This week, amid a great deal of fanfare, it was announced that work had begun on the derelict site of Battersea Power Station. But it's not hard to make money out of property if you've got political backing.
Most people feel that there is something terribly clever about developing property and that it takes a real visionary to make money out of those huge developments.
This is because most people – including most politicians – don’t really understand the calculations. They assume that property developers are modern Einsteins, who by some magical process are capable of making money. In fact the process is relatively simple. The details I am going to give could be worth several billion to any aspiring property developer.
All you need to know is how much it costs to put up a building. This might seem to be a very difficult thing to work out. But, in fact it is dead simple because the Building Cost Information Service have worked it all out for you. The BCIS is a service run by the Royal Institution of Chartered Surveyors. The BCIS has tables – primarily for insurance purposes – which give estimates of how much it costs to put up a building. The figures cover the cost of clearing the ground and completely building from scratch. The tables cover a variety of locations – for example the cost of rebuilding a home in central London will be different to the cost of building a similar home in the countryside. Almost any surveyor will have a copy of these tables and they are used as guidelines by the entire industry.
Let’s assume that you want to build a city-centre two bedroom flat with a lounge/kitchen area and a bathroom/toilet. If it’s a reasonable size the external area will be around 70 square meters. You have to add a bit extra for the cost of the lift and common parts (corridors and entrance halls). However a quick flick through the tables, reveals that the building cost will be around £100,000 per flat.
Since similar flats in the centre of London sell for between £700,000 and £1 million, you can see that there’s plenty of money to be made as long as you can get the land and the planning permission.
Looking at these figures, you realise that, to make money, you have to build as densely as possible. Let’s assume that you buy some land for £10 million. To get planning permission, you may have to promise around £50 million worth of expenditure on social housing, new parks and a local community centre. Let’s assume that you can sell the flats for £750,000 each. If you build 100 flats, you’ll only break even. If you can build 200 flats, you’ll make £65 million pounds and if you can get permission to build 400 flats, you’ll make around £200 million.
Developers will sometimes argue that the flats they build are made to a far higher standard than the ones envisaged by the RICS. But, for a small flat, even the most expensive kitchen and bathroom is unlikely to set the developer back by more than £20,000 per flat. Given the huge amounts of money at stake, this won’t make a big dent in the profits.
Now the only problem is to coax the politicians – usually those inWestminster - into giving you the land at a reasonable price, and to persuade local politicians to grant planning permission. As most of the politicals parties are desperate for cash, a donation to party funds can help considerably. It also helps if you produce some glossy pamphlets discussing the benefits of regeneration and stressing the amount of social housing and local jobs which are likely to be created: this should satisfy the local councillors. And as for the MPs, well we all know that politicans enjoy a good dinner. So book a decent table at Claridges and order a nice bottle of wine. Now you’re well on your way to becoming a property billionaire!
Let me know what you think. It would be nice to hear your comments.