The Property Strategy Conundrum

Hands up, who’s old enough to remember the Sinclair C5? The brainchild of serial inventor and entrepreneur Sir Clive Sinclair debuted in 1985 and was the talk of the town for a while. For those unfamiliar with the C5, it is best described as a small, one-person battery-powered electric tricycle. And if this conjures up an image of modern-day electric bikes, think again – the C5 rider sat recumbent, leaning back with their legs out in front of them in the same position you might adopt when sledging or rowing. Small and plastic-looking, with a top speed of 15 mph and a 20-mile range (or only 6.5 miles if you believe the AA), the C5 sat about 80cm high (or 32 inches if you can remember 1985).

So, how cool did one look when riding in a C5? Well, if you can recall the iconic image of Marlon Brando atop his Triumph Thunderbird in The Wild One film poster, then I can tell you that that picture sits at the exact opposite end of the coolness spectrum to a pic of you sitting in a C5. A quick image search on the internet will reveal the equally iconic picture of Sir Clive, resplendently dapper in a black suit and tie with a matching scarf, looking rather incongruous as he demonstrates his brainchild to a somewhat bemused media audience. Keep scrolling down, and you’ll find another image of a C5 user, this time on a busy high street, talking to a passing cabbie. At this point, you’ll probably have the same thought that passed through most of the population’s minds back in 1985: the chances of a C5 user being seen by a turning lorry are minimal. And while everyone applauded the exploration of electric vehicles as an alternative form of transport, no one particularly fancied the idea of getting crushed to death by a set of industrial-sized Bridgestones. Or, for that matter, being unable to make it up steep hills or turning up for work completely soaked due to the absence of a roof. So, you’ll not be surprised to learn that Sir Clive’s venture failed, his company was dissolved, and the world moved on.

Apart that is, from a dedicated few who became enthusiasts and still regularly meet up around the country to show off their Sinclair-made pride and joys. Some even decided to pimp their rides, in one case adapting a C5 to run at 150 mph. If you look at a C5 and think of it travelling at 150 mph, you’ll probably picture the same image I did, namely St. Peter’s pearly gates opening wide to permit a hasty admission. The protagonist later explained that the souped-up trike was stable up to 100 mph, but things started to get a bit hairy at about 110 mph. It was unclear what he thought about the 150 mph experience, but the fact that he’s quoted at all would suggest that he may not have risked trying to find out.

So, what does Sir Clive’s spirited yet ultimately unsuccessful venture tell us? Well, for many people who are not inventors nor particularly close to the electric vehicle movement (a.k.a. us ordinary punters), there was a distinct lack of surprise that the C5 failed. Just looking at a picture of someone riding/driving it in town, coupled with its numerous shortcomings in terms of range, reliability, coolness, and weather protection, would be enough for most people to form the view that, as inventions go, this was probably more of a turkey than a swan. And yet, despite this prescient viewpoint, many people surprisingly fail to apply the same level of assessment when it comes to their own ventures, property being a case in point. Which, you’ll be glad to hear (now that I’ve finally got round to it), is the point of this article.

Property and wealth go hand in hand, and given the name of the publication you’re holding, I suspect this may not come as a complete surprise to you. But property comes in many different flavours, and choosing which flavour to go for can be difficult, particularly if you’re a property investment virgin. So, let me give you a few pointers that I think should be front of mind when deciding what route to go down when it comes to property, and a simple philosophy you should adopt. Dare I say that it might be helpful to existing investors too.

One word I often come across concerning property investing is ‘strategy’. People ask questions such as ‘Which property strategy should I go for?’; and in that context, they’re generally referring to the property investment ‘flavours’ I mentioned above. Single buy-to-lets would be one strategy or flavour, and HMOs and Serviced Accommodation (SA) would be two others. Then there are variations on a theme, including rent-to-rent, commercial property, local housing authority lets, etc. Intriguingly, property development is often included in this group of strategies, albeit as an ‘advanced strategy’, whatever that means.

The general perception is that you should work your way up to development by doing more straightforward strategies first, such as single lets or HMOs. However, any developer worth their salt could tell you this is bunkum. Being a landlord does not automatically make you a better developer – developers have no tenants, nor do they have to comply with the same set of rules or even employ the same set of professionals in the main. In fact, not only does not being a landlord prevent no barrier to becoming a developer, but you’d also have to say that becoming a developer first makes better sense financially unless you’re swimming in cash. That’s because the average buy-to-let deposit is currently an eye-watering £70k or so, which begs the question, how will you find this money if you don’t already have it? One obvious answer would be to do a small-scale development first, which will then give you your deposit in relatively short timescales. You can then get your buy-to-let journey started more quickly.

Now, I’m the co-founder of a property development training company, so I’m clearly going to be completely biased; however, you’re free to stop reading if you think any of what I’m extolling in the following few paragraphs doesn’t make sense. The first thing to point out is that these are not strategies or flavours; they are, in fact, business models. Any money-making enterprise is a business, and you should approach each one with a business mindset. Unfortunately, very few people have ever been taught how to run a business. It’s not a subject they teach in schools, and they don’t, as a rule, teach it in colleges or universities either. So the first exposure that most people have to running a business is when they suddenly decide to start one, and this includes investing in property. So, for most of us, we’re in at the deep end.

The statistics for new business success make for interesting reading. Apparently, 20% of new businesses fail within their first two years, and 45% fail within five years. Presumably, the number of people who thought they would be in the other 55% who made it beyond year 5 was 100%, which demonstrates an admirably plucky spirit, albeit reality would have probably had something to say on the subject had it been asked. Of course, no one embarks on a venture expecting disaster. Still, the relatively high failure rate would suggest there’s more to running a business than simply opening a bank account and printing some natty business cards. Yet because no one routinely gets told anything about this fact during their statutory education, most go into business in a blaze of heady optimism and relatively little knowledge.

But, in the same way, I suspect you’d still have been able to look at Sir Clive’s C5 venture with a critical eye, so we need to adopt the same critical thinking when it comes to a property business. Two key areas you need to consider are the marketplace and the product you will put into it. The first key question here is, ‘Is there a demand for what I’m going to sell?’ Now, if we start with development, I think it’s safe to say that there’s a huge demand. The government has, up until recently, resolutely clung to a target of 300,000 new homes that needed to be built each year, of which we would typically manage to build around half. Bear in mind that there are around 275,000 homes in Oxfordshire, and you’ll get a sense of the sort of scale we’re talking about. The problem is that if we only build 150,000 homes in one year, then the target for the following year shouldn’t stay at 300,000 – instead, it becomes 450,000 since we need to play catch up, and so on for subsequent years. In short, there’s a massive demand for housing, particularly if you’re building in the ‘need’ market (starter and small family homes) rather than the ‘want’ market (luxury detached) because we’re under-building every year. This means there are more and more potential customers every year who need housing but can’t get it.

If we consider the product we’ll be delivering, then as developers, we don’t have the same problems Sir Clive had. Consider the mobile phone, a product that has gone from unheard of (I can’t imagine we’ll need it) to ubiquitous (I couldn’t possibly live without it) in the relatively short period since the C5 was launched. Now, if you were launching a new mobile handset today, there’d be no point debuting a product resembling the Nokia brick we all had back in the day. Instead, you’d need to develop something better than that currently offered by the likes of Apple and Samsung, a feat that would take some doing. And, unlike development, you don’t have 150,000 potential customers a year who desperately want your product but can’t get one.

No, virtually everyone who wants a phone already has one. So, if you wanted their business, you’ve got to offer them a phone that’s even better than the one they already have AND persuade them to swap. But the property developer doesn’t have to do this. Simply build something in the time-honoured fashion of clumping some bricks together using cement, and no one will think it’s a bit too ‘last year’. Developers don’t need to advance technology to meet demand – people are desperate for somewhere to live, and the standard, time-honoured bricks-and-mortar recipe will do very nicely, thank you.

Another critical advantage for small-scale developers is that there’s a big opportunity in the form of unused brownfield land, the volume of which is expanding each year. The government has so far tried and failed to get more houses built by changing the planning system, so they’ve resorted to extending permitted development rights that allow us to convert existing commercial property into flats and houses. Everyone tends to object when you try and build a new housing estate on a field or within a mile of where they live. But no one bats an eyelid if you take an empty eyesore of a commercial building and turn it into flats. There are around 1.4 million new homes that could be created using redundant brownfield sites, according to CPRE, so it’s no wonder the government has tried to make it as easy as possible for smaller developers to get developing.

The final point about development is that lenders will insist you target a minimum 20% profit margin based on your project’s gross development value (GDV). So if you’re building ten flats that will sell for £100k apiece, you’ll need to target a £200k profit. While this isn’t guaranteed, it still looks mighty healthy compared to other ‘strategies’.

So, property development has a darn good business case. But what about the other property flavours? Here’s where the picture gets a little more challenging. There’s a huge market for buy-to-lets, but the numbers look far less attractive than they used to, thanks to government intervention over the past few years. Not only have landlords appeared to be fair game for taxation, but they also have to fund the impact of a wave of regulation relating to tenant protection and environmental concerns. Most are worthy causes, but can landlords still turn a profit? And will the value of a buy-to-let property double every ten years or so, which is the critical requirement? Again, there are no guarantees. HMOs used to be the poster child of landlord profitability, but many areas have now reached saturation. Do we need the same number of new HMOs? Plus, Article 4 directions have now sprung up in many towns and cities across the country, effectively preventing new HMOs from being established. Serviced Accommodation can produce spectacular yields, but it’s proven to be a fickle market of late. Regulation looms large, and will the Airbnb boom continue in the post-covid era, particularly as budget hotel chains now dominate? Again, there are no guarantees.

Yet, it’s fair to say that despite all these negatives, there are still some great opportunities in the property world. When it’s easy, everyone jumps in. When it’s trickier, the majority sit on their hands, and it’s the educated, savvy, and strategic thinkers who make a killing. So, while I’ve been bigging up the virtues of development, I’d like to make a few key recommendations whichever property ‘strategy’ you’re considering. Firstly, understand the business and the market you’re entering BEFORE jumping in – don’t just go on the hype. Secondly, the more traditional property investment’ strategies’ can still be very profitable, but it’s now more important than ever that you know HOW to maximise your profit in the current market.

Simply jumping in without getting educated will make you cannon fodder. Luckily there are some reputable training companies out there that can give you that edge. And finally, don’t think that property development, particularly on a small scale, is beyond you. I’ll be the first to tell you it’s not easy, and it’s not risk-free. But the numbers make more sense than any other business model I’ve seen, and I’ve found that most people overestimate the amount of investment and work required – so make a point of finding out what’s involved. You can also combine it with other property strategies to really take things into the stratosphere.

And if Sir Clive were with us today, I have a sneaky suspicion he’d look at the current property development market with particular interest. Not only would there be some great opportunities for him to sell a simple product to a very needy customer base without having to invent anything, but there’d be little risk of him being crushed under the wheels of a pantechnicon while he did it.