KEY LEARNING POINTS
- Custom build projects attract local political and community support, and can be processed through planning quickly
- Development loans from public bodies like the GLA can help projects get off the ground
- Custom build makes commercial sense for private developers – ‘shells’ might sell for less and generate less profit, but developers get their money out earlier. Inhabit also generates income by charging a ‘development management’ fee
- Local residents can be good at identifying the potential of otherwise forgettable sites and developers can incentivise them by offering a land-finders fee. But it can take a long time to track down the owners of small sites and to arrange party wall agreements for enabling works - this delay often adds cost
- Offering purchasers limited choices is easier to manage than providing a completely bespoke customisation service
- A variety of levels of finish can be provided for ‘shells’. Inhabit recommends having a QS on board early in the planning stages to establish the most cost-effective way to design and construct shells. Inhabit’s model also allows it to proceed with construction even if all the ‘shells’ aren’t purchased in advance.
- The use of the ‘Golden Brick’ approach is vital to ensure savings in VAT and CIL can be passed on to the self finishers
Inhabit Homes is a small private developer with a track record of innovation in the custom build sector. Its aim is to share the risk – and profit – of development with owner-occupiers by effectively as their personal developer. The company also partners with landowners to bring forward sites for private housebuilding. As such, it typically earns a fee for ‘development management’ rather than taking developer’s traditional profit.
Inhabit’s Blenheim Grove project has evolved from previous experiments with customisation and it has learned to restrict choice in order to make projects more deliverable. The homes are therefore available at either: -
- ‘shell’ stage – here purchasers take on the property at weather-tight stage and finish it themselves, in their own time and to their own specification using their own contractors
- ‘fit-out’ stage - here purchasers can choose a floor plan from a discrete range of options and have their home completed in one of three ‘looks’
Inhabit sees this scheme as a ‘demonstration’ project and is also exploring the feasibility of custom build at another site in Somerset, and with other London Boroughs. The company is also developing a service aimed at groups – where it would advise them on the best development approach, budget setting and hiring a professional team.
“In every other part of our lives, customisation is normal…coke, phones, cars…but in the biggest expenditure you’ll ever make, you have limited choice. We want to help people buy the homes they would actually choose...My interest in Custom Build as a developer is not pure altruism and there are many things that balance a potential reduction in profit from selling ‘shells’ - as a developer I can get my money out earlier, I get better political support which reduces my planning risk and I get pre-sales, even if people don’t want just a ‘shell’, which reduces my marketing risks.”
Managing Director, Inhabit Homes
A custom build developer is delivering five ‘self finish’ terraced homes with financial support from the Greater London Authority.
The properties are designed to allow the occupiers to complete the interiors as they wish.
The homes should also deliver better value.
The project was initiated by a group of local residents who approached the developer to help them. Completion is scheduled for late in 2016
Initiator: Private Sector
Affordability: High Cost
Built Form: Terraced
Start on site late 2015
No. Units 5
For the purposes of this Toolkit we have made the following definitions:
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The project is on Blenheim Grove in the London Borough of Southwark, near to Peckham Rye station in an area of increasing popularity with families. The plot is immediately adjacent to a railway line and the Rye Lane Conservation Area.
The site is very urban, and is well-located for local amenities and public transport. Initial assessment by the developer highlighted that the site had capacity for five houses.
Inhabit became aware of the site through a local architect (Poulsom Middlehurst) who thought it would be great for a cohousing project that the firm had been planning. The architect had discussed the site with a small group of friends and approached Inhabit Homes for some advice about development. When Inhabit started to look at the costs and the length of time associated with purchasing the land (it took two years to track down the owner), the original group found themselves priced out by the high development costs.
Inhabit eventually tracked down the landowner – a company called Blenheim Grove Developments (Camberwell) – and purchased it in order to acquire the site.
The developer decided to retain Poulsom Middlehurst as architects, and it paid the practice a one per cent land-finding fee (on top of standard architectural fees).
When we visited in mid-June 2015, the site was still overgrown and construction had not started. All five homes are expected to be complete by early 2017.
Site identified by local residents who approached Inhabit; it then took two years to find the landowner and acquire the site; Inhabit also sought pre-application planning advice during this time
Completion of land purchase
Submitted planning application
Received planning permission
Start on site; six-month build programme which will commence even if all the units are not pre-sold
Complete the ‘shell’ dwellings
Complete the ‘fit out’ dwellings; a further six-months
The five homes will provide: -
- 56 Blenheim Grove – two-bedroom, 92 sq m
- 58 Blenheim Grove – two-bedroom, 118 sq m
- 60 Blenheim Grove – four-bedroom, 141 sq m (this home can also be a three-bedroom home with a large double-room instead of two singles).
- 62 Blenheim Grove – four-bedroom, 151 sq m
- 64 Blenheim Grove – four-bedroom, 171 sq m
The homes are available from two stages: -
- ‘Shell’ finish – the private homebuilder can define their own layout and source their own finishes. This is the cheapest option, and avoids VAT being payable on the fit-out. The private homebuilder buys the home as soon as it is watertight, with temporary stairs and capped off utility supplies
- ‘Fit-out’ finish - the private homebuilder choses one of three pre-defined options - ‘industrial’, ‘calm and neutral’ and ‘colourful’ - which are then built by Inhabit. The architects are currently developing the detailed ‘look’ for each of these (essentially a palette of materials and details rather than prescribed internal arrangements)
Each property is available as either a ‘shell’ or a ‘fit out’. The prices given below were current, but not fixed, in January 2015: -
Overall values are between £5,500 and £6,500 per sq m for ‘shell’ properties, representing a 20 to 23 per cent discount on open market value for a fully fitted-out home, depending on the size of the property purchased.
Inhabit is a small company and Managing Director Gus Zogolovitch feels it is vital to maintain regular contact with purchasers throughout the custom build process.
The company has not spent a lot on marketing the project, and found the ‘novelty’ of custom build has attracted a lot of press attention and public interest. Inhabit also operates as an estate agent and provides a sales function for other developers, so it has been able to organise all the marketing in house. This has involved running information evenings for potential customers, designing and producing brochures and installing site hoardings. Inhabit also used property website Zoopla once it had formally completed the purchase of the site. The developer’s website invites people to sign up for a marketing pack that includes a range of illustrated layouts for each property.
Inhabit is planning to complete the project in phases so it can walk interested purchasers around completed ‘shells’ to help them understand the range of options open to them.
Inhabit’s marketing drive focuses on the competitiveness of the ‘shell’ purchase price compared to an equivalent-sized, period property nearby - it estimates ‘self finishing’ a shell is around one third of the cost of refurbishing a period property. And it points out the added benefits of a customised floor-plan, and a better-performing building fabric.
Inhabit has produced figures that illustrate a typical cost saving of approximately £100,000, and it says this is achieved through a combination of the lower initial purchase price (and therefore reduced stamp duty), the lower cost of labour for customisation work, and the VAT exemption.
In terms of wider marketing of its custom build service, Inhabit has a good section on its website that explains its particular approach and product - including a ‘mini-guide’ to custom build, outlining the process and explaining FAQs. The developer has also produced a guide to the service it could offer a group of people interested in building together – or individuals wishing to join such a group.
“By offering these options we believe buyers get better value than buying a Victorian house in the area, gutting and rebuilding it. Self-finish means they will pay less stamp duty, they won’t have to pay any VAT on the finishing and they will live in a brand new home, which embraces cutting edge design and enjoys real thermal efficiency.”
Business Development Manager, Inhabit Homes
“Shell-finish gives you the opportunity to live in a space and really absorb it before adding your personal layers to your home.”
Managing Director, Inhabit Homes
In terms of wider marketing of its custom-build service, Inhabit has a good section on its website that explains their particular approach and product - including a ‘mini-guide’ to custom build, outlining the process and explaining FAQs. The developer has also produced a guide to the service it could offer a group of people interested in building together – or individuals wishing to join such a group.
The media is interested in custom build
Custom build is ‘new’ and ‘novel’ so its relatively simple to generate extensive media coverage for new developments
SALES AND PURCHASING PROCESS
Inhabit has set up a clear purchasing process: -
- A £2,000 reservation fee is required to ‘reserve’ a shell. This is refundable in certain situations - for example, if planning permission is either not granted or results in material changes that mean the property no longer suits the purchaser’s needs; if the floor area changes by more than 10 per cent of that advertised; or if start on site is delayed by more than six months. If Inhabit receives more than two offers for a given property, it will run a sealed-bids process, with first refusal offered to the highest bidders
- Purchasers then have 28 days from receipt of planning permission to exchange contracts and pay a ten per cent deposit of the purchase price – the price is fixed at this point. At this point purchasers must also provide proof of funds to complete the purchase
- Purchasers pay the balance upon completion of the home, but can pay more up-front if they wish – for which Inhabit offers a discount to reflect its reduced borrowing requirements to finance the project. Purchasers can also pay off the balance in stages if this makes it more affordable for them
Inhabit refer all of its customers to BuildStore – a mortgage broker specialising in self and custom build lending. BuildStore then secures a staged-payment mortgage, which is customised to each purchaser’s requirements. This is a traditional approach to financing a self build project. If they prefer purchasers can also use their own mortgage provider
Inhabit has found its ‘personal developer’ approach means purchasers are very open with it about their financial situation.
The company plans to employ the ‘Golden Brick’ approach - customers will therefore initially purchase the land (with foundation slab), and then pay for a shell or fully fitted-out home to be built on it by Inhabit. This provides a link through to the final ‘custom builder’ (ie the purchaser) for the purposes of local-level CIL and VAT exemption. In order to facilitate this link, Inhabit is required to obtain a signed agreement from purchasers prior to construction starting, stating that they will live in the home for a minimum of three years. Inhabit will have to pay CIL on any units it begins constructing without a purchaser on board. The project was given planning permission before the introduction of Borough-level CIL, and so has not been liable for this cost.
None of the homes are sold at the time of writing – although Inhabit has had two offers and is expecting a third. The main reason is that Inhabit is still working with a main contractor to establish firm build costs for the ‘shells’. The company has decided to proceed with construction even if it doesn’t sell all of the shells building work begins.
PLANNING AND DESIGN
Inhabit recognised that there was a tight existing community in the area that it wanted to address. The developer employed planning consultancy AZ Urban Studio and community engagement consultants Curtin & Co. who conducted a door-to-door survey and distributed leaflets with clear contact details so anyone with concerns could get in touch. This process allowed Inhabit to explain in person that this model was different, and allowed it to make a few changes in response to the comments received.
Engage with the local community
Use a good community engagement consultant to make contact with the neighbours when preparing for a planning application. This can make it easier to explain the custom build model, and provides an opportunity to respond to local comments
Inhabit did not experience many issues during the planning phase, and it praised the good pre-application advice it received from the local authority - this highlighted all the surveys they would be required and stipulated that the external finishes must be in brick.
The developer and its architects, liaising with the Local Planning Authority, fixed the external appearance and site layout. The design of the houses is influenced by the existing Georgian terraces surrounding the site and the contemporary ‘New London Vernacular’ style. All the homes have roof terraces, a study area and the two larger properties also have a private rear courtyard. The rear elevation is articulated, and was a particular concern for the planners due to its visibility from the train line.
The developer worked with a noise consultant to address the proximity to the railway line, and the architects dealt with this through specifying good air-tightness, and reducing the openable glazing to the rear walls. The homes will aim to achieve Code for Sustainable Homes (CfSH) Level 4, as required by building regulations, but purchasers can choose to upgrade their specification to Passive House standard by adding extra insulation if they wish. Inhabit is currently seeking a nonmaterial amendment to its planning permission to remove the CfSH requirement, which it says adds onerous requirements for self finishers.
The buildings will be constructed to create a structurally secure and weather tight shell, which will include internal floors, stairs and structural load bearing walls and be based around a split-level arrangement developed by Inhabit’s sister-company, Solidspace, which has proven to be highly marketable. The windows and external doors will come pre-fitted, and the all homes will be sold with a structural warranty.
Purchasers are able to influence the internal layout and specification of their homes. A range of drawings illustrate possible layouts – there is a lot of flexibility (within pre-defined limits). Service voids are pre-located where bathrooms are likely to be positioned.
The project is due to start on site in the spring of 2016. Inhabit still has a number of challenges to address before enabling works begin – including conducting site investigations, commissioning detailed design and agreeing a construction strategy with neighbouring landowner Network Rail.
Inhabit is not tendering the contract– instead it has selected a contractor, Sylva, with whom it has developed an approach to custom build construction. Working with Sylva from an early stage, alongside a Quantity Surveyor, has enabled Inhabit to accurately cost an otherwise untried project. The understanding is that as long as initial costs don’t rise too much before start on site, Sylva will get the contract to do the work.
The biggest challenge was deciding upon a structural system for the shells, as this significantly affects both the cost of construction and its internal flexibility. The structural strategy also affects the imagery used for marketing purposes - for example, if concrete was chosen then self-finishers would have to ‘trunk’ their services and this might not prove so attractive. However, timber frame might prove more difficult for purchasers to raise a mortgage against. Working with a Quantity Surveyor from an early stage - who produced a spread sheet of all the available construction methods comparing their cost, fire-ratings, mortgageability, flexibility, etc - has helped Inhabit to make well-informed decisions.
Inhabit is looking at phasing the construction, completing the smaller units first. This will help with marketing, as the Inhabit team will be able to show people what a ‘shell’ looks like. Phasing will also help when working with a small contractor, allowing them to manage multiple trades on site in a sequential manner.
In terms of building control, Inhabit is responsible for signing off the building up to weather-tight stage, while shell-purchasers remain responsible for final sign-off. In previous projects, Inhabit has adopted a ‘Homeowners Manual’ approach when it hands over a property. The Manual makes it clear where the responsibilities for fulfilling the requirements of building control lie and the process for doing so as the home is gradually completed. The Manual itself was initially a requirement of the now-defunct Code for Sustainable Homes, but Inhabit has found it a useful tool for explaining ‘shells’ to purchasers.
DEVELOPMENT PROCESS AND FINANCING
Inhabit is acting as Development Manager for the project. Generically, this role includes: -
- Acting as project managers; organising everything to do with the project on behalf of the landowner and the purchasers, acting in both parties’ best interest
- Hiring the best-value professional team and the best-value builders to ensure that the project is delivered on time and on budget
- Acting as design and commercial managers; making sure that the architect and design team are designing for and on behalf of the purchasers and making sure that what is designed will retain commercial value at the end of the project
- Acting as facilitators and decision makers in the event of a stalemate; prioritising the project’s programme and budget
The total development costs is estimated to be £2.2m.
The project will be delivered through a Special Purpose Vehicle (SPV), called ‘Blenheim Grove Development Ltd’ – the company that Inhabit bought when it acquired the site. Inhabit’s finance arrangements are through this SPV, which formally grants Inhabit an ‘Access License To Carry Out Works’. The SPV will build the project and then be wound up, common approach adopted by many developers.
Inhabit has a loan agreement with the Greater London Authority, through the GLA’s Custom Build Loan Fund (a revolving fund designed to support pilot custom build projects within the capital). This agreement allows the interest charged on the loan to vary between two and ten per cent as the development progresses and – hopefully – as both Inhabit and the GLA become more confident in its success. For example, Inhabit was able to draw down some of its loan to buy the site, at a higher interest rate to reflect the level of risk at that stage. The next tranche – to fund the start on site – will be at a slightly lower rate, as the relative risk has reduced. As the SPV does not have its own track record, Inhabit is currently working through further conditions to give the GLA comfort in its position as sole lender - such as opting to contract with a main contractor on a Design & Build basis, and putting collateral warranties in place with all sub-contractors - before a second tranche of development finance can be drawn down.
Inhabit does not have its own cash resources to fund pre-development costs, and so used some funds from sister-company Solidspace Asscociates to pay a deposit on the land and prepare a planning application. The GLA loan requires Red Book Valuations to be done on the land before and after planning permission has been obtained, in order to provide a robust basis for loan agreements. Inhabit is looking at whether it can retain equity in the land long-term, as this would allow it to borrow money for future projects.
Using the Greater London Authority ‘Build Your Own Home The London Way’ – Custom Build Loan Fund
Inhabit applied for funding from the Custom Build Loan Fund – a revolving fund with an open call for applications, administered by the GLA and designed to support pilot custom build projects in London. An equivalent fund is administered by the Homes & Communities Agency for projects outside of London.
A Special Purpose Vehicle (SPV) – Blenheim Grove Developments (Camberwell) - owns the site and takes out the loan from the GLA. The GLA – through GLA Land & Property Ltd (GLAP) in the sole lender on the project and has first charge on the site.
The total development costs are estimated to be £2.2m. Inhabit will fund 25 per cent of the development costs with developer equity raised from private investors (deposits from the private homebuilders it has signed up for the project). The remaining 75 per cent is financed by a £1,917,404 loan to the SPV, repayable with interest.
The loan agreement between GLAP and the SPV protects the GLA and controls how the loan can be drawn down – for example, never to a value greater than the security offered to GLAP before planning is achieved, or (during the construction period) never more than the higher value of either the security on offer or 75 per cent of development costs as identified by an independent Quantity Surveyor. The maximum amount to be loaned will be 100 per cent of the land value before planning permission is granted, and 75 per cent of costs thereafter.
The GLAP also hold step-in rights related to key triggers – such as failing to start or complete by a certain date, failing to attain planning permission, changing the developer, failing to pay contractors, breeching warranty or the developer being convicted of dishonesty - to further de-risk their position as the sole lender.
The GLA also required £7,500 in legal fees to set up the loan agreement, which it paid itself out of the revenue element of its fund.
The GLA initially takes first charge on the land, which will transition to second charge at the point of sale of the shells (when the purchaser’s lender will take over first charge).
This case study was compiled with reference to the following sources:
Suzannah Bignell – Development Manager, Inhabit Homes
Gus Zogolovitch – Managing Director, Inhabit Homes
The NaCSBA Research & Development Programme is funded by the Nationwide Foundation and aims to promote the self-build and custom build sector as an affordable route into housing for a greater number of people in the UK.
For further information, please visit:www.nacsba.org.uk or www.selfbuildportal.org.uk