As a consequence, the commercial risk is now more likely to be shared between the landowner and the developer, with the banks remaining out of the picture.
Tods Murray, which is currently acting for both landowners and developers across a number of projects in central Scotland, recognises that while tougher, the new market dynamics are an important stimulus for the recovery of the property sector.
Susie Thornton, partner at Tods Murray and head of the firm’s commercial property team, said:
“We are in a new era in financing for residential property developments. The banks are unlikely to lend to property developers, meaning that most must go it alone and put up all the funds. This, in turn, has created a far more cautious environment for establishing land values and the process by which a landowner is remunerated. But it is having the effect of re-invigorating the property market.
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“Gone are the heady days of the property boom when sky high land values were calculated on a soaring market and the landowner was paid the whole price on the day of the purchase. Now the landowner can expect to get only a modest payment, if anything, on day one with the bulk of the price being paid as the developer receives the sale proceeds down the line.
“The approach has inherent risks. If the land price is tied to how the market might perform in the future, prices can do down or uplifts may not be as much as anticipated. And with one party putting up all the funds, there will always be a danger that the developer defaults before the development is complete. Care has to be taken how any variable payments are secured should the developer go bust before the payments are crystallised."
Ms Thornton continued: “However, we are seeing a growing commitment from the housing developers looking to purchase development land. And as the value of development land still greatly exceeds that of agricultural land, there are landowners ready to sell.
“Within our own practice we have various land deals underway, stretching from smaller projects accommodating 20 homes and less through to the large scale developments involving 100s of new houses. The new contractual approach, while tougher, is underpinned by careful due diligence and a thorough understanding of risks and rewards on both sides. It is also allowing developments to get underway once again and that has to be good for everyone.”
gressed on this basis are helping us move forward on a number of new developments.”
(GK)
