our first PDR or 'Prior Approval'
applicationforSurreyHouseinCroydonwas
(alongwitheveryoneelse)initiallyrefusedon
'Highways' grounds as the council did not
want residents applying for parking permits.
"ThankfullyIhavesomeexcellentplanning
consultants and planning lawyers. Between
themtheymanagedtostructureasolutionto
the councils' primary objection to allowing
new residents to park on the streets by using
a Unilateral Undertaking which ultimately
evolved into a very simple and low cost
Section 106 agreement. We were the first
developertosecurePDRconsentinCroydon
and our drafting has in effect become the
template that all the other developers have
usedtosecuretheirconsents.
"As long as the building has been
occupied as a B1(a) office building, it is not a
listed building and is not in an area that is
subject to an Article 4 restriction then it is
infinitely cheaper, easier and quicker to
secure a PDR consent for conversion than
it is to secure a full planning consent
for re-development.
"The actual process typically takes 8
weeks while the application fee costs just
£80. There are of course many other costs
for architects, planning consultants and
specialists to ensure all the key potential
objections (flooding, contamination and
highways) are covered but these still come
to a fraction of the usual planning costs.
"I generally follow up the initial PDR
consent with planning applications for
façade/window improvements, penthouses,
roof terraces and additional units on the
land that comes with the core office building
so I typically allow a more traditional two
year period to secure planning, convert and
to then complete all the unit sales.
"I am able to quickly de-risk the planning
and start demonstrating premium £ per sq.
ft. sales, which then enables me to reduce
my finance costs and if I want to, then also
to leverage up the project.
"A high loan to cost can still be a low loan
to value/GDV when I am achieving gross
margins on cost that are consistently in
excess of 50%. My appraisals typically
show much lower margins at the point
when we raise finance and buy. But we then
outperform through working very hard to
optimise the project via space efficient
flat designs, higher specifications and
technology etc and thereby we really
maximise the returns."
PROPERTY INVESTOR NEWS
TM
>> 21www.property-investor-news.com
I N V E S T O R I N T E R V I E W
M A R T I N S K I N N E R
“ We then outperform
through working very hard
to optimise the project via
space efficient flat designs,
higher specifications and
technologyetc
”
Surrey House - Before Surrey Hse - After
3. *Readers should note from the example
floor plan and CGI's how the space is
maximized within a typical apartment and
the high quality of fittings.
The benefits of buying an existing
building and converting it rather than
constructing from out of the ground are
obvious but the recent sales prices Martin's
company (Inspired Homes) are achieving
relative to the development cost indicates a
high level of profit. The Surrey House
development currently comprises of 30
individual one or two bedroom flats and on
current trends it will achieve profit levels in
excess of 50% gross margin on costs for a 19
month development/sales cycle and a total
gross profit of just over £3m with a Gross
Development Value (GDV) of just over £9m.
One bedroom flats which initially were
being sold at an average of £177,000 are
now achieving £239,794 with 20 units
already exchanged from a total of 30. In
addition, a protracted planning submission
process is in play with the local planners for
the construction of nine additional
penthouses on the existing roof space.
Martin adds: "We have had two
applications previously refused and are
expecting a decision any day now on our
latest planning application at Surrey House
for the penthouse additions but this should
underline to PIN readers that development
of any new building or adding floors onto
existing ones is very often a protracted
process and involves a great deal of effort
to (hopefully) achieve success.
These are obviously impressive sums,
however Martin explained that on the larger
development at Green Dragon House they
confidently expect to achieve over £13m of
profit and 71.7% gross margin on costs,
with 40 exchanged of the 48 units reserved
from a total of 119 to be built over the next
12 months. In addition he hopes to get
planning approval for a 10 storey new-build
block of 42 flats on the rear car park for
which they are currently going through an
initial planning application.
As can be seen from the floor-plans, the
individual flats are 'compact' and space
is obviously maximised, so I asked
Martin what else is in the specification of
their residential conversions which is
enabling these substantial profit margins to
be achieved.
"My background in developing, letting
and managing some 2,500 units worth of
professional house shares with my previous
business Nice Room has given me a
detailed insight into the wants and needs of
young professionals in London. I work very
hard to produce compact homes that still
exceed all (buyer) expectations for
convenience and luxury.
"At Inspired we put a lot of effort into our
customer experience but in a very practical
way and with a view to keeping everything
affordable for average working Londoners.
For example, we put in high quality durable
components (like oak and granite worktops
with appliances from Bosch, Hans Grohe
and use NEST), which typically results in
much lower utility, service and maintenance
costs. By minimising wasted space and
other costs for our customers and by cost
effectively delivering what is typically the
best quality product and finish in the area,
we are able to keep unit prices down while
still achieving premium £ per sq. ft. (and
therefore premium margins) for our
product. In time we would hope to establish
a lasting brand premium."
The national media have been focusing
their attention on various data sources
which portrays a decline in Central London
property values in more recent months
so I asked Martin how he sees the London
and South East residential property
markets performing over the next three or
so years.
"I have always been most active in Inner
and Greater London rather than Prime
Central London, so I still see a lot of room
for growth in my areas and I am if anything
pushing out a little bit into commuter towns
where the sites are still relatively cost
effective and where Transport Authorities,
Local and Central government (and
increasingly private developers) are
investing heavily in infrastructure and
regeneration. Commentators tend to now
agree that although Central London values
will probably continue to grow, the
'doughnut' around London which is much
more affordable (but still accessible) for
many working Londoners is expected to
outperform. And that's where I will be
continuing to concentrate my efforts."
And finally - what are the key risks to
consider? "Property development is
complicated and risky," Martin concludes.
"The returns can be fabulous as our Green
Dragon House project illustrates - we are on
target to achieve a profit of around £13m on
just £2.3m of equity in two years - but it
has been extraordinarily challenging. For
example, we had 38 existing (commercial
office) tenants to deal with as only half the
building was vacant and we had to apply to
about 35 lenders before we finally found a
combination (LendInvest/Montello and
then Maslow) that provided the funding that
we needed. And if the market turns against
you then you have little or no income to
support your borrowing - so timing and
persistence is everything."
I N V E S T O R I N T E R V I E W
M A R T I N S K I N N E R
PROPERTY INVESTOR NEWS
TM
>> 23www.property-investor-news.com
PIN
Sample Floorplan - One Bedroom Flat - Green Dragon Green Dragon House - After