Can you really make a fortune in property during a downturn?

By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO

I have witnessed a few unhealthy economic periods over the years. The 2008 downturn saw house prices plunge by around 15% – a major correction in historical terms. I was recently asked whether it was possible to look at what the most successful investors did during previous downturns and develop a successful formula for profiting from property in the current economic crisis. Experience tells me there isn’t a playbook to follow that guarantees success, but the common requirements are knowledge, timing, and bravery.

Downturns are never alike

Downturns can differ in many ways, so there is never going to be a one-size-fits-all solution to making money during these periods; the underlying drivers will differ from one situation to the next. But in every downturn, you need to be selective. Big winners aren’t merely lucky, they invest intelligently and spot opportunities in prevailing market conditions.

Downturns represent great opportunities because there is less competition and a greater chance for bigger market swings. The bigger the downturn, the greater the benefit, particularly if you can make your move(s) when the bottom of the market is reached. Timing is critical.

Know what to avoid

Be wary of opting for smaller projects such as house flips and refurbs. Unfortunately, these aren’t going to work so well in a market where property prices are falling. The best results from flipping are achieved when the asset you are refurbishing is increasing in value month on month. You do not want your asset to be dropping in value while you are spending money on it. With house prices continuing to fall in 2023, this is the situation you would be in. Wait until 2024/5, when prices are likely to be on the rise again.

If we look at the property landscape over the recent past, the smart money has moved from buy-to-let investing to small-scale development. The government continues to tax and regulate buy-to-let landlords to oblivion with little sign of things easing 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.

There is an undeniable sweet spot: projects that involve converting brownfield sites into residential use, such as office conversions or putting flats above shops. 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.

So, the timing looks to be perfect for tackling a small-scale development project.

Let’s take a look at the three key cost factors involved in any development project – you want to optimise all three:

1. The cost of the asset

Asset acquisition means buying some type of commercial property or shop. As the economic downturn continues to bite, 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. But they have a problem: commercial property values are on the way down, but the cost of maintaining those properties has gone up significantly. Mortgage repayments, energy costs, 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, they are motivated to sell sooner rather than later. This will lead to many more commercial properties hitting the market in 2023, adding to the downward pressure on prices. It is difficult to predict precisely when the market will bottom out, but somewhere from mid-2023 to early 2024 would be my guess. So, you should be able to lock in some excellent value by buying this year.

2. The cost of developing

Developing costs include the cost of materials and labour, as well as the finance costs 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 see a significant reduction in costs. The major housebuilders have a big impact here. As house prices start to fall, so 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, so 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 through to mid-2024.

3. Selling price of your finished development

A consistent forecast is that house prices will start to increase in late 2024 and make solid upwards progress throughout 2025. In other words, you ideally want to be selling swanky new apartments in late 2024 onwards to hit a rising market.

Hopefully, you can see that there is a potential perfect storm here, and the timing could work out very nicely. Having secured your commercial property at the bottom of the market in mid-2023, you will be tendering in late 2023 or early 2024, when labour and materials prices should be much lower than they are today. After completing the conversion, you then 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.

Remember that there are no guarantees, but hopefully you can see the simple logic involved.

You can never have too much knowledge

What should you do while you are 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. At propertyceo.co.uk there are lots of free resources for aspiring developers and those looking to understand what is involved.