It is noticeable that when a significant recession hits, property developers are amongst the first casualties. That said there are some developers that simply seem to be able to manage the storms that economic cycles bring.
The first question that comes to mind is, why is that some developers survive economic turmoil and others don’t. Some peer reviewed studies suggest that there are two factors that influence survival. The first is short term contingency planning and the second medium to longer term planning. After all no one can be absolutely sure how long a recession will last.
Short term contingencies
The controlling management of a property development company have to make sudden short term contingencies to ensure the immediate survival of their business, when downturn is sudden. Downturn could be caused by sudden political unrest, or economic incidents that happen abroad in markets that are not always closely scrutinised. When this happens and financial institutions themselves face serious risk, so do the businesses that depend on them for continued funding.
The studies show that those companies that act quickly to reduce overheads, managed to survive. This included reducing staff and other operating costs, selling off project stock to reduce costs – sometimes even at a loss, and changing the way the business invests in future projects.
Longer term plans for property developers in recession
Most of the companies that have survived recessions, and some have been around long enough to survive several, have managed to alter their long term strategies to accommodate the economic climate. Evidence suggests this is the key strategy for long term survival. There is always a market for property developers even in downturn. How they access their market is what makes the difference.
The other noticeable strategy is implementation of diversity. There are developers that suddenly fins themselves with stock that they cannot shift because lending has become a closed market. Those that survive complete these projects and will rent their development property for a survival income while they wait for buoyancy in the market to return. Others will sell off their stock and research where development opportunities still exist, possibly in low cost housing or commercial development. A well know Irish development company simply moved their development activity abroad when Ireland was hit with the recession of 2008.
For all these businesses, some key factors came into play. They found a way to offload stock that they couldn’t shift. Even if it meant renting it out until they could. They looked for alternative opportunities in the local market and where these weren’t viable, they took their business abroad.
Property development with flexible contingencies
The single greatest fact that stands out is that those that survived all had one characteristic in common. Flexibility. When trouble came, they faced it without applying a single rigid business mindset. Developers became landlords to survive for a short period. Others changed the type of development they invested in. Yet others sought out development opportunities elsewhere even when it meant finding a developing market abroad.
Twentieth and twenty first century economic cycles have delivered some real lessons to property developers and speculators. The primary lesson being that to have a contingency that involves flexibility will almost certainly ensure survival. Any development project that can be turned over to meet alternative economic needs will contribute to survival. It may however mean that the project must face other risks such as overrun in time and budget.
The key question now for developers all over the UK, Scotland, England, Northern Ireland and Wales, is whether Brexit is going to bring with it an economic turndown or the opposite an economic boom. Either way flexibility in the approach as to how the project can be turned over in the event of a crisis will determine who survives and who does not.
Tags: Property development / Property Finance Brexit / UK Property Finance