Rental property yields are shrinking as the costs created by more regulations and legislation eat into landlord profits – so is it time more BTL landlords became SME developers?

That’s the question being asked by Herman Abel (main image), director at InDome Capital, who says that although more and more landlords are trying property development as way to earn higher returns and ‘diversify risk’, many struggle to gain a foothold and either return to BTL or exit the sector altogether.

But Abel says that despite this churn, there’s a cohort of BTL landlords who’ve successfully transitioned to small-scale development.

And if planning restrictions are eased in a meaningful way by Labour and local councils are provided with the resources to process permissions more swiftly, SME developers could find it easier to launch projects and bring new housing stock to market, claims Abel.

Profit margins

“Successful projects can generate a profit on equity well in excess of 30–50%, though it’s vital to keep in mind that property development demands active, hands-on engagement and is far from being a purely passive form of income,” he says.

Many first-time developers rely on short-term lending products or structured financing to supplement their own cash, with lenders typically expecting a personal guarantee or a demonstration of sufficient assets on the developer’s balance sheet.

“Small projects can involve total costs ranging from about £400,000 to £2 million, with part of that sum covered by equity and the rest secured through development finance, bridging loans, or mezzanine funding,” says Abel, whose company provides tailored funding solutions to this SME developer sector.

“Whatever the model, developers must be prepared for rigorous due diligence and ensure they have robust project management capabilities to stay on time and on budget.”