Many investors new to property development and construction, or those who know relatively little about the real estate development sector in general will think that anyone who decides to develop property on contaminated land must be mad!
When in fact there is much more to developing on this kind of polluted land than meets the eye, and many property developers have seen great success utilising such untapped opportunities.
Developing on Contaminated Land
In many ways, disregarding the true potential of contaminated land and the opportunities to profit could see you miss out on a great opportunity.
Despite this however, it is perfectly understandable why a property developer or builder would seek to steer clear of developing on land or brownfield sites that come with the stigma of being polluted from previous use.
Common sense would suggest that the land and the final development would struggle to command as much value as a clean-site development opportunity would… however, there are always ways to make it work for you – so long as you follow a number of important steps.
Firstly though, we’ll look at a few important aspects that you should be aware of when it comes to evaluating brownfield sites and potential land contamination issues.
Contaminated Land Values & Appraisals
As previously mentioned, land contamination can have a pronounced effect on both property and land values, it is therefore important that property developers take this and any other cost implications in to account at the development appraisal stage.
A good, well-structured development appraisal will take into account many factors including any discounts you can negotiate for the “contaminated” status of the site, the costs associated with any required site remediation/clean-up activities etc.
Always remember that a detailed financial appraisal can sometimes mean the difference between financial success and failure so it’s important to get it right.
Increasing Popularity of Contaminated Development Sites
You should also be aware that there is likely to be lots of interest in any contaminated development sites that come on to the open market.
This increased demand is primarily because successive UK governments have pushed heavily for the development of brownfield land in preference to untouched, greenfield land.
This has meant many more investors and property developers are aware of the potential opportunities that such contaminated sites can deliver.
Many investors naively assume that they will be the only ones bidding for such land; but in actual fact, they should really be prepared to fight for the site they want, as there will certainly be other interested parties.
How many Contaminated Land Sites are there in the UK?
Staggeringly, there are thought to be as many as 100,000 contaminated sites suitable for redevelopment in the United Kingdom, which is a significant number when you realise that this figure equals just over one per cent of the UK’s landmass.
This fact alone surely makes it an avenue worth pursuing.
Who is Responsible for the Remediation of Polluted Land?
One other thing to consider is that the owner of the land that is contaminated or the original polluter will usually be expected to pay for any site remediation (clean-up) costs… unusually, this is something that many people do not take into account.
It may therefore be worth investigating what the land was previously used for, who occupied the land and who owned it.
Contaminated Land Values
Now that we have established some important facts about contaminated land, we shall look into why contamination can have such an impact on the value of the land.
The biggest thing to consider in any valuation is the amount of work, time and money that will be required to remediate the land before it can be redeveloped.
This level of additional complexity is often something that puts many property developers and investors off in the first instance and is something that certainly needs to be carefully considered before purchasing any brownfield or contaminated site.
Always be aware that the cost of land remediation may be too high to ever make a return on a development, so do your homework before making any purchase.
Site Contamination & Remediation Costs
When it comes to researching the costs involved in the remediation of contaminated land, you should note that there are both direct costs and indirect costs that need to be taken account of.
These factors must be carefully accounted for in your development appraisal to get an accurate appreciation of your future profitability and what you can afford to spend.
Overcoming the Stigma of Contamination
The stigma that comes with contaminated land is often hard to shake off and needs careful consideration before you start.
This is because even though your development plans may be everything that people desire, once they know it is situated on a previously contaminated site, they may feel obliged not to purchase and to look somewhere else.
Calculating the Value of your Contaminated Development Land
Because of the increased financial risks associated with contaminated land developments, you may wish to carry out a quick “ready reckoner” type of calculation to see if your finances stack up.
A quick and simple calculation that you can use, that’s not too dissimilar from the residual appraisal equation is:
Land Value = Gross Development Value – (Remediation Cost + Construction Cost + Developers Profit)
This simple land value calculation does come with a warning however… it gives only an approximation, and does not include the stigma effect which may have a huge bearing on your development aspirations.
Changing Public Perceptions
One thing that is worth bearing in mind is that people are now much more open to the idea of developments on old contaminated land than they were previously.
Why? The answer to this is simple: many people now understand that permission would not be granted for the same development if the development site had not been rigorously checked and tested to make sure it was clean and fit for purpose.
People also recognise that remediation technology has improved so much that methods of remediating the land (clean-up) are now much more efficient than they were previously.
Expert Property Development Support Solutions
As leading independent property investment specialists Investment Property Partners offer expert advice and support to clients across our specialist areas of expertise helping them to achieve their investment objectives.
If you are a property developer or investor looking at contaminated land opportunities please contact our property experts today to discuss how Investment Property Partners can help you.
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