Earlier this year at the outbreak of Covid-19, I was asked about my experiences in my past life in property development, and how we survived the peaks and troughs of the property industry. Typically, what with the anxiety of our clients from the lockdown in March and the ongoing reassurance required, I completely forgot to upload it.
Rediscovered today, it’s certainly worth a read…
Expect no gain unless you’ve planned for it…
In that respect as a company we were always looking at being in the best possible position for a downturn. We knew we could take advantage of the market thinning out.
Let’s face it everyone wants to be a property developer when the market is strong and debt easy to come by. Sites get stupidly expensive, builders get busy, more ‘project marketing’ teams led by the white shoe brigade flood the market and the media is full of ‘opportunities to buy’.
Within the property development space there are also many ‘squirrels’ to distract you and the success of your business whilst you are out bear hunting!
For example, we’d be affected by fear stories in the press and TV or click bait in the new media. A programme would air on a Thursday and by the weekend enquiry would be down and foot traffic at the displays over the weekends to a dribble.
But I digress…
In our case simplistically speaking we had three sides of the business. First the distribution ie. sales and marketing - let’s not forget the banks would want us to sell everything before we laid a brick. Secondly site acquisition’s and yes, it is, a bit chicken and egg. And of course, thirdly the physical development and delivery of the project. All requiring careful management and indeed innovation where possible.
You will appreciate this requires some very selective oiling of the parts to keep moving forward, efficiently and profitably… but today I’m not here to tell you how to run your businesses but I will quickly touch upon what we did across these three areas.
We developed a sales management system accessible to the various project marketing teams we had deployed, so we had complete transparency of the sales pipeline and control of our sales teams, even though we had huge distances between them. This also allowed for the ongoing workflow management hooked in with finance, conveyancing so important for contract exchange and ultimately settlements.
We then dove tailed this into our marketing analysis, to monitor our prowess through spend, media type and location. Bearing in mind we also had a call centre making thousands of calls an evening; its’ sole purpose to fill seminars with people interested to learn more about investing. This message would be enhanced by local radio spots and press ad’s reinforcing our play.
Very rarely would we buy a site on day one, preferring to option them up with a promise to pay an agreed price at a later stage. This required less money upfront and gave us time to get the distribution machine rolling. All things being equal we’d be ‘all sold’ off-the-plan before the transaction was settled. The key part here is that upfront sales and marketing is expensive but necessary to de-risk.
Importantly should the market stall or fall, we’d renegotiate with the vendor. Mentally they’d already spent the money, so would be looking for a solution to get out even if they had to give a discount.
A smart cost program starts early and focuses on sustained changes, instead of cutting muscle or trimming across the board at a later stage. So keep trim and carry no dead wood.
Sadly and inevitably, there are staff who are going to be surplus to requirements in a downturn. If you can redeploy key members in order to retain them then your start up when times are good will be accelerated.
The first bit of advice I received when I started to work in property was “it’s not a question of if you go broke but when”, a pretty good mantra to repeat, I’d say!
By that manage your margin and make sure you are in a good financial position should things change. This is something my investor clients regularly hear from me when I’m running a risk assessment matrix over their numbers.
Interestingly this was the first bit of advice that the chap who told me, had received when he first cut his teeth in development. I have to add he’s been very successful as a result and now one of the most successful private developers that I know.
Many businesses just try to cut costs, thinking that taking such extreme measures enough to survive. Acquisitions are put on hold, research and development gets slashed, marketing budgets are ripped up and staff (their most expensive commodity and in many cases their IP), get laid off. Like an airplane jettisoning fuel before it lands, just in case crashes!
Some forget their core business, rather than invigorating and adjusting their own business model they chase the brightest shiniest thing be it tech or business, perhaps to them a welcome distraction from the ensuing mêlée but under such conditions bloody risky.
Lastly the sit back and wait types, wait and wait until its too late.
Looking back, I’ve been researching how winning companies behaved differently, Tom Holland and Jeff Katzin bothy partners of Baine & Company share some interesting points.
“Companies that outperformed, by contrast, moved deliberately to capture opportunities before the recession. While they focused intensively on cost transformation, they also looked beyond cost.”
They have use wonderful analogy ‘think of a recession as a sharp curve on a racetrack — the best place to pass your competitors but requiring more skill than on the straights.’
If you apply the brakes just ahead of the curve ‘by taking out excess costs’, turn hard towards the apex of the curve ‘by identifying the short list of projects that will form the next wave of your business model’, and accelerate hard out of the curve ‘spend and hire before markets have rebounded’.
These were the small things we were doing before the GFC. Always taking stock of your position and moving ahead accordingly. Who was it that said it’s a combination of all the little things that make a big thing?!
The most prepared and competitive companies go on the attack early, while many of their competitors sit on their hands, waiting for fortune to change.
Successful growth companies used a few common tactics to boost their commercial growth.
They invested substantially in R&D instead of cutting back.
They pointed sales teams to top priorities among accounts and prospects, as determined by the account’s all-in profitability and potential lifetime value.
They realigned distribution by rebalancing the mix of current and new locations, or next-generation formats.
They also maintained marketing while competitors cut back. And focused on improving the customer experience, making it simpler and more personalised through investments in digital capabilities.
They restructured costs before the downturn, without cutting muscle.
Pursue a proactive acquisition pipeline
Be in the game..
Taking advantage starts with a rational appraisal of your strategic and financial starting positions.
For the well-positioned, recessions present an opportunity to reshape your business. Negotiate to acquire new acquisitions and services at lower prices.
It’s also an opportunity to exit businesses or services that don’t fit strategically in the company’s future. Indeed, in many cases this includes staff too.
Always have a reserve in cash. During an economic crisis, this will give you a safety cushion and allow you to buy assets at low prices.
Avoid an excessive debt. Only invest in projects where you bring 35% of your own capital and 65% loan from the bank. Should things get sticky this will give some breathing space should you need to take out new loans to repay old ones and paying a high interest on them. The melting point for many investors.
Following the previous guidelines, invest more in residential real estate than in non-residential. Past experiences show that residential property retains its value to a much greater extent, “property is both an investment and a consumption”. It will bounce back.
In conclusion..
In 1918-19 the ‘Spanish flu pandemic’ H1N1 virus hit Australia, rapidly spreading through the our major cities, brought in by soldiers returning home at the end of the 1st war. The media amped up the fear, panic buying ensued and the streets were empty. Around the world around 50 million died. When you think that the casualties of the recent war totalled 20 million deaths and 21 million wounded, it puts it into perspective.
Australia contributed only 15,000 deaths to the tally even though 40% of the population caught the virus. The government of the day were quick to act, limiting the movement and assembly of the population, capping the spread and allowing hospital care to those that needed it. As a result this model has become internationally accepted, for containing, limiting and ultimately eradicating such pandemics.
Interestingly Australian property prices did not decline, conversely, they boomed in 1919 and rose at more than 10% per annum until 1921. Bolstered by returning soldiers, refugees and immigrants fleeing disease and the devastation of war.
Then and now, housing demand has always been linked to population growth. Our largest capital cities are in a more or less permanent state of housing undersupply, with this the rents increase as more people are unable to buy.
Until now Australia has had one of the highest population growth rates in the western world (my data showing 371,000 in the year to September 2019).
Landlocked by sea and admittedly taking evasive measures a couple of weeks later than we should, (with a few misdemeanours to test our mettle), I believe we have every opportunity of recovering from the virus quicker than many other countries. Again, Australia will be looked at as the ‘lucky country.’
Add to this the many investors that abandon shares and savings for a better return in property and it is far more likely that our population growth rate will continue to rise after the repercussions of the COVID-19 pandemic.
Our location, climate, resources, culture and happy outlook, combine to make an appealing ‘safe haven’ for immigrants seeking a better life. Mark my words, they will come.
So surprise, surprise, I’m sticking with property :)