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The importance of project and developer due diligence for a property investment company

by Nikki Dale -

At REW our clients are investing into property to enjoy a healthy annual rental income year-on-year and hopefully price growth on their asset during these years.  However, some may feel it’s a little too good to be true, or are not sure of the process of buying off-plan directly from a developer.  Therefore, clients instinctively ask us worst-case scenario questions before investing such a large sum of their money.

We fully understand this process and openly talk about the deep due diligence process we go through to be able to answer their questions and overcome, or lesson, their doubts and fears.

Before we add a PBSA development, a mixed-use project or an alternative investment to the REW portfolio, we carry out a thorough due diligence process, and here it is in a nutshell.

Developer Check

We check the track-record and history of the company: land ownership, projects already completed, Companies House check relating to the projects SPV and who the Contractor will be. We also look for good and bad news stories on the company, its projects and its directors.

Project Suitability

We check planning approval documents, when the project will start construction and whether the start date is subject to anything e.g.: build funding. Most importantly we look at how investors monies are ring-fenced i.e.; how project cost management is controlled and a contingency plan by the developer – so in the event of assured rental shortfall this will be sufficiently covered.

Project Details

We look at the asset and investment model combined. The purchase price and the assured yields and what will happen after the 3, 5 or even 10 years assured rental period. Importantly, what will the annual fees be in a few years and what projected rental should the property be yielding.

Management & Lettings

A developer will usually have an experienced management and letting company in mind pre-construction and be in preliminary discussions with them. It’s important to check the developer has clear appraisals of achievable annual rental income along with realistic service charge and management fees.

Location Review

We look for under supply to dictate demand and keep rents buoyant and on the rise. Positives are regeneration projects in the area and in relation to student accommodation, the expansion plan of the local universities. We compare local like-for-like properties and look at rent comparisons to ensure what is being assured yield wise is realistic and attainable.

Solicitors

We always have a solicitor that we can recommend to you. With a recommended conveyancing in place, we ensure the Solicitor Fee and disbursements are negotiated & already clearly laid out – no need to source and negotiate fees with a solicitor – and due to the standard 28-day turn-around to Exchange, we ensure our recommended solicitor has already received Purchase Contracts and has in-advanced prepared the Report on Title.

Contracts

We review the contracts as an important part of the property check. We look at how they are structured in terms of the assured rental yield and if applicable the buy-back exit strategy. We ensure all contracts, and its covenants are assignable in the event of resale and that there is developers’ authority to sell before completion in certain circumstances. We also check for any future clauses relating to annual fee increases or any extra costs involved.

Site Visit and Meeting The Developer

Where possible, we visit every site and meet the developer. This helps bring the vision of the development to life and means we can gain even more area knowledge.  It allows us to obtain real-time updates of construction and if the project is nearing completion obtain video walk-throughs of the properties.


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