Property development is a challenging, risky and yet potentially highly rewarding business.
The seduction of quick returns presented by various television shows, website articles and property training academies attracts many. But does the short-term thinking of quick wins consider the long-term potential of a more sustainable development approach?
Could developers miss out on even greater margins by chasing short-term rewards over strategic long-term thinking? As Architects, we believe there is real scope for developers to gain from taking a longer-term view of building design and sustainable development.
Read on as I explore why we believe developers should create a long-term business plan built around sustainability and sustainable design thinking.
The mistake of short-term thinking
Property developers are likely to prioritise cash flow and profits right now, and who could blame you (see earlier note about this being a risky business).
It would seem a no-brainer to remove seemingly unnecessary costs associated with low carbon, low energy buildings, such as thicker insulation, solar PVs, ground source heat pumps, or anything beyond only meeting ‘Building Regs’.
When the market is slow or depressed by highly uncertain socio-economic conditions, reducing your risk in development by cutting costs, maybe even more of a priority. But is this tenable over the long term?
Consider how your approach may change as local planning authorities further tighten thermal efficiency requirements in their decision-making. The Building Regulations are already being ramped up to help meet the Government’s ambitious net zero by 2050 target.
Promotion: why not join our Property Developer Workshop in November to learn more about the latest changes to the Building Regs?
Apart from the building regs, what if home buyers start judging properties on the new Home Quality Mark and not just the location or number of bedrooms?
Why a long-term plan for sustainable development matters?
Every successful entrepreneur knows the value of a long-term strategy. Business leaders continually espouse the benefits of thinking 5, 10, or even 20 years later. Property development businesses should be no different.
With a long-term plan, developers can think about factors beyond cash flow, such as building brand equity, good placemaking, and ultimately leaving a lasting legacy. After all, the buildings you create are homes, offices, schools or hotels that should last for decades or longer.
Beyond the potential for additional profitability, there are three core reasons why developers should care about the long-term sustainability of their schemes:
1. Meeting the needs of the local planning authority.
Most new build properties are now required to perform far better than Part L of the Building regulation – this section covers requirements relating to the conservation of fuel and power. We often now see planning requiring a 19% improvement in energy efficiency beyond the necessary standards – many local authorities now require this as part of their planning conditions.
Most buildings already have high insulation levels and some renewable onsite energy generation. However, if you cut these costs, you may breach the planning consent in place for your scheme.
New governments are continually shifting the goalposts with planning permission and laws, which may affect a property development company’s continued viability. You only have to consider the number of Housing Ministers we have had in the last decade to know this is a highly uncertain landscape. What is allowed one year may not be permitted the next.
Let’s not mention recent government u-turns and how this may or may not change planning!
2. Stay ahead of the shifting expectations of homebuyers.
It is also useful to keep abreast of the changing consumer landscape.
Consumers in the millennial and Gen Z age brackets – roughly anyone born between 1980 and 2000 – are thought to care more about sustainability. However, recent research (Nosto, 2020) suggests this trend is broadly similar across all age groups.
Research from Deloitte (2020) shows 43% of consumers are actively choosing brands due to their environmental values. A study from Nielsen (2015) found that millennials sre most willing to pay extra for sustainable offerings—almost three out of four respondents, up from approximately half in 2014.
The same study found Gen Z’ers are also willing to pay more for products and services from companies committed to a positive social and environmental impact.
Staying ahead of trends is, therefore, a smart move. Why should property developers care; after all the main factors people look for when buying a house are typically location, size and cost.
What if your buyers changing circumstances and preferences are likely to add a new dimension to their decision-making? Consumers are increasingly interested in sustainability and managing their carbon footprints, so you might consider the new Homebuilders Quality Mark (HQM) certified homes standard.
This new standard recognises properties that achieve high-quality standards, running costs, health and wellbeing, and environmental impact. As an independently assessed certification scheme, you can gain extra selling points by achieving a good star rating for your home design, construction, and sustainability standards.
The Guardian recently highlighted high costs for the buyers of new build homes in upgrading them to meet future standards; discerning home buyers may be interested in avoiding these future costs.
Your role as a successful property developer is to give people houses they want to inhabit. Maybe considering HQM alongside location, size, and cost will enable you to stand out in a crowded marketplace.
“Brands that establish a reputation for environmental stewardship among today’s youngest consumers have an opportunity to not only grow market share but build loyalty among the power-spending Millennials of tomorrow,” says Grace Farraj, SVP, Public Development & Sustainability, Nielsen.
3. Higher quality leads to greater revenue.
There is a huge benefit for developers in making attractive places where people want to live.
Suppose there are two developments in the same location, one with a high HQM star rating and another with a more standard specification. In this instance, expecting the former to achieve a greater sales price seems reasonable.
It’s no different to other big-ticket purchases, where quality products attract premium pricing. Think of the cost of an iPhone versus a Samsung Galaxy. They both essentially do the same thing, but Apple’s product is arguably more successful.
Of course, it’s not merely the case of putting out a higher-cost product; a lot of marketing goes into achieving Apple’s position in the market.
Can developers build brand equity around their sustainability credentials and achieve higher margins? We certainly believe there is value in this approach. People will always need decent homes to live in, and housing will always make a sound investment for people.
However, shifting your positioning from the middle ground to feature sustainability will likely add an extra dimension to your product and drive better margins.
For PRS developers, the business case for sustainable development is even clearer. Efficient buildings cost less to run, and operational cost savings go straight to the bottom line. Any additional capital expenditure in development should have a short payback period due to reduced costs associated with heating, lighting, ventilation and voids.
Why taking the long view just makes sense
If better margins, improved alignment with consumer demand, and an increased likelihood of satisfying a local planning authority hasn’t convinced you to consider sustainable development options, here’s one final thought.
The current forecast on climate change (UK Met Office) shows that by 2070 the UK will be 30% wetter in the winter, 60% drier in the summer, and 6 degrees centigrade warmer.
With all that extra heat and water, one thing is for sure; it will cost you a lot more to build houses.