Why development sites fail, and how gateways keep them viable

Very few development schemes fail because of one bad decision. They fail by drift. The appraisal that justified buying the site is put in a drawer, and over the following months the design changes, the planning obligations grow, costs rise, the programme slips and the sales assumptions go stale. Each change looks reasonable on its own. By the time anyone runs the numbers again, the money has been spent and the options have narrowed.

The discipline that prevents it is simple to describe and hard to keep: test the site properly before you buy it, then re-test it at every stage before committing more money.

Why schemes lose viability

• The price was set on an untested appraisal. The land value assumed costs and values that nobody had checked.
• Abnormal costs are found after exchange. Ground conditions, contamination, a sewer or cable to divert, utility capacity, access or a right of light.
• Planning obligations grow. Affordable housing, Section 106 contributions, the Community Infrastructure Levy, biodiversity net gain and conditions all add cost, and the final package is often heavier than the first assumption.
• The design creeps. More amenity, a higher specification or a less efficient layout, each agreed for a good reason, each eroding the margin.
• Costs and programme move. Build cost inflation, a later start, a longer build and more months of finance and holding costs.
• Values were assumed rather than evidenced. Sales prices or rents taken from hope rather than from comparable evidence and the current market.

None of these is unusual. What makes them fatal is finding out late.

Due diligence before you buy

The point of due diligence is to find the problems while you can still reflect them in the price, the terms or the decision to walk away. For a development site it usually covers:

• Title and legal: ownership, boundaries, rights of way, easements, restrictive covenants, access and any third-party land the scheme depends on.
• Planning: the history, local policy, the likely affordable housing and Section 106 package, the Community Infrastructure Levy, and any designations such as conservation areas, Green Belt or protected habitats.
• The ground and services: ground conditions, contamination, flood risk and drainage, and the capacity and position of utilities, including any diversions.
• Neighbours and the environment: trees, ecology and biodiversity net gain, rights of light and party walls.
• The market: what the finished homes or space would sell or let for, and how quickly, from current evidence.
• Cost and programme: build costs, abnormal costs, fees and a realistic timetable.
• The appraisal: everything above brought together, with the main assumptions tested to show how much the result moves if they change.

Gateways: re-testing the scheme at each stage

A gateway is a decision point where the scheme is re-tested before more money is committed. At each one the appraisal is brought up to date with the latest design, costs, values, programme and obligations, compared with the case that was approved at the start, and a decision is taken: go on, change the scheme, or stop.

A typical sequence runs:

1. Land: before an offer is made and again before exchange, once due diligence is back.
2. Design brief: before the design team is fully appointed, so the brief matches the appraisal.
3. Planning submission: before the application goes in, with the scheme as it will be submitted.
4. Planning consent: once the consent, conditions and Section 106 agreement are known.
5. Procurement: when the contractor’s price and programme come back, before a contract is signed.
6. Start on site: a final check that the scheme still stands up before work and the largest spending begin.

What keeps the discipline

• One live appraisal, owned by one person and updated as things change, rather than a new spreadsheet for every meeting.
• A minimum return agreed at the start, so everyone knows the line the scheme must stay above.
• Changes tracked against the approved case, not just the latest budget, so it is clear how far the scheme has moved and why.
• Independent challenge from someone who is not invested in the design or the contract.
• Stopping treated as a valid result. A scheme stopped at a gateway costs far less than one stopped on site.

This is the approach Philip Baily developed and ran at London Square, where schemes were re-tested at gateways from land purchase through planning to the start on site. It works as well for a single building as for a major development, because the questions are the same.

For what happens once building starts, see keeping the approved case alive through delivery.