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Opinion: Why increased due diligence is needed in development

More development projects than ever are being undertaken around the UK, thanks to a heady mixture of international capital attracted by Sterling weakness, structural supply issues, permitted development rights and a rapidly growing list of lenders ready and willing to lend.

Residential is driving the lion’s share of this activity, taking up two thirds of the projects we are currently monitoring, but commercial is also active. And it’s the major cities outside the capital that are the real hotspots, as investors look for greater value than can often be had within the M25. I’m not overstating it when I say the market is as robust as I have known it to be for many years.

But the market’s strength, as strange as it sounds, can also be its weakness. In recent months we have seen more developments fail than we have over the past two to three years. In part, this is a numbers game. After all, with the level of development activity we’re seeing these days, it’s inevitable that there will be more projects that come unstuck.

But there’s more to it than this. In a growing number of cases the reasons for failure are a lack of experience, developers biting off more than they can chew because the finance is more readily available, an inadequate amount of due diligence surrounding the commercial viability of a project, or an inability to exit in what remains a slow-moving market. Often, of course, it will be a blend of two or more of these factors.

Understandably, this is more of an issue among smaller developers who will tend to have less resources, expertise and experience to draw on. But the growing number of red flags we’re seeing on the ground reinforces the need for all potential developments to be looked at in the cold light of day.

The fact that there are so many reasons for developing property at present does not mean it will always be a success if corners are cut. An additional layer of due diligence will never do any harm.

Blane Perrotton is managing director at Naismiths

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