Opportunities and threats facing your property investment business

I am writing this article to support you, with building and scaling your property investment business. 

In my experience, investing in property is the best way to:

• Achieve financial freedom
• Build an impregnable financial fortress 
• Build generational wealth over the long term 

Whilst investing in property is an excellent vehicle for creating wealth, the process of building and scaling is fraught with complexity and challenges. 

The key to navigating this complexity and overcoming the associated challenges, rests in: 

• Continuously updating your knowledge
• Surrounding yourself with experienced and knowledgeable people, who are willing and able to support your wealth building efforts
• Retaining a rational, positive and resourceful mindset at all times

The final point is especially important during periods of rapid change and uncertainty. Such periods tend to create an atmosphere of panic and fear amongst the majority of the population.

It's during such times, that the greatest opportunities often present themselves. Your challenge lies in staying calm, so that you can recognise and capitalise upon these opportunities. 

I will start with an assessment of market conditions and current affairs. 

I will then share my thoughts on where the threats and opportunities are to be found. My hope, is that armed with this knowledge, you will be able to:

• Protect your interests
• Position yourself effectively, in order to take advantage of all the opportunities, which are likely to present themselves

Current market conditions

Key economic metrics

Let's start by looking at a series of key metrics in the UK. 

Key economic trends

Bank of England base rate

Average asking price

Current affairs

Needless to say, there is plenty happening both in the UK and around the world. 

Whilst these events are playing out at a macro level on the national and international stage, it is worth paying close attention. as they will impact our property investment businesses, on both a short and long term basis. 

Let's take a quick look at some of the key factors at play.

New Prime Minister and Conservative party crisis

It's certainly not been smooth sailing for Liz Truss, since she became the new Prime Minister and leader of the Conservative party. 

Following the announcement of a £150bn energy package to help households and an unfavourable market reaction to the chancellor's mini budget last week, Truss finds herself under immense pressure.

According to the Financial Times "A YouGov poll this week gave Labour a 33-point lead over the Conservatives - a margin not seen since Tony Blair's heyday - while other polls have confirmed the Tories are in meltdown."

War in Ukraine

There is no end in sight, as the war in Ukraine rages on, fuelling the global energy crisis and de-stabilising global markets, which are already highly volatile. 

Fallout from Brexit

It seems like ancient history, but considering that the UK has extremely low levels of unemployment, in combination with high job vacancies, it's important to consider the impact of Brexit on the UK's workforce and labour market. 

Coronavirus recovery

A side effect of increased quantitive easing to deal with the Coronavirus pandemic, is that we're now seeing significantly increased levels of inflation.

Soaring inflation rates have not been helped by ancillary global events, such as the war in Ukraine. 

Cost of living crisis

With inflation now at 9.9% and the Bank of England expecting it to rise further to 11% during October, UK households are finding it increasingly difficult to pay their bills, which is causing economic and mental health challenges for much of the population. 

What does the future look like?

Just like the rest of you, I do not have a crystal ball. 

A few observations, which may provide insights into the likely course of events: 

Politics

With a general election coming in the next two years, is it possible (if not likely) that we will see a changing of the guard? 

According to Tory grandee Sir Charles Walker "I think it's hard to construct an argument now that the Conservatives can win the general election."

With the Conservative party now facing such an existential threat, is it inconceivable that we may see another change in the party's leadership team and policies? Much like the former Prime Minister Margaret Thatcher, Liz Truss may well be 'not for turning' but the stakes are high and time is in short supply. 

Inflation and interest rates

We need only look at the policies of the Bank of England, which are publicly available, in order to gain insights on the likely direction of both inflation and interest rates. 

I would suggest that the key sentiment from the BOE is "We will take whatever actions are necessary to bring inflation down to 2%."

To achieve this in a timely manner, it is surely reasonable to expect further and potentially long lasting increases to the Bank of England base rate. 

What are the threats facing our property investment businesses?

Based on market conditions, current affairs and the likely course of events moving forwards, let's now look at the key threats that we need to face up to and prepare for. 

Increased borrowing costs

In order to curb inflation and bring it down from approximately 11% to its target of 2%, the Bank of England will likely continue to increase the base rate, which currently stands at 2.25%. 

These increases will be reflected in the products being offered by the high street banks and mortgage lenders.

It is well worth a conversation with your mortgage broker, to conduct a strategic review of all your existing mortgage products.

If you feel there is scope for interest rates continuing to rise, you may wish to consider switching to longer term fixed rate products. This could protect you against increased monthly mortgage payments and make your monthly cash flow more predictable over the next 2-5 years. 

If you have mortgage products, which are due to end in the coming months and years, you may also wish to keep extra cash on hand, to allow for the potential increase to your monthly mortgage payments. 

The key sentiment here is to prepare for the worst and plan accordingly, so you're best equipped to weather the storm. 

Compressed deal margins

With the Bank of England base rate having increased significantly in recent months and the potential for further increases, you are likely to face challenges in making your deals stack. 

This, in combination with increased energy costs, will apply downward pressure to the monthly cash flow you will generate from your deals. 

It is also important to consider the time, costs and risks associated with all aspects of delivering your property development projects. 

Not only will your monthly cash flow be squeezed, the cost of labour and materials are also elevated, with the potential to continue increasing. As we have seen, unemployment in this country is extremely low, whilst job vacancies are very high. This means that demand in the UK labour market is currently outstripping supply, which will lead to further increases in the earning power for workers. 

On the subject of timing, it is prudent to expect and prepare for delays, not just with developments but also with the conveyancing and financing elements of your project.

For example, more people are engaging with their mortgage broker, to review their existing mortgage products. This will lead to increased response and lead times. 

Increased rental arrears and tenant churn

As the cost of living crisis continues to apply pressure to household finances, it is important to accept that tenants will be facing increased affordability issues. 

It is also likely that a lot of tenants will consider viable alternatives to their current living situation. For example a lot of young professional tenants may be tempted to save money by returning to live with their parents, especially if it is possible for them to work from home. 

What are the opportunities, we can take advantage of?

Patience is a virtue. 

A lot happening in the world right now. It will take time for events to play out and the dust to settle. 

Stay calm, think rationally and prepare for the opportunities that will gradually present themselves. 

Reduced demand for property listings

In light of the recent increases to the Bank of England base rate and the likelihood of further increases, it will gradually become harder for people to justify buying a new property, on account of the elevated monthly mortgage payments.

In an effort to ride out this economic storm, the majority of people will become more conservative in their fiscal habits, preferring to save rather than to spend.  

This will likely lead to a reduction in demand for properties on the market, which would have a direct impact on asking prices. 

If things do play out in this manner, you will likely find yourself in an increasingly strong negotiating position when offering to buy properties, so why not throw in some low offers and establish a strong system for regularly following up with vendors? 

More reasons for vendors to sell their properties

There are a couple of elements to consider here. 

In the same way that your margins are being squeezed when you are stacking deals, existing landlords may find that their margins are squeezed on the investment properties they already own.

If they were not generating much monthly cash flow to begin with, they may actually find they are making a loss on their investments, due to increased monthly mortgage payments and energy bills. 

Either now or when their current mortgage products start drawing to an end, they may be inclined to sell their properties. 

It is also worth bearing in mind that from 2025, all newly rented properties will be required to have an EPC rating of C or above. If landlords need to spend money on poorly performing investment properties, in order to make them more energy efficient, this will likely provide even more incentive for them to consider selling. 

A lot of landlords may also be considering selling, simply because they want to have more cash on hand, to ride out the economic storm and be better equipped to deal with increasing costs. 

If more properties start coming onto the market, at a time when a lot of potential home buyers are withdrawing from the market (due to increased monthly mortgage costs) we could see further increases in supply and reductions in demand. This will apply further downward pressure on asking prices and further strengthen bargaining power for buyers. 

Increased scope for creative deal structures

If we do gradually move towards a point where supply of housing on the market increases and demand begins to decline, vendors will need to be more open-minded and flexible, in order to achieve a sale. 

Perhaps this is a good time to sharpen your knowledge in respect to:

• Purchase lease options, in which you provide the vendor a guaranteed monthly rent, whilst securing yourself the option (but not the obligation) to buy their property for an agreed price, between the date of signing the option agreement and an agreed expiry date in the future. 
• Deferred considerations, sometimes referred to as vendor finance deals, in which you pay some now and some later, whilst providing the vendor an agreed return on their funds in the interim period.

Putting these more creative deal structures aside, just having the cash on hand to be able to buy properties at reduced prices, could provide you with a competitive advantage that will pay dividends over the long term, as part of a buy and hold strategy. 

Summary and key take-aways

• Stay calm and rational
• Accept the threats and take pro-active measures to mitigate the associated risks
• Pro-actively identify the opportunities, which lie ahead and get ready to take full advantage of them, when the time comes
• Be patient
• Sharpen your knowledge, so you can structure your deals more creatively, if required