www.propert y-investor-news.com20 << PROPERTY INVESTOR NEWSTM

M A R T I N S K I N N E R

I N V E S T O R I N T E R V I E W

Longer term readers may well recallthe previous article with MartinSkinner back in 2012. In that

interview he talked about his 'bounce back'from the painful fallout he experiencedfollowing on from the 2008 economicdownturn and how he had begun to rebuildhis personal property portfolio. At that time -some two years ago - Martin had progressedfrom doing relatively straightforward flatconversions and was doing smaller scalesecondary mixed-use sites by adding value,primarily converting the upper floors forresidential lettings. He was sourcing hisdeals mainly through London auctions andas explained in the previous article, with ahighly systemised analytical approach forpotential purchases.

Since then we have kept in touch as he has progressed his property developmentstrategies, primarily in the wider southLondon area. In April of this year Martin'slatest property venture attracted theattention of the Financial Times and hiscompany's use of a peer to peer lendingplatform was the lead story on the front pageof the FT. The development in question(Green Dragon House) is in the town centreof Croydon and it's a quite large scale officeto residential conversion site with significantpotential. Within just 50 metres of this siteconversion, work is already underway onthe first of his current projects in Croydon(Surrey House) and Martin is also just aboutto conclude on another purchase close by.All three of these buildings are formeroffices with Permitted Development forconversion to residential use.

I met up with Martin a few weeks ago inCroydon to see exactly what he is nowdoing and to hear his thoughts on thecurrent market and the opportunitiescreated by the government allowingchanges for permitted development.

Firstly, I ask why he chose Croydon for hismore recent property development projects.

Martin explains: "When the Mayor ofLondon Boris Johnson intervened to securean agreement between Westfield andHammerson for a huge new shoppingcentre in Croydon I recognised that the regeneration the area was alreadybenefiting from would rapidly accelerate,just as Shepherds Bush and Stratford alsohave done and that local residential pricesshould outperform.

"I was convinced that decision shouldmake Croydon a magnet destination forpeople keen to work/shop/play throughoutthe South of England, because unlike with the other Westfields to the West andthe East of London there are no majorcompeting (major) centres to the south (ofCroydon). After spending a bit more timeexploring the area I realised just how goodthe local transport links are here, as it's lessthan 16 minutes on the train from Victoria,

London Bridge, Wimbledon and Gatwickairport. As a result I am confident thatCroydon property values will continue tooutperform in the years ahead."

The use of joint venture funding (JV)sources has enabled Martin to progresssome larger scale deals in recent years so Iasked him to briefly explain how thefunding for purchase and development isdone with his investor partners and whatcommitment he has to put in apart fromthat of sourcing and structuring the deals.

"I have stuck to my original model of givingmy JV investors a priority return and a profitshare in return for the use of their capital.I take a profit share and a DevelopmentManagement Fee for arranging anddelivering the project and achieving theinvestors return and if a Personal Guarantee(PG) is required then I am the one that signs itrather than the investors.

"I sometimes put in a small share of thetotal equity requirement and often my PG

Property developer Martin Skinner talks with Richard Bowser about the opportunities createdby Permitted Development (PD) and converting redundant offices into residential living space.

Creating Quality inCompact Spaces

This article has been reproduced from the November 2014 issue of Property Investor NewsTM. Toreceive a sample copy go to: www.property-investor-news.com or contact us on 020 8736 0044

© All rights reserved. Farscape Ltd - copyright. The content within is not to be reproduced or transmitted in form or in part without the express written permission of the publishers.

can be as high (sometimes higher) than the equity that my investors put in, though I do intend to start phasing these out from the end of this year. As potentially thebest operator in this space we have nowstarted attracting offers from major fundersto develop their existing offices/portfoliosin return for a slightly smaller share ofthe profits and with a DevelopmentManagement Fee. The efficiency, scale and low risk nature (relative to big PG's) of working this way with existing owners is attractive so I'm keen to follow this through."

Regular readers will be aware of thegovernment's changes to PermittedDevelopments for office conversions (seepage 41) which were brought in from January2013 and there have been many applicationsput forward to local councils by developers,but they have not always been received withenthusiasm, so I asked Martin what are themain issues to consider with PD projects.

"Article 4 can be implemented to removePermitted Development Rights though thistakes a year if the Local Authority wants toavoid potentially expensive litigation and itcan and typically is overruled by theSecretary of State.

"There is currently an expiry date foroffice to residential Permitted DevelopmentRights (PDR) which is the 30th of May 2016and depending on your interpretation of therather vague rules you need to have theproperty converted and occupied by thisdate rather than just having started work onthe conversion, which is more commonwith developments. However, it now looksas if this deadline is likely to be extended byat least three years."

Many councils, particularly in London havesought to challenge the PDR for developersas we have commented on previously overthe last year here in PIN magazine, often onthe grounds of councils not wanting to seeemployment 'space' in their borough beinglost, irrespective of the obvious need formore residential accommodation with everincreasing occupier demand.

I ask Martin to explain how he gotthrough the first PD application and whathas been the implication.

"Our first PDR or 'Prior Approval'application for Surrey House in Croydon was(along with everyone else) initially refused on'Highways' grounds as the council did notwant residents applying for parking permits.

"Thankfully I have some excellent planningconsultants and planning lawyers. Betweenthem they managed to structure a solution tothe councils' primary objection to allowingnew residents to park on the streets by using a Unilateral Undertaking which ultimatelyevolved into a very simple and low costSection 106 agreement. We were the firstdeveloper to secure PDR consent in Croydonand our drafting has in effect become thetemplate that all the other developers haveused to secure their consents.

"As long as the building has beenoccupied as a B1(a) office building, it is not alisted building and is not in an area that issubject to an Article 4 restriction then it isinfinitely cheaper, easier and quicker tosecure a PDR consent for conversion than it is to secure a full planning consent for re-development.

"The actual process typically takes 8weeks while the application fee costs just£80. There are of course many other costsfor architects, planning consultants andspecialists to ensure all the key potentialobjections (flooding, contamination andhighways) are covered but these still cometo a fraction of the usual planning costs.

"I generally follow up the initial PDRconsent with planning applications forfaçade/window improvements, penthouses,roof terraces and additional units on theland that comes with the core office buildingso I typically allow a more traditional twoyear period to secure planning, convert andto then complete all the unit sales.

"I am able to quickly de-risk the planningand start demonstrating premium £ per sq.ft. sales, which then enables me to reducemy finance costs and if I want to, then alsoto leverage up the project.

"A high loan to cost can still be a low loanto value/GDV when I am achieving grossmargins on cost that are consistently inexcess of 50%. My appraisals typicallyshow much lower margins at the pointwhen we raise finance and buy. But we thenoutperform through working very hard tooptimise the project via space efficient flat designs, higher specifications andtechnology etc and thereby we reallymaximise the returns."

PROPERTY INVESTOR NEWSTM

>> 21www.propert y-investor-news.com

I N V E S T O R I N T E R V I E W

M A R T I N S K I N N E R

“ We then outperformthrough working very hard to optimise the project via space efficient flat designs,higher specifications andtechnology etc ”

Surrey House - Before Surrey Hse - After

*Readers should note from the examplefloor plan and CGI's how the space ismaximized within a typical apartment andthe high quality of fittings.

The benefits of buying an existingbuilding and converting it rather thanconstructing from out of the ground areobvious but the recent sales prices Martin'scompany (Inspired Homes) are achievingrelative to the development cost indicates ahigh level of profit. The Surrey Housedevelopment currently comprises of 30individual one or two bedroom flats and oncurrent trends it will achieve profit levels inexcess of 50% gross margin on costs for a 19month development/sales cycle and a totalgross profit of just over £3m with a GrossDevelopment Value (GDV) of just over £9m.One bedroom flats which initially werebeing sold at an average of £177,000 arenow achieving £239,794 with 20 unitsalready exchanged from a total of 30. Inaddition, a protracted planning submissionprocess is in play with the local planners forthe construction of nine additionalpenthouses on the existing roof space.

Martin adds: "We have had twoapplications previously refused and areexpecting a decision any day now on ourlatest planning application at Surrey Housefor the penthouse additions but this shouldunderline to PIN readers that developmentof any new building or adding floors ontoexisting ones is very often a protractedprocess and involves a great deal of effortto (hopefully) achieve success.

These are obviously impressive sums,however Martin explained that on the largerdevelopment at Green Dragon House theyconfidently expect to achieve over £13m ofprofit and 71.7% gross margin on costs,with 40 exchanged of the 48 units reserved

from a total of 119 to be built over the next12 months. In addition he hopes to getplanning approval for a 10 storey new-buildblock of 42 flats on the rear car park forwhich they are currently going through aninitial planning application.

As can be seen from the floor-plans, theindividual flats are 'compact' and space is obviously maximised, so I asked Martin what else is in the specification oftheir residential conversions which isenabling these substantial profit margins tobe achieved.

"My background in developing, lettingand managing some 2,500 units worth ofprofessional house shares with my previousbusiness Nice Room has given me adetailed insight into the wants and needs ofyoung professionals in London. I work veryhard to produce compact homes that stillexceed all (buyer) expectations forconvenience and luxury.

"At Inspired we put a lot of effort into ourcustomer experience but in a very practicalway and with a view to keeping everythingaffordable for average working Londoners.For example, we put in high quality durablecomponents (like oak and granite worktopswith appliances from Bosch, Hans Groheand use NEST), which typically results inmuch lower utility, service and maintenancecosts. By minimising wasted space andother costs for our customers and by costeffectively delivering what is typically thebest quality product and finish in the area,we are able to keep unit prices down whilestill achieving premium £ per sq. ft. (andtherefore premium margins) for ourproduct. In time we would hope to establisha lasting brand premium."

The national media have been focusingtheir attention on various data sources

which portrays a decline in Central Londonproperty values in more recent months so I asked Martin how he sees the Londonand South East residential property markets performing over the next three orso years.

"I have always been most active in Innerand Greater London rather than PrimeCentral London, so I still see a lot of roomfor growth in my areas and I am if anythingpushing out a little bit into commuter townswhere the sites are still relatively costeffective and where Transport Authorities,Local and Central government (andincreasingly private developers) areinvesting heavily in infrastructure andregeneration. Commentators tend to nowagree that although Central London valueswill probably continue to grow, the'doughnut' around London which is muchmore affordable (but still accessible) formany working Londoners is expected tooutperform. And that's where I will becontinuing to concentrate my efforts."

And finally - what are the key risks toconsider? "Property development iscomplicated and risky," Martin concludes."The returns can be fabulous as our GreenDragon House project illustrates - we are ontarget to achieve a profit of around £13m onjust £2.3m of equity in two years - but it has been extraordinarily challenging. Forexample, we had 38 existing (commercialoffice) tenants to deal with as only half thebuilding was vacant and we had to apply toabout 35 lenders before we finally found acombination (LendInvest/Montello andthen Maslow) that provided the funding thatwe needed. And if the market turns againstyou then you have little or no income tosupport your borrowing - so timing andpersistence is everything."

I N V E S T O R I N T E R V I E W

M A R T I N S K I N N E R

PROPERTY INVESTOR NEWSTM

>> 23www.propert y-investor-news.com

PIN

Sample Floorplan - One Bedroom Flat - Green Dragon Green Dragon House - After