With predictions of economic contraction, businesses across every sector are grappling to survive the myriad of macro factors affecting their industry.
The housing market boomed in 2020 as demand rose post-lockdown one and remained steady throughout the year with prices reaching record highs. However, we are still feeling the effects of the pandemic, as well as slower international trade as a result of Brexit, supply chain issues due to overseas conflicts and a fraught UK economy.
What does 2023 have in store for the housing market, and how can property developers continue to thrive and grow their portfolios?
Events affecting the UK Property and Construction Market
- COVID-19
During 2020, the Royal Institute of Chartered Surveyors (RICS) conducted surveys in May and September to explore the impact of the pandemic on UK professionals in the property and construction industries. The May 2020 survey found 80% experienced a reduced workload and 67% had a fall in new business enquiries. RICS professionals saw 47% of construction sites closed and 29% of projects cancelled. In the September 2020 survey, 63% saw a continued reduction in work but 54% were cautiously optimistic about the next 12-24 months.
Homes England, the government’s “housing accelerator”, reported a 38% decrease in starts and a 25% fall in completions in the first half of 2020-21 compared to the same period in the previous year.
- The Russian invasion of Ukraine
In February 2022, Russia invaded Ukraine and many European countries placed sanctions on Russia; there was a knock-on effect across the continent, first notable through the fuel crisis in 2021. Because of the continued presence of Russia in Ukraine and therefore the ongoing sanctions against Russia, construction projects are experiencing higher production costs, delays and staff shortages.
In an interview with Construction News, Graham Robinson, Global Infrastructure and Construction Lead at Oxford Economics urged contractors and their supply chains to discuss their response to these increased costs, adding: “Higher prices need to be passed on as the sector can’t absorb any more increases.”
- UK economy
The UK economy is also struggling following the impacts of the pandemic and leaving the single European market, with 2022 ending against a backdrop of economic uncertainty and high borrowing costs – the base rate is currently 3%, up from 0.1% in November 2021.
The UK Construction Purchasing Managers Index dropped to 50.4 in December 2022, little over the dividing line (50) between growth and contraction, a 3-month low and the first drop in 4 months.
Confidence in new residential building projects has also fallen, given the rising interest rates and concerns over the economic outlook.
How Can Property Developers Overcome the Challenges of Recession?
Property and construction industries are often the worst hit by a recession. During the last financial crisis in 2008, eight construction companies went insolvent every day, representing a 40% increase in insolvencies. So how do the developers who survive manage it? What’s their secret?
- Be Savvy with Your Budget
It stands to reason that if there is less business coming in, cutting non-essential costs is a smart move and the only way to stay afloat in an unpredictable economy. This could mean reducing staff hours or letting people go, but this may not be necessary. Reassess where your money goes and how it works for you — is it possible to switch to investments that will make up for lost sales and profits? Can you negotiate prices with suppliers? Do you have any stock left over from old projects that you could sell off for a profit?
Conduct a full audit of your income and expenditure to see where you can free up some capital and compensate for any loss of revenue.
- Invest in Your People
This may sound like a contradiction to point one, but your people are your biggest and most valuable asset. It might be tempting to ignore aspects like performance management and professional development when faced with the challenges of running a business in a recession, but looking after your staff will pay off in the short and long term.
Your team may be worried about the security of their jobs. Being open and honest about your plans will reassure and motivate them. Effective communication and strong leadership are essential to ensure that individual workloads don’t get out of hand and that staff receive the support they need to remain productive.
- Focus on Short-Term Projects
In the current volatile economy with rising interest rates and international trade barriers and conflicts, it’s impossible to plan long term with any confidence.
Short-term projects allow greater control and are less vulnerable to unexpected changes that could result in delays, expense and lost sales. Smaller developments are also less likely to encounter supply chain issues as you only need to plan a few months ahead and can more accurately assess the risk of disruptions at the start of the project.
- Offer Something Your Competitors Don’t
With a shrinking pool of potential buyers, you need to stand out from your competitors and offer an exceptional customer experience. What services would attract people to your development and away from a competitor’s? Are there any additional services you can offer to make it easier for people to buy a property from you?
It goes without saying that the quality of your homes will need to be top-notch. Adding value with services that help people overcome barriers to buying and enhance the reputation of the brand will win you more customers, directly and through referrals. Offering a part-exchange (PX) scheme, for example, would allow someone who is struggling to sell their house to do so quickly while buying a new home from you in one transaction — everybody wins.
The year ahead looks set to be a challenging one for property developers, but even in the harshest economic downturns, some developers survive and thrive. The key to succeeding in a recession is developing the ability to adapt to changing circumstances, review and revise development plans, offer exceptional customer service and be smart with your budget. Carefully managed, 2023 could be your best year yet.