Property Investment: Stick Or Twist In 2023?
Crystal balls are much in demand at the moment, and the property market is no exception. As the nights draw in and winter looms large, there are many questions to answer, such as what will happen to house prices, whether now is a good time to buy a buy-to-let, and whether property development is a good strategy in the current market. And while my crystal ball is working about as well as everyone else’s, I can hopefully offer a few nuggets of wisdom, having worked in property for the last forty or so years. That’s not to say I’ve seen it all, but there have certainly been a few booms and busts during that period, and history seems to have a habit of repeating itself to some degree. So what exactly can the past tell us about the future?
The first and perhaps most important point is that uncertainty breeds opportunity. Two things always happen whenever there’s a property crash, a recession, or some other economic crisis. The first is that most people will sit on their hands and do nothing. They don’t want to go for a swim when the waters look choppy, so they decide to wait until things are nice and calm again. Risk aversion takes the driving seat on most people’s investment pedalos, where the ‘do nothing’ waiting game becomes the de facto choice for the majority when the outlook is uncertain.
The second thing that invariably happens is that the vanilla property investment strategies – the standard ones that most people employ – no longer work as well as they did. Some no longer work at all. And for most people, vanilla is the only strategy they know, darn it. There may be a few not-quite-vanilla examples out there, but tutti frutti is entirely off most people’s menus – they don’t even know it exists. So, there are lots of scared people sitting around waiting for their vanilla strategies to start working again. And until they do, they won’t be making any investment returns. And when they do, everyone will be jumping into the swimming pool at the same time, all fighting for space. As investment strategies go, you can probably see what might be wrong with this approach.
But 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 side-line-hugging hand-sitters playing the waiting game. It’s like rocking up late to the same swimming pool yet finding someone’s conveniently removed all the towels from the sunbeds. You can even swim lengths. However, it’s not just a question of being bold – you must also be intelligent and strategic in your choices.
Vanilla is probably not the flavour to go for. You need to do your research and understand what strategies are going to work best for you, given the current economic situation. Some people will think that this probably involves an honours degree in macroeconomics and a large pair of cojones, neither of which they possess either physically or metaphorically. But the truth is that a little education goes a long way when it comes to property investing. You don’t need to peel back too many layers to see some entirely logical reasons why a particular type of investment can make good sense. And in my experience, that is a critical point. If you don’t understand why a strategy will work, you’re in the wing and a prayer market, and while I wish you luck, luck is the only thing you’ll be relying on to return a profit.
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. Let’s start by looking at traditional buy-to-let, which has been struggling of late, and appraise ourselves of the facts. Fact number one – the country is in the grip of a perpetual housing crisis, and they’re not currently making any more land. This means that as an asset class, owning or building property will always be a relatively safe bet. Sure, it’s got to be the right property, and your timing needs to be on point, but property isn’t about to go bust or 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’re 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 the exit.
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 problem is that 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 and work out these solutions yourself. The opportunities have already been quantified – and the solutions created – by people that 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.
So if hand-sitting is on the cards for you right now and you think maybe it shouldn’t be, I urge you to do some light digging and get ahead of the pack. You may yet choose to stay glued to the side-lines, but at least you’ll have first had a chance to weigh up today’s opportunities. And who knows, even if you don’t jump in now, it might just put you in the best position to steal a march on the pack when everything finally starts to settle down.