A well-experienced property developer and/or investor will understand that the property market and the global economy is cyclical and will experience many different life-cycles over time. This article discusses some of the strategies that you can implement, and the opportunities that you can consider, during a period of Recession. What strategies should I be considering or implementing during a recession?
- Reviewing the strengths and weakness of your company, set more comprehensive guidelines regarding property development/investment and due diligence, and ensure your management practices are optimised and efficient.
- Monitor your stock levels and the costs of holding construction supplies.
- Strengthen your relationships with the most qualified and skilled contractors.
- Take the time to develop your business, invest in marketing and your clients.
- Be innovative by using new technologies and products which will assist you to have a distinctive brand which may lead to an increased market share.
- Ensure that any potential new projects that you will commence will be appropriate for future demands and are substantially researched in relation to location, desirability and financial return.
- Investigate if your business is entitled to any tax reduction or other benefits which are implemented by the Government as part of its stimulus package.
- Consider delaying the sale of your already-constructed properties and proceed for a period by securing long-term renters.
- Investigating if it is now a favourable time, in terms of interest rates and lending conditions, to secure finance approval for upcoming projects.
- Be aware that financial conditions will change over time and your company should (subject to viability) have a structure in place to meet the increasing demand usually following the end of the Recession.
Are there opportunities for property developers/property investors in a time of Recession?
- There are of course numerous property markets existing within Australia at any one time. For example, the Sydney market and the Brisbane market will experience different troughs and peaks at different points in time. This can be an opportunity to diversify and to balance the risk in your portfolio.
- There are opportunities to innovate within hardship which can lead to longer term stability, resilience and growth.
- The potential for decreased competition within the property market may ensure that you have additional time to conduct your due diligence enquiries.
- During the Recession there will generally be a decrease in property prices and this may assist you in proceeding with projects that were not previously financially viable. Consider developing your strategy by purchasing properties in carefully targeted locations with optimum timing.You may also consider the purchasing of other companies to enable your business to diversify and also to capture a different market share.
- Consider purchasing properties under an option agreement which would entitle you to secure a property for a nominal option fee with the ability to determine at a later date, during the option period, if you wish to continue with the purchase of the property.
The option agreement should contain terms which will entitle you to conduct your due diligence enquiries, such as undertaking testing, taking photographs and measurements, and commissioning reports regarding the property.
These due diligence enquiries will allow you to properly assess the suitability of the property for the process of development.
We also recommend that a further term is included which obligates the registered proprietor to execute development approvals on your behalf. As development approvals can take considerable time, this will allow construction of the properties to commence in times when there are better economic conditions.
In times of Recession, what should I make a priority? In difficult times it is invaluable that you have an excellent understanding of your current financial positions which would include your income and liabilities, including loan to value ratios and the serviceability of your loans. You should also consider if there will be reduced cash flow, make attempts to limit your discretionary spending, and consider if there will be a reduced demand for property, and the potential nature of demand in terms of total demand and prices. You should also be aware of the potential changes in the current market (which can change dramatically and quickly) as the current performance of the market may impact the availability and cost of credit. This may further affect the conditions of lending, such as there being an increased requirement for pre-sales of properties and more onerous penalties. If you are considering proceeding with private lending we would recommend that you obtain comprehensive advice on the loan agreement so that you are aware of your legal rights and in particular the payment requirements, the penalties that could be imposed, and the securities for the loan. It is imperative to obtain expert advice from your financial advisor and/or accountant. If you wish to discuss any matters which have been raised in this article please contact Dean Woodbridge on (02) 9279 4888. This article is intended to be general advice only. We always recommend that you obtain advices in relation to your personal circumstances.
