Dwight D Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Eisenhower's point was that plans never go the way we think they will, but having one allows you the flexibility to strategically pivot when the situation calls for it.
Last week, I exchanged a Tweet or two with TV property pundit, buying agent and builder basher, Henry Pryor. I suggested that any forecast for the rest of 2020 would be no more than a guess. His witty response was, “every forecast is a guess”. That’s true, obviously, but there are wild guesses - then there are educated guesses; guesses based on reliable and extensive data and informed by many years of experience of the devilishly fickle UK residential market.
I’d like to think (he says modestly), that mine fall into the latter category, but let’s be clear, any guess that takes into account the way the market will respond to the Coronavirus crisis, lockdown, furlough, job losses, recession et al, is going to be more ‘wild’ than ‘educated’. There is no precedent to refer to, certainly not in the last seventy years or so. Notwithstanding the noble efforts of Savills’ Lawrence Bowles, trawling back through the archives to assess the effects of the 70’s oil crisis, the recessions of the 80’s and 90’s and the global financial crisis in the 00’s of course – none of them compares with the impact of Covid19.
So, right now, I suppose that means all guesses are equal. And potential outcomes are exceptionally difficult to predict.
Let’s start with the effect on transaction volumes. In their April Market Outlook, Knight Frank confidently predicted the 2020 numbers will fall by almost 40%, down to just 734K; lower than they were in 2009, even though we’ve already seen almost 260K deals done in Q1.
Savills is even more downbeat, if you accept the low end of their estimate range, that is. In their latest update they say, “At the end of last month, we took an educated guess that this year housing transactions are likely to between 37 per cent and 52 per cent lower than last. The evidence of the past week has entrenched that view.” By my calculations, that means Savills is predicting a total of between 565K and 740K transactions for 2020. They are suggesting there may only be 300K transactions between now and the end of the year! Seriously?
I simply don’t buy this.
I accept there will be serious economic fallout as a result of the lockdown, and that fallout will be exacerbated with every additional week it continues. So, it would be reckless to be over-bullish without knowing how long that might be. Savills’ solution to this uncertainty is to offer up a forecast with a range so vast, it’s about as much use as an ashtray on a motorbike. In this type of febrile situation, where there are so many unknowns, I prefer to make some assumptions and then fix the consequent values. At least that way, if the assumption is wide of the mark, everyone knows, in good time, we need to rip up Plan A and reach for Plan B, or C. I’m confident ‘Ike’ would approve.
I have based my revised forecast for 2020 volumes on the presumption that, for the property market, the lockdown will be lifted, to some extent at least, by the end of May.
I’m going to have to make other assumptions too. One or two people still having a job on the other side of all this. The availability of mortgage finance. The return of Loan to Value deals of up to 90%. It is extremely likely that interest rates will stay rooted to their historic lows for the foreseeable future and I am assuming competitive fixed-rate deals will be available for homebuyers too.
There is much that could still go wrong, but this crisis is not a typical crash, people are waiting for the all-clear to resume their lives, go back to their jobs, press ahead with their plans – if they possibly can.
It is important to remember residential property was in rude health coming into the crisis. The market craves certainty and Boris Johnson’s 80 plus majority in December gave the country that, whatever colour their politics were. You have to go back ten years to find a Government with a majority over 50 and there was a tangible mood of, “right, we’ve waited long enough, let’s get on with this”. The property portals were reporting record traffic levels in January and, at the end of March, the Nationwide Price Index (the only one I trust these days) had leapt to a four-year high on their reliable rolling 3 months’ index.
The property marketing agency I work with, Aylesworth Fleming, recently carried out a small-scale, straw-poll survey of around 350 individuals, asking those who were in the market when the virus arrived, what their intentions will be post-Covid. Over 80% were determined that they would still be buying – and/or selling.
I’m no economist, but I agree with those experts who predict we’ll see a ‘V’ shaped recession. This is not like 2008/9, we’re all in this together, East and West. And it’s in all our interests to climb out of it together too. If the residential market starts rumbling into life as May draws to a close, it’ll take it a while to build up a head of steam, but I think we’ll have a busy late summer/autumn. And, if my assumptions are correct, I believe the last quarter of this year will see volumes in excess of 300K, just like last year. On that basis, my forecast for total UK residential transactions in 2020, according to the HMRC numbers, is between 900k and 950k.
What about prices? Well, Savills reckons on a fall of between 5% and 10% in the year, before recovering in subsequent years. Knight Frank is predicting a fall of 3%. I don’t want to sound like an optimistic fool, and I do believe there will be some pressure on prices while trading is running at a trickle, but I am confident there will be no slump. In normal downturns, sellers reduce prices to ensure they secure a sale in a depressed market. This is different. Reducing your price isn’t necessarily going to help you sell in a lockdown, when buyers are unable to buy, however attractive the price. Those most affected by the pause in the market, that need to sell fast, may well adjust their asking price and that could be reflected by a limited fall in average prices in the early summer, but by the end of the year, I believe prices will be at or close to where they were at the end of 2019.
So, how do the housebuilders minimise the damage caused by the Covid19 catastrophe and maximise the opportunities that arise when we emerge from lockdown? It’s all about planning. Being nimble, adjusting the final plan according to changes in market conditions. Being prepared, on your marks in the starting blocks ready for the ‘B of the Bang’.
The developers were quick to batten down the hatches when the scale of the crisis became apparent. They closed their showhomes and sales offices, and their sites shortly after. Many withheld dividends, secured their lending streams and most of the big guys withdrew from the land market. Eminently sensible steps at a time when the lockdown was indefinite and cash was most certainly king. But already signs of life are returning to the industry. As I type this, one by one, the Big Three are re-opening their sites; carefully imposing strict social distancing measures and safe working practices
When talking to my developer contacts around the country, I’ve been shocked by how many reservations they have been taking during the lockdown – remotely, of course. Innovative use of video tours, virtual viewings and augmented reality has seen them steal a march on the second-hand market. Plus, I hear of more and more stories where the appeal of a squeaky-clean new home is compelling at a time when hygiene is so important.
My planning for the short-term would include a programme to protect existing reservations and avoid cancellations. When sales rates are running at a quarter of their normal levels, it follows that the value of avoiding a cancellation quadruples. Regular communication is key. Video calls have become the norm, they’ll help the sales team establish ‘emotional engagement’, cement that crucial bond and secure the purchaser’s commitment. Innovate. Don’t just use videos to sell but to take your excited buyers round their beautiful new home as it nears completion.
Be ready for the re-start. Make sure your marketing department and external agencies have got their running shoes on. Even though trading may well resume at the end of May, it is likely that Social Distancing will still be in force. With clever planning, not only can you make it safe and reassuring for prospects to tour your showhomes and reserve their new home, you can empower your potential purchasers with incentives like VIP viewing slots and offer other benefits for those prepared to make a commitment.
Hold your nerve on prices. I accept that’s easy for me to say, but much tougher for the developer to do when the pressure for numbers increases. But remember, this is not a typical recession. Sure, the bargain hunters will be out there post-crisis, but I’m convinced the underlying demand will soon push its way to the surface. Prices can always be dropped later if circumstances dictate, much tougher to increase them and maintain sales rates.
Even if you think my vision of how 2020 is going to roll-out is at the more optimistic end of the scale, it is a fairly straightforward exercise to replace some of my assumptions with darker possibilities and plan accordingly. Whatever assumptions underpin your planning for the next nine months, the crucial message of this piece is that you need to be ready to change course, introduce Plan B and take advantage of events over which you have little or no control.
Dwight D Eisenhower was an incredible man by any measure. During World War II, he became a five-star army general and served as Supreme Commander of the Allied Expeditionary Force in Europe, he won two landslide victories in US presidential elections and was the first Supreme Commander of NATO. He knew a thing or two about making the best out of impossible situations. He’d be the first to remind us that, in a fast-evolving crisis, it’s not about the plan, it’s all about the planning.
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.