CASE STUDY: There's lots to learn from this land development flip deal

Land development plays can be delicate balancing acts between many competing interests. Investor Felix Ghauri has learned to deftly walk the line with an approach that mixes both quantitative and qualitative elements with an intricate understanding of policy. There’s a lot to learn from this highly profitable and award-winning London commuter-belt land flip case study, not least that research pays…

OTH: You started your career in Westminster as a political aide and then went into management consulting, before carving out a niche in change management, something you are still involved in today. When, though, did property investing cross your radar?

It all started with a daydream when I was at work one day, in between client projects, sitting on the fourth floor of 20, Old Bailey. I found myself imagining, if the head of our practice area – organisational change - came over and said, ‘Right, your new client is you. I want you to use all the facilities here and just decide what project it is that you yourself would like to do next.’

Felix Ghauri - Investor and land developer

I was captivated by this idea and the sense of freedom was compelling. I went onto Google to help brainstorm this idea, I can’t remember exactly what I first typed, but I remember at some point coming across the exciting phrase; ‘passive income’.

This led me to question, ‘how can I establish an independent income?’ The main things that came up were e-commerce, financial trading and property. Out of those three, property was easily the least comfortable for me. At that point I’d just purchased my first property in Wimbledon - a one bedroom flat just to live in. I’d never thought of properties as anything other than that and I literally didn’t even know how to put a picture up on a wall. At that time my belief was that if you did property, you were either a large company like CBRE or someone you would see on ‘Homes Under The Hammer’ – with tools in a van, a pencil behind the ears and I was neither.

OTH: So where did you start?

Very soon, I had realised that deals needed to stack up against certain metrics: you need to be buying so many thousand pounds per lettable room, securing fixed finance at certain rates, getting clarity on fixed and variable costs. I went all over the Southeast - from Brighton to Surrey – looking for where these economic variables worked best.

The thing is, at this point I lived in and loved central London. I loved being there amongst the architecture, history, commerce, people from all over the world and the general bustle. Everyone said ‘you can’t make it work in London as the economics don’t stack up - you need houses with garages to convert and extensions to add’. What I ended up doing was something slightly different.

In the end, I just really wanted to make it work in Central London. I was looking for how to make my blueprint work in Kensington and Chelsea and the City of Westminster Boroughs so I ended up using the same formulas but recalibrating them to the economics of these areas. I worked out the price per square foot, cost per lettable room, lending variables, typical remodeling opportunities, likely refurbishment costs and so on.

There was a free ads paper called ‘Loot’, and almost everything was online. There were still a few people that were only advertising in Loot and I found this amazing three- bed property marketed for an unusually attractive price. Fewer people went to view it because it was only advertised in print in Loot – there was no picture of the property in there, it’s just a line of text. I thought, that’s probably an ex-local authority property but it turned out to be a period property, perfectly located in a superb part of prime London. I offered the asking price of £375K having spoken to literally every estate agent in the area. None of them said that they would get less than £500K for it.

Well, that’s golden rule number one, isn’t it? Buy with a discount built in, then that is your buffer if anything goes wrong.

So, in the years that followed you expanded your central London and then Canary Wharf-focused property investment business alongside fulltime consulting work. Fast forward to recent years. How did you source the Hazelwood Court project - a land development deal?

With this particular deal, it was part of a very methodological approach because I wanted to get a bit more serious on the land and development side of things. It’s one thing buying a flat where properties are in excess of £1,000 per sq/ ft but buying land in

that same location is a completely different game. The approach I used was as follows: First, start with the likely capital-raise and then work backwards to a land value that worked for the size and type of sites we would be looking for, which turned out to be around the £650 sq/ft mark. The second filter was to look at available data on how planning friendly or hostile different planning authorities were in terms of refusals, time-to-decisions, size and types of sites applications consented and refused. This is publicly available data. And then the third element was a bit more qualitative - areas that I knew and have a bit of a head start in terms of having that micro understanding. All of this led me to Kingston and Surbiton, which, critically, I knew very well. I had local associates and contacts I could call on to, for instance, walk past prospect plots and take pictures. I used a professional mapping tool from the company LandInsight, now called LandTech, to methodically work through the maps, one sector at a time, to identify sites of potential interest and value.

A key factor throughout all of this was the ability to draw on advice and mentoring support from Paul Higgs of the Millbank Group. Paul has over 30 years of successful planning and development experience, is a former lecturer in land and planning at London South Bank University and is also a founding investor of LandInsight. He taught me the mechanics of how to find a site, evaluate it, work out the land value, the most valuable reconfiguration of the space, the cost to build-out those plans and the likely end Gross Development Value (GDV).

For each site, you then access the Land Registry record which you can do quite easily within LandInsight. You can then create a database and send a carefully worded letter to the owner inviting them to discuss how we could work with them to maximise the value of their land. These letters would go off and the responses would then get filtered through a virtual assistant. Anyone who wasn’t just ringing up to say ‘no thanks’, we would then telephone and schedule a meeting to discuss our proposals.

OTH: What was the first contact with the vendor of this deal like?

What was interesting is that I used to walk past this site every morning when I was living in the area. When I was researching this site on LandInsight, I was looking for how constrained the site was in terms of: ‘Does it have trees on it? Is it overlooked? Does it have

pedestrian access, car parking, etc?’ Of all of these traits, sunlight and daylight is a big factor. The more constrained it is, the less likely you are going to be able to achieve any significant planning permission.

This site appeared heavily constrained but because I knew the location and its merits so well, I fired off a letter. As it turned out, I got a note to say that the owner had responded. When I phoned him, he said, ‘This is interesting, but you know, it’s too late. It’s already on with an agent.’ I immediately checked Rightmove and couldn’t find it so asked him which agent it was on with. He said; ‘Uh, well, I haven’t actually signed it yet but the agreement is sitting on my kitchen table.’ I immediately got on a train and went down to see him.

He was an older gentleman, interesting, somewhat cynical and cantankerous. He said that the agent was going to put it on for £650K with a view to getting £625K. We worked out that we could offer him £1.1 million, on the basis of the planning scheme we had envisaged. This would clearly be a win-win for him and for us.

OTH: I understand there was an issue with the conveyancing?

A lot of the conveyancing issues were down to the poor relationship between the vendor and his solicitor. We circumvented these issues by finding and proposing a different solicitor for him alongside offering him funding to move to a new solicitor that he was happy to work with. Something I have learned through various projects is that it can be wise to invest in a project in ways that nurture your longterm goal, even if it wasn’t in the original costing.

OTH: How did you finance the deal?

Our money-in was just under £25,000 which was paid, over a number of months, through existing cashflow so no external financing was required.

OTH: So, the plan was to tidy up the site and then take it through planning and hopefully achieve permission for the building of two semi-detached properties. One a three-bed and the other a two-bed. Were there any roadblocks?

Yes, there were. During the planning stage - we had a daylight and sunlight report that came back and the conclusion from them was that we needed to lose a whole floor, which would have killed the deal. We had to sit down with the daylight and sunlight experts and the architects and actually work out whether the scheme was salvageable. As you can see, from the artist renderings, we were able to reduce an angle on one side of the building to make it compliant without losing a floor.

OTH: Can you do anything to help prepare for these sorts of issues?

We strategized the situation as a ‘negative-inclined planning officer’ and put ourselves in his or her shoes. Even the most negative-inclined planning officer must be able to justify their decisions in relation to current and emerging planning policy.

You also have to keep in mind that Planning Authorities need to comply with a legislative timetable for decision making. They are also often understaffed with a high turnover of planning officers which may sometimes give rise to a natural tendency to refuse where time pressure is a consideration.

OTH: So, when the planning was approved you sold the plot of land rather than choosing to develop it yourself?

Yes, we flipped it. We had a £1 option which we initially secured the site on the basis of a future, possible purchase of £1.1 million. Following successful planning application, we split the title allowing a sub-sale of the main house for £725,000 which effectively left us the development site for £375,000. The site achieved a residual land value and sale of £550,000 leaving us with a profit of £150,245.

THE NUMBERS

Project expenses:

SPV Set-Up - £30, Legal Fees - £1,490, Topographical Survey - £1,800, Tree Report - £480, Tree Felling & Removal - £1,560, Daylight & Sunlight Report - £1,500, Architectural Fees / D&A Report - £9,210, CGI Artwork - £1,050, Planning Statement - £2,100, Local Planning Authority Fees - £1,524, Printing - £256, Fencing - £1,000, Ground Investigation - £2,315, Utilities Search - £440.

TOTAL PROJECT COST: £24,755

Option Contract Purchase Price - £1,100,000

Option Consideration - £1

Sub-sale of Main House - £725,000

Sale of Residual Land - £550,000

Project profit - £150,245

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