Sunday Supplement 22/11/2020

Nov 22, 2020

Sunday and that means one oasis of calm in the choppy waters of 2020’s world…..the supplement.

The year has felt strange to make the understatement of the day….sometimes it feels like a disaster movie, sometimes it feels like the fastest year ever, sometimes you remember back to January and can’t believe it is the same year. There has been so much to think about and process.

Covirony continues to grip the nation as many get more fed up as the weeks go on, even though the situation has not really improved quickly enough during lockdown 2.0. The North West will be pleased to see an R rate under 1 (yesterday’s estimate 0.9-1.0) while the country remains at 1.0-1.1 (and no, that’s not low enough to unlock).

Dismayed that the date of 2nd December is slipping away from us but let’s remain positive.

Enough covid anyway – we’ve all had enough.

I wanted to talk over the next few weeks about some of the phenomena that we haven’t really seen before, historically, that have led to what has happened this year in the property market, and then what might happen next year and indeed beyond. I never forget this is a long game, a marathon not a sprint, etc. Etc. We need to build businesses that are recession proof, pandemic proof and shock-proof overall.

That’s the name of the game.

To kick us off i want to take us back to early 2017. I was in a networking meeting, in person (remember them?).

The main speaker was a charismatic gentleman who delivers fantastic presentations. He was talking about property at a high level, cycles, and was talking from significant prior experience.

I love that sort of talk! So I was sitting there highly engaged.

I remember 2 highlights from that meeting

  1. he asked what is the number 1 danger to property investors in 2017 and beyond. My hand shot up. “Interest rates!” I proclaimed. Some of the room looked at me as if I had two heads. A few nodded agreement. It was a point that really came from two places. Firstly I had and still have a recognition that we as individual investors or SMEs have zero influence over rates. They are an external factor. We can control our exposure to them of course but that’s a different conversation. Secondly it is a broader point that I still make today – I believe many of the other risks you are exposed to when scaling a property business can be controlled quite easily once you have identified them and worked out ways to manage them whereas this risk is more difficult because it is hard to scale without debt and without using significant leverage/term debt (unless you find a very wealthy equity partner who is satisfied with quite limited returns – let me know how you get on with that one!).That all remains extremely significant for 2021.
  2. he asked who could possibly be investing with confidence in 2017 given that Donald trump was about to be inaugurated and also the UK was leaving the EU which was the implied end of the world. Guess what – yours truly once again shot his hand up. I bought a shade over 50 units in 2017 and that was my plan in January that year. I extolled my confidence in continuing to invest in that year and we had a very good back and forth where the speaker asked me some quickfire questions about how I would deal with the challenges coming. I don’t remember all of those questions but here are the ones I do:
    1. (this meeting was being held in Cambridge, for context. The local market had done incredibly well 2010-2016 but was showing signs of losing pace). “What about the fact that prices are flattening or going down?” He asked. I answered “perhaps around here, but be geographically flexible, why not? Anyway, there are deals in any market and I invest for cashflow AND capital growth, not one or the other”
    2. “How will you deal with a market which is putting off foreign investment” he asked. My answer was along the lines of “this has distorted some of the local market and definitely London but in a lot of the rest of the UK it has not been a significant factor”. I’ve not seen any robust analysis on this post-2017 but I know that spending the last 4 years buying in volume rather than sitting on the sidelines has been a good thing.
    3. “how will you compete with ever-rising costs of doing business/compliance” – my answer “rents are already under upwards pressure and I expect significant increases in rents over the next years in my target areas” – borne out to be true. Basic economics especially with inelastic “goods” like housing. The reality is that the tenants take the majority of the brunt of increased cost of doing business.
      The reason why I recant this story is because a lot of this (if not all) holds true today.

Perhaps this gives some insight as to why I am very keen on staying abreast of the likely interest rate in the UK.

The 2020 situation has meant one thing which I identified very early in the pandemic – interest rates are likely to stay on the floor for years and years to come. Rightly or wrongly, that represents a massive opportunity for investors and a terrible situation for savers. Much much worse than it has been over the last 10 years (or much better depending on which side of the fence they are on).

2021 sees expansion opportunities for me. I made the point back in 2017 that if the alternative was sitting with money in the bank that would be damaged by inflation. Many I am sure wish they could go back and buy at 2017 prices right now!

Next week i will talk a little more about where pricing has gone this year and where it might go next year.

Property can be full of recycled BS clichés but one good one is that the best time was 30 years ago but the second best time is now. I still know or stay in contact with several people who were in that room nearly 4 years ago, and some have kicked on, and some have done nothing/stayed still and indeed gone backwards. It is easy to find reasons to do nothing. What are you doing to find reasons to do something??