Opportunities for Developers and their Investors in 2020 and 2021
Where will we find deals as we adopt a ‘new normal’, now and post the Covid-19 Pandemic?
By Richard Little, Development Director at Your Land Partner, a company that works with land owners, local authorities and investors to buy, sell and develop land across the UK.
We have a saying: “Lots of people make lots of money in the good times and fewer people make even more during the tough times.”
Tough times are coming to the property sector; please do not believe the commentary suggesting that we will bounce back quickly. The economic “damage” already suffered means that is not possible. Strong words? Maybe. That said, my view is that we should plan for the worst and “hope” for the best.
Before we look at the opportunities, it is best if we understand the effect that relatively small falls in house prices has on the sector and how we work with them.
Using optimistic forecasts is foolish when appraising, negotiating and agreeing deals so all deals should be stress tested for increased costs and falling values (up to the % where the asset has no purchase value).
We will be seeing some increased costs; whilst labour is likely to go down due to unemployment, materials may well go up. Deals should be structured on the lower base values and if the vendor won’t do this then walk away, watch and wait as the opportunity may come back. We were always told and have always told others that a deal is made in the purchase which is 100% correct; anything that is made after is a bonus.
If we are wrong and values remain stable, then no real problem as our own deal structures allow for the landowners to receive additional payments on top of the purchase price depending on the values at the time of sale or refinance.
However, many “experts” are suggesting a quick bounce back for the housing market with strong pent up demand and continuing low interest rates fuelling a return to the strong market seen in the first quarter of 2020. Will this happen? We do not know how Covid-19 will impact our economy, regardless of expert opinion on QE, taxation, inflation, stagflation, interest rates ,etc. No one knows and as ever most only see the headlines and commentary that fits their own thinking.
Lloyds are the biggest mortgage provider in the UK and earlier this month they issued forecasts indicating a 5% fall in house prices during 2020 with a severe downside indicating a 10% loss.
Whilst I do not believe that a 10% drop is the worst that could happen, let’s consider the effect it would have on land values. With most development projects targeting a 15 to 25% profit, based on the gross developed value (GDV), a 5% reduction in market values will see those potential profits fall between 20% and 33%. If we consider a 10% reduction, potential profits would fall between 40 and 66%. With forecasted profit reductions of just 20%, developing to sell becomes difficult to fund and developing to hold would require more cash to be left in at refinance.
When we look to acquire land (including buildings), the land value is based on the GDV less all costs and profit. A 5% reduction in GDV will see land values fall drastically. Looking at the average UK house price which last month went over £220,000 for the first time, a rise of more than 35% in 7 years, coupled with the projected big rise in unemployment and well documented affordability issues gives clear indication that a fall in values is likely. The seemingly forgotten economic fallout of Brexit will only compound the Covid-19 effect.
The table below shows the impact on land values for a project with a GDV of £2m. Our own projects generally see land values between 10 and 20% of GDV; areas of much higher values can see values rise to 30% and more of GDV. On average for our own projects we would see land values fall between 33% and 100%. What seems to some as a relatively small fall of 5% has a massive impact on the base land value.
It is clear that Land values at less than 20% of the GDV will be close to or less than £zero, with a 10–20% fall in values, which is obviously an impossible sell to a landowner unless they are philanthropists and looking to provide homes for the community and/or special groups.
Agents, valuers and most landowners are always extremely optimistic in respect of both GDVs and land values; they largely refuse to accept any downward change in values and it will take time to either reduce their expectation or for values to return. So where do we find the opportunities that can become deals? Regardless of any optimistic predictions, the reality is that many people will suffer financial loss during 2020 and quite possible 2021 and, when that happens, savvy property developers and investors get opportunity. Motivation to sell or realise value from assets is always essential for a good deal. Without such motivation, good deals will be elusive, so understanding the motivation as early as possible in discussions will save a lot of time spent chasing “dead end deals”.
Struggling businesses across many sectors and troubled development projects are likely to be plentiful for a good while. Development projects and businesses have been interrupted with cashflows impacting, for most, negatively. Increased funding costs and fees, fixed business costs, contract deadlines, planning consent deadlines, lower site and project end values, loss of rental income, and loss of fee income are amongst many of the business challenges developers and investors currently face.
Identifying assets that may provide development and/or investment opportunities and having meaningful discussions to ascertain the extent of financial problems are needed. A business “failing” or closing down is not the same thing as one going bust; it can be described as one that has not been successful in its aims. If it can’t generate enough money to pay its owners/shareholders, then it might just cease trading and the directors wind up the company. In these circumstances, there may be a motivation to look at maximising the value of any property assets.
Many types of business have land assets including retail, hotels & guest houses, pubs, restaurants, care homes, garden centres, leisure, garages, builders, farmers, professional services, storage & distribution, property developers, landlords, investment companies, medical & personal care, etc. These businesses could be operated by sole traders, partnerships, limited companies or PLCs so the routes to decision makers is very different.
If you have an idea that a particular business may be struggling, this will often come from your own connections, local observations or maybe you decide to look at assets owned in a particular sector which is known to be having issues, e.g. currently closed restaurants, pubs, etc.
Land Registry should give you information on who owns a particular asset and if there are any/many charges against the property and how recent they are. Lots of properties in the UK are owned by landlords, investors and investment companies and some businesses have their premises owned by different companies. Whoever owns the asset may be interested in discussing a potential sale if the business/sector is struggling.
Company information can be found on Companies House’s website. Personal introduction is the very best way to start a conversation but mostly a connection is made by writing to the business owners and/or the listed property owner/s. It often takes 2 or 3 letters before we get a response, dependent on the owner’s motivation.
Many struggling businesses, even big companies, do not reach out for help until its too late and then creditors, often those with charges over property commence proceedings for recovery of money and/or property. Some businesses enter administration, which means that the company is being taken under the management of an administrator — who must be a licensed insolvency practitioner (IP). A list of IPs can be found here.
Once a company enters administration, it is given protection from creditors who may be threatening to begin legal action to recover outstanding debts. It can be of benefit to discuss potential property deals with an administrator as they may well be able to bring any fixed asset charge holders to the table for discussions and deals for purchase, even subject to planning, can be achieved.
This process however doesn’t stop the charge holders from taking action to recover the assets and many opportunities for deals can come from working with funders and investors that hold charges over properties to maximise the value of property assets, possibly through development and/or management. Do explore straight purchase, obviously at a price that works and accounts for any planning risk and current values.
Whilst it is more difficult to access the development funders holding first charges, there are a number, new to the market in the mid and late 2010s, that have never taken back a fixed charge asset, and knowing what to do with it other than sell is beyond most of their experience. Most assets are taken back using fixed charge receivers. Their role is to take control of the asset and recover monies for the lender by selling it. Incomplete projects often have a value close to the amount of money lent and in times of uncertainty this value falls below thus creating a situation where the lender needs to complete the project. With a package of some cash and the ability to complete an unfinished project, there are and will be opportunities to work directly with the lenders.
Connections with anyone holding 2nd charges on projects can give you access to the 1st charge holder and 2nd charge holders; being a lot more exposed to market fluctuations, they are often keen to discuss “rescue’ proposals. There are many investors and some platforms, that are exposed as 2nd charge holders and investors that have no charges or debentures, possibly with PGs who are even more exposed.
Connections that may be in this position are also potential sources of opportunities, though it should be said that right now it may be difficult to save the investment. Anyone with less than 1st charge is exposed and indeed it’s fair to say that a number of 1st charge holders are very nervous at the moment.
Projects may be in negotiation; at heads of terms; in legals; secured; in the planning process; agreed funding; part allocated funding; on site at different stages; pre-sold & under build contract; sold awaiting completion/s; on the market at pre-virus valuations; subject to joint ventures with landowners, equity stakeholders, contractors, professionals, end-users; the list of situations and combinations is potentially endless. It may be that Developers, funders and investors have multiple projects potentially all with different scenarios.
Details of individual and company insolvencies can be found in The Gazette, the UKs official public record. This is very useful for searching for companies and individuals that you can’t trace or are unresponsive to letters; it may be that they are already insolvent. Details of the IPs can be found and contact made if you are interested in a particular property or piece of land.
Many business and assets are offered for sale through agents so keeping an eye out through the normal channels like Estates Gazette, Rightmove, etc. could be useful. Our own preference is to connect with a couple of commercial agents in each desired area and be specific in your criteria. In a soft/declining market, experienced agents are more motivated to work with the buyer and in my view it’s the only time to be using agents for acquisition.
They will often be offering seized or controlled assets to the market and can be the only way into some of these opportunities. Agents can give a good idea of the vendor’s motivation and credible purchasers are happy to facilitate meetings with vendors where possible. We always look to agree terms direct with the vendor; it makes for less issues during legals.
Our usual methods of sourcing opportunities are identifying using the planning portal for sites with current or lapsed consent and refused applications, a combination of google earth street view and Land Reg e-services to find undeveloped sites, local plans and policy documents for identified, allocated and unallocated sites; everyone we know are continuing to use direct to owner letters and introductions.
Keep an eye out for proposed changes to planning, particularly new permitted development rights that are likely to be announced over the coming months.
One of the first things to do is to revisit any previous offers and identified opportunities. Get back in touch as circumstances may have changed or possibly will change in the coming months. Whilst many opportunities will come from others misfortune, it is my view that many will also come from changes in lifestyle with an increased motivation to realise value from assets to achieve those changes.
We are in a period of massive opportunity and you need at least two of the following to fully benefit:
- Cash
- Experience
- Connections
- Available and deliverable ‘deals’
For those with only one of the above, be careful and you might do ok.
For those with two, there is a decent chance of earning some cash.
If you have three, then it should be a case of how much you make.
If you are fortunate enough to have all 4, it will be a case of how much you want to make.
I’m not aware of many that have a solid balance of everything above so there lies the big opportunity for those that have one or two. Collaboration is the best way to achieve the greatest results. Find what you don’t have and work together.
Qandor is a property club for professionals in property and construction. Through several networking opportunities and exposure, we aim to help you in growing your portfolio and moving forward in your career. To know more about becoming a member, send us an email or click on this link. We also have a bi-monthly online magazine, Q. Magazine. To check it out, click here.
