The Property Strategy For A Slow Growth Economy

One of the perks of my job is that I get to travel around the country meeting lots of new people and having some fascinating conversations about all sorts of things, not just property development. However, occasionally I get a chance to do something a little different, and last week was a case in point. I found myself being filmed at a swanky hotel deep in the leafy Hampshire countryside for a sizzle reel about a new podcast I’m doing. Now, I know what you’re thinking. It’s only the first paragraph, and he’s already plugging his podcast; this Clapson bloke is utterly shameless. And, of course, you’re also thinking, what on earth is a ‘sizzle reel’ when it’s at home?

To be fair, I didn’t know either and suspected that my assistant had only mentioned it due to its implied food connotation and the interest this might inspire. However, it turns out it’s our video company’s informal name for a short promotional video about a product or service. Or a podcast, in my case. Anyway, I dutifully turned up and met the video production team, a.k.a. John, a lovely chap who hails from Bristol. Over a hearty Full English, John talked about the required shot list for the day. The premise of the podcast, which is called ‘Driven To Success’, involves me interviewing various people from the back seat of a limo as I get driven around the country to attend my speaking events. John’s idea for the video’s storyline involved me being collected by my driver from the hotel and then pretending to conduct interviews from the back seat as we drove around. Some acting, it transpired, would be required; however RADA wasn’t required.

Breakfast duly dispatched, we got to it. I’ve been told that I take direction well (although curiously, it’s not something that gets mentioned much at home) and being the star of the show certainly wasn’t an unpleasant experience. Admittedly, there was no sign of a Winnebago, and my Crème Egg rider didn’t materialise. But other than that, I was thoroughly enjoying myself. Things took a slightly more challenging turn with the arrival of Phil, a burly ex-special constable who had retired from the force some time ago and who had turned his hand to the highly skilled art of drone filming. John had assured me that, in drone circles, Phil was something of a grand fromage. He explained that one shot he wanted to get was of yours truly in the back of the limo with both windows open. The drone would then pass into the car through one window and out of the other, filming me as it went. ‘Wow, that’s impressive!’ and ‘What happens if he sneezes?’ were two thoughts that appeared in my mind almost simultaneously. Followed, it had to be said by a cowardly and mercifully unvoiced question relating to a possible stunt double engagement.

One slightly bizarre yet sage piece of advice I received many years ago from my first ever boss, was that one should judge the skill of a knife thrower by how long they’ve had their assistant. In a similar vein, I rather anxiously awaited Phil’s arrival. Would his car have broken windows, a swathe of rotor blade scratches all over the bodywork, and suspicious-looking red stains on the rear seats? Luckily enough, it didn’t. Being a consummate professional, I was also highly conscious that my facial expression, when captured by the drone as it passed about two inches from my face, might be more appropriate for a horror flick than a promotional video.

I mentioned this to John, possibly in a slightly higher-pitched voice than usual, and he said that I really didn’t have anything to worry about. He assured me that he could change my facial expression after the event with his fancy editing software. It wasn’t quite the confidence boost I was looking for, but I suppose it was a case of having to suffer for one’s art. Luckily, as it turned out, the creatives got their heads together over lunch, and decided that the talent (me) and bot features (the drone) wouldn’t be required to share cabin space after all. Instead, they’d hatched an alternative plan that didn’t involve the former getting shaving nicks from the latter (much to the former’s relief).

Now, I’ve just remembered that this is supposed to be an article about property development, and as luck would have it, there was a property-related incident that occurred during the said thespian endeavours. I was resting between takes while John grabbed some B-roll (whatever that is) when there was a knock on the Green Room (ok, meeting room) door. It turned out to be the hotel’s manager who had come out to see which A-list celebrity was filming in his establishment. Recovering quickly from his evident disappointment, he and I then had a very pleasant chat about the property market. His own view was that the slow-growth economy in 2024 would make it very difficult for people to make any money, particularly since many investors and businesses tend to pull the shutters down whenever any doom or gloom is doing the rounds. Now, never let it be said that I don’t rise to a challenge, and this was, frankly, a red rag to a bull. So I sat him down and told him exactly why it was perfectly possible to make a decent six-figure sum in the next couple of years, even while the economy was tanking its way around the U-bend, so to speak. And because you’re here, I thought I’d share it with you, too.

Interest rates, inflation, a general election, and world affairs will be the most significant economic influences this year. World affairs are stealing the limelight, with various wars breaking out left, right, and centre, but all four will impact the economy. People’s sentiment is all about their level of uncertainty versus their feel-good factor. So, how good do you feel economically when you think about 2024?

The first thing to say is that any property or business strategy that you start this year needs to be robust. And whatever venture you’re considering, you’ll need to test your business against the four economic influences I’ve just mentioned. Ultimately, it’s all about making sure you have strong margins.

So, which strategy has the best margins? Well, to save you a bit of time and bother, let me tell you right now that the answer I’m going to arrive at is small-scale property development. I’ve been assured that the next article over the page is an absolute belter, so if you’re either in a hurry or not too keen on detail, you can stop here; I’ll say farewell for now and see you next month. But for everyone else, please feel free to read on to hear my rationale.

We’ll use some typical small-scale development metrics as an example. Let’s say we’re converting an old commercial building into five or six flats; nothing too fancy or substantial. We’ll assume that the gross development value (GDV) is £1m, the target profit is £200k, and the remaining £800k has to pay for the source building and also fund its conversion into flats. Now, let’s benchmark each of my four risk factors against this model.

First out of the blocks is the risk of interest rate rises. In our example, we’ll assume that I’m borrowing all the £800k I need to buy and develop the building. Let’s also assume that I’m paying interest at 10% since this makes the maths easy for both of us. It means I’m paying interest of around £80k (I know this won’t be exact, but it’s the principle I want to convey). Now, let’s assume that finance interest rates double to 20%. Incidentally, I recently did a straw poll at a presentation where I asked the audience what the highest base rate they could remember was. I’m old enough to remember rates of 15% back in the 1980s, and the highest figure anyone could come up with was 18%. So, it’s probably a bit of a stretch for anyone to predict that base rate increases will drive finance rates to 20% anytime soon. What would be the impact on our model if they did? We’d end up paying an additional £80,000 in interest, reducing our margin from £200k to £120k. So, a very gloomy interest rate position, but we’d still make a healthy profit.

It’s worth noting another couple of points in respect of interest rates. Firstly, the interest rate that applies to your borrowing gets locked in at the start of the loan and applies for the project’s duration. So, even though you’ll be drawing down funds as the project progresses, the interest rate will stay fixed irrespective of what happens to rates after you’ve done the deal. The second thing to note is that you’ll always have two exits. If Plan A is to sell your flats, then Plan B would typically be to hold on to them for a while and rent them out. You’ll simply switch from development finance to a buy-to-let mortgage. An increase in interest rates can affect the housing market since mortgage affordability reduces, thereby stifling demand. This causes more people to rent instead of buy, which drives up rental demand and yields, which benefits your Plan B outcome. It’s effectively a win-win for developers. The final point to make about interest rate hikes is that, while they can prove terminal in buy-to-let investing, they usually only dent your profits in property development.

Turning briefly to our second critical economic influence for 2024, I’m going to cheat a bit here because inflation has pretty much the same impact as interest rate hikes, for obvious reasons. As inflation increases, the Bank of England ups the base rate, leading to higher interest rates for commercial lending and buy-to-let mortgages.

So, let’s move on to this country’s third key economic influence in 2024: the impending general election. No one knows precisely when this will happen, but the smart money is on October or November 2024, while January 2025 remains an outside bet. What does a general election mean for the average man in the street? Well, it generally means there will be no bad news. The government and the opposition will be in full sales mode during the run-up to Election Day. And whichever party makes it past the winning post, it usually takes them a good year or so to renege on all their pre-election promises. It means that, as a rule, 2024 and 2025 should be good news years, politically speaking, for the economy.

Now, without wishing to doom-monger, I suspect the government is not about to do a wholesale U-turn on its victimisation of the buy-to-let sector. Similarly, one suspects a Labour government is not the obvious choice for a tax bonanza for landlords, perceived as the haves in society rather than the have-nots. Are they really going to help landlords who have HMOs or serviced accommodation units? Probably not. But would they help small-scale property developers? The problem that any government will have is an underlying shortage of homes across the country. And no matter how the individual parties feel about property developers as a species, they’d have to admit they can be pretty useful in helping to reduce the new home deficit. In particular, small-scale developers are the prime movers in converting unused commercial and brownfield properties into residential homes using permitted development because the bigger housebuilders won’t touch these buildings. Since this is about the only planning strategy that doesn’t appear to cause people to lobby their MP in disgust, one suspects that we’re likely to see more Permitted Development Rights being granted in 2024 and beyond. So, another tick in the box for small-scale property development fans, then.

Finally, what will be the impact of world affairs in 2024? Wherever you look, there’s something nasty going on somewhere. Ukraine was a massive shock in February 2022, and the papers were full of almost nothing else for months. Yet, even though war in Europe continues, it’s slipped off our front pages. The conflict involving Israel and Gaza shocked the world last October, but already it’s been displaced by what’s happening in the Red Sea. And all three conflicts get nudged to the inside pages if there’s any new news about the Post Office scandal. Our sense of fair play, it would seem, trumps all. However, the point here is that we quickly get acclimatised to bad news, and things settle down relatively quickly without having a lasting impact on any particular business strategy.

That said, there are some events that can undoubtedly have an impact when it comes to property development. World conflicts and events such as the blocking of the Suez Canal resulted in materials shortages, which saw a spike in the costs of certain construction staples. If the cost of bricks doubles, then you’d think this would be pretty seismic for a developer’s business plan. But let’s go back to our example for a moment. We’ll assume that of our £800k total costs, half will relate to construction, the remainder accounting for the cost of acquiring the building or the plot. And of this £400k construction cost, let’s assume that half relates to materials, with the remainder accounting for labour costs, giving us £200k. Let’s assume that ALL of our material costs increase by 50% due to some world event. This would mean that our £200k profit would reduce to £100k. Painful? Yes, but still a healthy profit. If we assume finance interest rates went up to 20%, AND that material costs increased by 50%, then, even if you had zero contingency funding factored in (which certainly wouldn’t be the case), you’d still walk away with a profit.

What about the timing of all these things, given our crystal ball extends only to 2025? A small-scale development typically takes around 18-24 months from start to finish. So get yourself trained in the first half of 2024, and then find your first project in the second half. If we allow two months to purchase the site, two months to get your permitted development right approved, one month for tendering, and nine months to build, then you could be putting your finished units on the market in late 2025.

Also, will house prices be more robust in 2025 than in 2024? Most commentators seem to think so, meaning you’ll likely sell in a rising market. And with the economy in the shape it’s in at the moment, there’s likely to be an increase in the number of motivated sellers of commercial properties, which should make your hunt for a profitable project easier.

As my newly found hotel manager friend reeled in the onslaught of my reasoned argument and compelling case for small-scale property development, the door opened, and John reappeared. He said his B-roll was safely in the can, and wanted to know if I was ready to do some tracking shots. I nodded sagely as if I had the faintest idea what he was talking about, and silently followed him out towards the limo, sketching a parting wave to the hotel manager as I exited stage left. In the nick of time, another of my old boss’s mantras had sprung appositely to mind; sometimes, it’s better simply to look like you don’t know what someone’s talking about, rather than open one’s mouth and remove all doubt.

And for those that made it to the bitter end, I thank you – I’ll see you next month too.