Many years ago, I remember being shocked when a football pundit berated a badly beaten team because it hadn’t received a single yellow card throughout the entire match. I struggled to understand his view; I’d always thought getting booked was a bad thing, but his reasoning was straightforward, if the players were pushing themselves right to the limit, they’d occasionally go beyond it – and if they didn’t, they weren’t trying hard enough.
I believe this is a perfect analogy for that traditional bane of the builders, the down-valuation.
At face value, down-valuations are bad news all round, particularly at a time when prices are falling. It makes it difficult to secure lending, unsettles the purchaser, invites a reduced offer and risks a cancellation. But, right now, we are in a rising market*. Much as it perplexes the ‘property experts’ the length and breadth of the nation, demand is still outstripping supply. Despite lockdowns, furlough, recession and the inevitable rise in unemployment that will follow, there are still more buyers than there are sellers and we all know how that outturns.
When the market is rising, down-valuations don’t have the same fear factor for the developer. Much easier to walk away from a deal, or a reduced offer, when you have two or three prospects waiting in the wings. There might even be the chance of a price gain in the process.
Right now, we have a hiatus in the housebuilding business. During the first lockdown, back in March, building was stopped completely but, while selling also stopped – the buyers never went away. All those who had decided to make this the year to move didn’t change their minds, they just delayed their plans. Add to that the ‘once in a lifetime’ reassessment households made about their lifestyle and work/life balance in the aftermath of the pandemic, and you have a perfect storm of pent-up demand.
The result of this extraordinary market event has been the creation of a supply vacuum. New build stock is just about non-existent, earliest completion dates for property being reserved at the moment is typically March and April of next year. And that’s without taking factors other than build into account, such as searches, valuations, and conveyancing. Delays in these disciplines are rife and getting worse. So, volumes are not the most important issue right now, everything that’ll be built this year, can be sold this year; it’s much more about value, maximising the return from precious inventory and realising the best price for every plot.
I’ve often talked about the sensitivity – or lack of - the value/volume control as part of a comprehensive and responsive sales strategy and how more finesse in its application across a business can have an extraordinary effect on outcomes. One of the biggest issues with its use, is accurately measuring its effects. Tickling prices up to take advantage of market movements, or drive best value on a site with limited supply, or dropping prices to get out of a site early or sell particularly difficult plots, is regular practice and has been since the first houses were built and sold. But a range of factors can affect how these changes are reflected in the sales data – if at all.
In difficult and falling markets, or when developers push prices a bit too hard or too fast, the dreaded down-valuations raise their ugly head. It’s important to keep at front of mind that a valuation is just an opinion, an important opinion granted, but an opinion nevertheless. Down-valuations are also influenced by other, not necessarily market related, factors too. If a lender decides they are over-exposed in a region or a property type, they will invariably issue a directive to surveyors to take a ‘realistic’ view of the values they set.
I maintain that down-valuations are not necessarily a bad thing, indeed, in a strong market, the lack of them can be a cause for concern. Much like the losing manager whose team didn’t collect a single booking.
What I do find surprising, is how few developers collect and consider the data – company wide – and measure it as a KPI, on a weekly basis. Regularly measuring the number of down-valuations will give the very best indication of how prices are positioned on a site by site basis and show how to use the Value/Volume control to the very best effect, staying in line with sales targets and income forecasts.
The residential property market faces one of the most turbulent periods in living memory. Next year, we have the introduction of regional Help to Buy limits, the end of the Stamp Duty Holiday, the falling availability of high Loan To Value mortgage products – not to mention more potential lockdowns, deep recession and high unemployment.
On the flip side, we have a number of potential vaccines in the pipeline, a population that has decided to adopt a ‘new normal’ and a political will to keep the nation building and the property market bouyant. One plan will NOT be enough. The industry will need to be nimble and ready to adopt new strategies as the situation demands. We will need all the tools in the box to manage our way through the next 12 months, coping with problems and taking advantage of opportunities.
Crucially, whatever measures we adopt, their value will be dramatically reduced if their impact isn’t measured, and if you really want your team to get genuinely competitive next spring, tell them you want to see a few yellow cards!
Matt Fleming is a Residential Property Consultant advising marketing agencies and housebuilders direct. He has specialised in residential property for over 35 years and, during that time, has worked with most of the UK’s top 20 developers. The thoughts and sentiments in this article are entirely his own and do not necessarily reflect the views of the businesses he works with.
*At the time of writing, the Nationwide Index stood at 453.3, an increase of 5.8% over the previous year.