During economic downturns there are always some who prosper. How do they do it? In the property sector, house flips and refurbs aren't going to work well when property prices are falling. You do not want your asset to be dropping in value while you are spending money on it. But there are fortunes (of all shapes and sizes) to be made, but you need to be brave, get the timing right, and be armed with the right knowledge.
The government is desperate to have people build new homes, so it has taken steps to encourage smaller development projects such as converting brownfield sites into residential use. 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. This is where the opportunity lies.
Let's take a look at the three key cost factors involved in any development project – you want to optimise all three:
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.
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, the likes of Barratt Homes 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.
Selling price of the finished development
A consistent forecast is that house prices will start to increase in late 2024 and make solid upwards progress throughout 2025. You want to be selling apartments in late 2024 onwards to hit a rising market. 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 new flats on the market in late 2024 or early 2025, when property prices are rising again.
Knowledge is key
Small-scale development projects require less capital and less work (as a developer) than doing a simple refurb, but you need to know what you are doing, and you need to know how to find the best opportunities. At propertyceo.co.uk there are free resources for aspiring developers and those looking to understand what is involved.
By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of leading property development training company propertyCEO. To discover how you can get into property development, visit www.propertyceo.co.uk
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