In our business, we have to realistically assess the developed value of a project before we can identify the most appropriate deal and lending structures for clients. This means we take location perception into account.
For example, if you are planning on building fabulous homes next to Chelsea, but the area has an Earls Court postcode, it shouldn’t make a difference, but it generally does. A postcode doesn’t provide any indication that it’s any less attractive of a deal but may suggest that the developed asset should be priced differently.
We ask potential developers about many things; local transport links, availability of good schools and amenities nearby, flood plains, air traffic routes, potential sources of pollution and the availability of employment across the area – to name just a few. All of these are fully justifiable and relevant in predicting ROI for investors.
The trickiest factor to justify is postcode snobbery. This can result in someone actively choosing to buy a smaller property, perhaps in a less attractive setting, just to say they live in what is perceived to be a desirable area.
This was brought home to me some years ago when my wife was accosted at the gates of our eldest’s nursery school by someone presumably sizing her up as potential friendship material. Interest was lost almost immediately when she corrected my wife about the name of the area in which we then lived. She even went so far as to query how we had got a place in the particular nursery, with waspish parting advice not to reveal our address to any other mums or dads.
I’ve never forgotten this lady whose values and manners caused upset to my wife. I have a genuine moral objection to such subjectivity and recognise that it is rarely based on fact or deep thought.
However, postcode snobbery is real, and it affects the value per square foot of any new development. The good news is that with a correctly structured deal, this can be a hugely positive message. Lower priced land may even allow prejudice-busting features to be built into the plan.
At Hallcroft, we take postcode snobbery into account, not because we like it, but because it’s one of the many aspects we help clients explore, before constructing a deal capable of bringing the most appropriate and reliable return for all parties.
Below is one such project that could be classed as Chelsea to some but Earls Court to others. Either way, it was a pleasure to see this mansion block revived and now featuring five separate homes to enjoy, we hope without too much postcode snobbery.
More lessons in property development can be learnt by attending our next webinar: Property Development Finance – To what extent has development finance increased to 70% LTV? Hosted by myself and Martyn Pollock, on Tuesday 5th October 08:30 BST.