In the absence of a working crystal ball, hopefully, having worked in property for the last forty or so years, I can offer a few nuggets of wisdom. In my time I’ve seen a few booms and busts, and history seems to have a habit of repeating itself. So, what exactly can the past tell us about the future?
Uncertainty breeds opportunity
Two things always happen whenever there’s a property crash, or a recession, or some other economic crisis. The first is that most people will sit on their hands and do nothing. Risk aversion takes a tight grip. The second thing that invariably happens is that vanilla property investment strategies (the standard ones that most people employ) no longer work as well as they did, and some no longer work at all.
For most people, vanilla is all they know. So, there are lots of people who let extreme caution overcome them, and they freeze, waiting for their trusted strategies to start working again. But when their frozen strategies thaw, the opportunities are gone.
As Warren Buffet famously said, ‘When others are greedy, be fearful, and when others are fearful, be greedy.’ This is undoubtedly true in the world of property investment; you only have to look back at previous property crashes and economic downturns to see the multitude of investors and developers who took action and subsequently made their fortunes. After all, the competition was decimated due to all those cautious types playing the waiting game.
However, it’s not just a question of being bold – you must also be intelligent and strategic in your choices. You need to do your research and understand what strategies are going to work best for you, given the economic situation of the moment; a little education goes a long way when it comes to property investing.
So, what exactly are these strategies that make sense in an economic downturn? They are many and various but let me use two as an example to whet your appetite.
Buy-to-let
Let’s look at traditional buy-to-let, which has been struggling of late, and appraise ourselves of the facts.
The country is in the grip of a perpetual housing crisis (and no one is currently making any more land). This means that as an asset class, owning or building property will always be a relatively safe bet. It’s got to be the right property, and your timing needs to be on point, but property isn’t about to go out of fashion. It’s a market with massive under-supply.
Another key fact is that the immediate future is uncertain. House prices may come down as affordability declines which then stagnates the market. Inflation will see interest rates climb and the cost of borrowing increase. On top of this, the buy-to-let market is facing an unprecedented level of taxation and regulation, which has already forced many landlords to sell up.
Rental properties will shortly be required to meet more stringent EPC ratings, and for many, the cost of upgrading them makes the whole buy-to-let venture unprofitable or unaffordable. And then there are those landlords who hold portfolios in their own name, which means when they do sell up, they will attract a prohibitive amount of capital gains tax due to their properties’ values increasing significantly during their ownership.
So, providing a solution to those landlords could be quite an attractive proposition for them.
What if you were to find a way of taking control of their portfolio while ticking all the buy-to-let regulatory boxes and allowing them to sell properties over time so they could take advantage of the CGT allowance every year? You could then acquire their tenants today and their portfolio over time, giving them a more profitable exit and you a significantly discounted means of creating an active portfolio. Is this possible? You’ll find plenty of people who are in the know that believe that it is. You just need to know how to do it.
More often than not, the trick is to uncover who needs a solution most and then work out a way of providing it. You are then in the enviable position of being one of a small group supplying a large number of people with something they desperately need. And believe me, every time there’s a crisis, there’s never any shortage of people looking for an exit.
Small-scale property development
Another growth area at the moment is small-scale property development. Interestingly, property development is a strategy for all seasons (you can turn a healthy profit irrespective of the economic climate) but again you need to know what you don’t know.
Many canny landlords have already worked out that smaller development projects are simply the other side of the same property coin and that they already have the skills to both rent property as well as to develop it. Again, a modest bit of research would tell you that the government is desperate to encourage people to create new homes. Unfortunately, every time it tries to solve the housing crisis, a wave of nimbyism rises up to prevent any meaningful progress.
But one relatively nimby-friendly area is the conversion of the existing unused brownfield stock that we have up and down the country. These old shops and commercial buildings are lying there, unloved, and unoccupied, with little intrinsic value due to a lack of demand. We have more commercial building space than we need and not enough homes. It’s therefore not rocket science that converting one into the other is likely to be a savvy move
But surely the large, established developers will have already snapped up all these opportunities? The thing is, they’re not remotely interested, nor do they have the skills to do it. Give them a nice empty field where they can plonk down a few dozen of their standard house designs and make a few million quid – then it’s a case of where-do-I-sign. But give them a small commercial building that requires a bespoke solution and only makes them a few hundred thousand – that’ll be a thanks-but-no-thanks. Which means it’s a market that’s been effectively left to the smaller developers.
Better still, the government has recently granted a raft of permitted development rights that make it possible to change the use of these buildings without the need for full planning permission. And with around four years’ worth of new homes locked up in these brownfield sites, it’s no wonder the government is keen to encourage as many people as possible to start developing.
There are many examples across the property spectrum where it’s possible to make money while others are swimming in the other direction or simply treading water. And you don’t need to sit down and try to work out these solutions yourself. The opportunities have already been quantified—and the solutions created—by people who have been there and got the tee-shirt. We’re fortunate in this country to have a vibrant property education and networking industry that naturally gravitates to the lowest-hanging fruit and the biggest opportunities, whatever the market is doing.
