Is There A Secret To Making A Property Fortune In A Recession? Hello everyone, I hope you are well. In today’s post, I will share a guest post from Ritchie Clapson, propertyCEO, looking at whether you can make a fortune in the property during a downturn. People are, understandably, a little sceptical when they hear stories of fortunes being made when the world was in the middle of an economic downturn, financial meltdown, or housing crisis. Did they have inside knowledge, subscribe to an excellent tipster, or maybe their crystal balls work better, or is it simply that they were lucky?
Is There A Secret To Making A Property Fortune In A Recession?
Turn the clock back to any recession, and you will find a small but significant group of investors who bucked the trend and made millions. Over the years, I have witnessed a few recessions, meltdowns, and crises. The most recent one occurred in 2008, when the economic downturn saw house prices plunge by around 15%, representing a major historical correction. I was recently asked whether, armed with all this hindsight, it was possible to look at what the most successful investors did during previous downturns and develop a successful formula for profiting from the current economic crisis.
So here goes.
Not All Downturns Are Created Equal
Downturns not only come in different strengths, but they also come in different flavours. As a result, there will never be a one-size-fits-all solution to making money in a downturn since the underlying drivers will differ from one situation to the next. What does hold in every downturn is that you need to be selective. The big winners won’t simply be lucky; they will have invested intelligently and spotted opportunities in the prevailing market conditions.
The other reason that downturns represent such great opportunities is that there is less competition and a greater chance for more giant market swings. Timing, in that respect, is critical. The bigger the downturn, the greater the benefit, mainly if you can hop on the bus when it reaches the bottom of the market.
If we look at the property landscape over the recent past, smart money has moved from buy-to-let investing to small-scale development. There are no real surprises here as the government continues to tax and regulate buy-to-let landlords to oblivion with little sign of things letting up any time soon. But that very same government is also desperate to have people build new homes, so it has taken steps to make smaller development projects as attractive as possible.
Undeniably, sweet spot projects involve converting brownfield sites into residential use, such as office conversions or putting flats above shops. This is mainly because these types of projects now have permitted development rights that allow you to change the use of the building without all the hassle and risk associated with gaining full planning permission.
Big Is Beautiful
But what about smaller projects such as house flips and refurbs? Unfortunately, these don’t work well in a market where property prices are falling. You ideally want to be flipping at a time when the asset you are refurbishing is increasing in value month on month, not dropping. With house prices falling in 2023, you will swim against the tide. Better to wait until 2024/5, when prices are likely to rise again.
So, why could the timing be perfect for tackling a small-scale development project? Three key cost factors are involved in any development project: the price you pay for the asset you will develop, the cost of doing the development work, and the price you sell your finished units. If you can optimise all three of these, you will be on to a winner.
The Cost Of The Asset
Asset acquisition means buying some commercial property or shop. As the economic downturn continues, more businesses will struggle to survive. Some will go bust, while others will sell off assets such as property resulting in more properties in the market, which, in turn, puts downward pressure on prices.
Also, many commercial landlords have been holding out, hoping to sell their properties to developers for top dollar. Only now do they have a problem? Not only are commercial property values on the way down, but the cost of maintaining those properties has increased significantly. Mortgage repayments, energy costs, not to mention security, and general maintenance – all of these have increased. It has created a situation where the value of their property is decreasing, and the costs of maintaining it are growing.
In other words, the sooner they sell, the more money they will make. This will lead to more commercial properties hitting the market in 2023, adding downward price pressure. It is difficult to predict precisely when the market will bottom out, but my guess is from mid-2023 to early 2024. So, you should be able to lock in some excellent value by buying this year.
The Cost Of Developing
Developing costs include the cost of materials and labour, as well as the finance and professional fees. Much has been written about the cost of materials and labour following the global pandemic and the war in Ukraine. However, there is a real prospect that late 2023 to mid-2024 could significantly reduce costs. The major housebuilders have a significant impact here. As house prices fall, the Barratt Homes and Persimmons of this world begin to put their developments on ice.
Existing projects will be built out more slowly, and new projects slated for 2023 will be deferred. They have no appetite to build in a falling market – far better for them to wait until the market is buoyant again. As housebuilders stop building, the demand for labour and materials decreases, causing prices to drop significantly. We started to see this messaging from several housebuilders in late 2022, and as house prices look set to fall throughout 2023, there is nothing to suggest that this will change. Consequently, the best time to look for materials and labour might be from late 2023 to mid-2024.
Selling Price Of Your Finished Development
House prices have increased by around 20% in the last two years. However, most knowledgeable commentators predict 2023 will see a 5-10% value reduction. Even the Office for Budget Responsibility (OBR) predicts a 9% reduction between now and Autumn 2024. However, as they have yet to get any of their previous predictions to bang on, no one is betting the house on it. But one consistent forecast is that house prices will increase in late 2024 and make solid upwards progress throughout 2025. In other words, you ideally want to sell expensive new apartments in late 2024 to hit a rising market.
Hopefully, you can see a perfect storm here, and the timing could work out nicely. Having secured your commercial property at the bottom of the market in mid-2023, you will tender in late 2023 or early 2024, when labour and materials prices should be much lower than today. After completing the conversion, you will put your lovely new flats on the market in late 2024 or early 2025, when property prices are rising again. It’s a perfect triple-whammy.
But What Happens If Your Timing Is Off?
If the market hasn’t bounced back by the time you come to sell, developers have a distinct advantage, as they can always rent out their finished projects instead of selling them. We have seen in the current market how a lack of affordability has not only created downward pressure on house prices but also pushed more people into the rental sector. This, in turn, has caused rents to go up significantly.
So, if you would instead defer the sale of your finished units, you could refinance them onto a buy-to-let mortgage, pay back the development finance and then rent them out profitably until house prices have recovered. It’s the perfect Plan B.
Remember that there are no guarantees, but hopefully, you can see the simple logic involved. What should you do while waiting to bag a cut-price commercial property in mid-2023?
My strong recommendation is to get yourself educated. Taking on these small-scale development projects requires less capital and less work from you as a developer than doing a simple refurb. But you have got to know what you are doing, plus you have got to know how to find the best opportunities.
If you would like some free training to understand better what is involved, you could head to propertyceo.co.uk, where there are many free resources for aspiring developers and those looking to understand what is involved. Armed with both skills, you should be able to steal a march on the countless other people looking to develop property in 2023.
I hope you enjoyed that.
About The Author
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of the leading property development training company propertyCEO.
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