This week will examine the anatomy of different types of recession and how these could impact us. I will outline my 20-point checklist on how we can make our property portfolio bulletproof in response to these recessionary pressures. A glimpse of optimism is how we conclude as we look ahead in terms of trends and opportunities too. Details of a more complete presentation on the topic are also shared. We can only control that which we can control, so let’s do that.
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Transcription of the show
This week will examine the anatomy of different types of recession and how these could impact us. I will outline my 20-point checklist on how we can make our property portfolio bulletproof in response to these recessionary pressures. A glimpse of optimism is how we conclude as we look ahead in terms of trends and opportunities too. Details of a more complete presentation on the topic are also shared. We can only control that which we can control, so let’s do that.
Property Chatter
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it's a pleasure to have you join me again on the show today. You know how you sometimes get this idea that's really in the moment? It's relevant, it's topical, it's hopefully useful. Well, over the last week or so I've been rethinking about the idea, I guess of why we call bulletproofing our property portfolio. That's been on my mind. Obviously, we're right in the middle right now, of a situation where we could do with it being bulletproof. There's a lot of chatter in property circles about ... "I wish I was more prepared for this Coronavirus thing."
Let's just look at this now. There's things we can do in the short-term. There's also things we can do in the long-term. This talk today is all about bulletproofing our property portfolio. This is based on a presentation that I actually prepared, and will be delivering on Wednesday the 22nd of April, at one PM on the TPV Live Lunchtime Wednesdays slot for that particular day, which is actually also the same day this goes live. So, if you listen to it first thing in the morning, you can still jump on that session. There'll be a link to the Zoom call that will be in show notes, and if you didn't manage that, well, I'm going to try and record the presentation. And so by all means, write in if you want to see a replay, and I'll be able to send it to you. But I wanted to get this as widely available as possible, so sharing an extract on the podcast, sharing the Zoom presentation and you probably ... If you follow me on things like LinkedIn you'll start to see some extracts of this type of story unveiling, I guess.
So, what am I going to talk about? Well, there's the ... Just a quick reminder about the four principles that I've been speaking about recently. Four principles for now. A little talk about recessions and how they can impact on us as property investors and developers. How can we deal with that? In other words, how can we make our property portfolio bulletproof? And then, let's finish on a high, shall we? And look at some opportunities and trends for the future.
So just a quick reminder. I've covered this on previous episodes so I'm not going to dive into the detail too much but the four principles for now. They are, number one, look after ourselves and, indeed, others. Let's not be selfish. Let's look out for others as well. Obviously, it's a difficult time for many of us, and some people are on their own, some people are in a difficult spot. I was talking to a business owner the other day who had, I think, it was 18 staff and now got four left. And they were in tears, actually, as they were relaying this story. So, yeah. People are suffering in different ways. People are suffering for health, people are suffering because of social isolation, people are suffering because of business and economic reasons. Yeah, there's a lot going on. So, look after ourselves and for others, too. In fact, later on I'm going to talk a little bit about holistic wellbeing and maybe how we can support ourselves that way.
Two, control that which we can control. It's so easy to get carried away. I've been switching the news off. I try and catch the news cycle at different times than my wife. And sometimes, she'll come in and she'll put the news on, and I just get absolutely sick of it. So I've either insisted that it's turned off, or go somewhere else, because the general media, and indeed social media, is not always that helpful. So don't let our minds get buried in that kind of chatter. But let's just focus on what we can control, because, trust me, we can't control everything. But what we can control is our mood, and our reaction to things. And it might not be easy to do, but it might be easy to say, but it's something that we can actually do with practice.
The third is to use this time wisely. I've been talking about this quite a lot. And so, now is the time to up-skill, to reach out to people, to look at new directions, perhaps to get some insights from a mentor. So use this time wisely. And ready ourselves for the opportunities ahead. So it's not all doom and gloom, it's not all below the line curves, it's not all alarmist headlines. There will be opportunities that emerge out of this. So we just need to lift our sights onto the horizon, and see what's ahead of us, and look out for those opportunities ahead. And even if we've taken a bit of a knock, or even a battering in the short term, there is an opportunity for recovery as well. So let's focus, and we'll end on a high in that way.
I did mention holistic wellbeing. I have kind of covered this before, but we should look after our health and our wealth. In fact, arguably, our health is our wealth. It's not just money that I'm interesting in here, it's a holistic outlook. And so, that means looking at our physical, mental and emotional health, as well as obviously our wealth. And so, just a bit of a shout out really, if you remember, I redesigned the wheel of life. I think it was early this year. And so, I've got a scorecard, the wheel of life scorecard. If you'd like to see that, work through that, just evaluate where you are, on all of the different measures, that's freely available for you, so just drop me a line, and I'll gladly share that with you.
Now let's just look at recessions, and how they can affect us. Been doing a bit of deep dive in to the topic, and obviously pandemics is one kind of stimulus for a recession. So let's look at what some of those principle causes, or main causes of recession could be. Well, it could be high interest rate recession. We're not in that place now, are we? So 1973, 1980, and 1990 are classic examples of recessions that included high interest rates. Could be a high inflation recession. Again, not now. 1973 and 1980 also had high inflation. Notice that in fact, 1990 didn't have high inflation, and there was a distinction between 1990 and the other two years, I mentioned there. So I'm not going to get into that too much right now. Maybe for the presentation on the Zoom call, but not for now.
Then we've got currency shocks. 1990 was a good example, with the European exchange rate mechanism. And then we've got lack of liquidity, or what's become known as a credit crunch. 2008, anybody remember? And the of course, we've got some regional or global shocks. I've listed quite a few, because I've gone further back in time. We've got 1919, 1930, 1939, 1973, and now, 2020. So global or regional shocks, in there we've got pandemics, we've got world wars, we've got oil crises. We've got those big, black swan events, that no one apparently saw coming.
So they're some of the principle causes. What about the impact? So here's some quick headlines. So if it's a high interest rate recession, then we could have a high cost of borrowing, couldn't we? If it's a high inflation recession, well there might a lack of affordability, of housing generally, in terms of purchase and also rents for our tenants. If it's a currency shock, well there could be a devaluation of assets, that we're looking at. If it's a lack of liquidity or credit crunch, it could be a lack of financing altogether. You probably saw that in 2008. A little bit now, but it's improving a little bit. My broker sent me a message today, saying that whilst there was a temporary reflection, let's say, from the lenders, they're trying to open up again. They're trying increase loads of avenues, they're trying to find a way to do desktop valuations. They're trying to stay open, basically. So it's not the same as 2008.
And then, we've got these regional global shocks, and I guess, I would just say that it's reduced economic activity in general. So to some extent, all of the above things could happen, but for different reasons. I.e., borrowing costs could go up, affordability could be squeezed, assets could be devalued, and there could be a lack of financing. But as I'm going to illustrate, not necessarily for too long. But just hold that thought. I've got a bit of a graphic, in my presentation, which is obviously not going to come out very well on a podcast, but just ... It's called A Quick History of Pandemics, and this is courtesy of Visual Capitalist, which does a lot of good graphical content. And what they showed is the history of pandemics, over time. And it goes back several hundreds of years.
In fact, actually several centuries, in fairness. And it positions COVID-19 in relation to some of the other, major pandemics, that we've had in history. Now of course, the numbers are shocking at the moment. And if you watch anything about the news, just seeing ... I think there's about ... is it, 130,000 140,000 people have died, globally from COVID-19, which of course is terrible. But actually, when you put it into the context of history, it's not as massive a deal, as it has been in the past, let's say.
Now, thankfully probably all the lockdown measures, and the social distancing, and the healthcare improvements is helping to keep a lid on the extremity of the impact of this disease, that's resulted from this virus. Hopefully we don't have anything like the Bubonic Plague, which wiped out 200 million people. But you're going to hear a bit about the Spanish Flu in a minute. The Spanish Flu that actually ... Well, I won't tell you all about it now, but if you want to get hold of these slides, reach out to me, or join the Zoom call, and you can get hold of them. And you'll see that illustration, a little bit more vividly perhaps.
But I wanted to focus on the Spanish Flu, because we have been here before. I.e., with being the coronavirus/COVID-19 pandemic, we have fairly recent history. And when I say fairly recent history, I mean on the scale ... and perhaps even more greater scale than we have now. So the Spanish Flu is the closest we got to COVID-19, as I mentioned. It came about in 1918, and it was helped to spread across the globe, because of migrating soldiers, returning from the first world war. And so, they picked up some of these nasty viruses, and were traveling around the world, and back home. And unfortunately were transmitting the virus, at the same time.
Now, the death toll is cited at somewhere between 40 and 50 million, globally, so it was pretty significant. I don't think we're going to get anywhere near that with COVID-19. And thank goodness if that's the case, but just to put in some sort of perspective, that's what that Spanish Flu did. It was only 100 years ago. Now, of course not many of us here are going to remember that. I think there was one gentleman who did 100 laps of his home, to raise money for NHS charities. He won't even remember it, because he was just about born, but he was alive around that sort of time. But most of us, we won't remember that.
But here's a thing. It was characterized by what I would call a short, sharp, shock. It did involve lockdown periods, for a period of time. Now, some places had stricter measures, and faster reaction to lockdown than others. And it did actually make a difference. Those places that locked down sooner, for example, saw a quicker recovery. But overall, the approximate time to recover the short, sharp, Shock, which was deep, was two years. So if you compare that to the 1990s recession for example, there was a whole decade, really of recovery from the recession. So two years, to recover what might be probably, from an economic point of view, 20 to 30% drop in GDP, over a quarter or a half year period, put that in perspective, because I've seen some newspaper headlines, putting scary numbers out there. That would be a sort of a quarterly result, and potentially is pushing up towards a half year result. Maybe not up to the 30% over the half year, maybe a lot more like 15% to 20% over the half year, and short, sharp, shock over a quarter.
So a sense of perspective, but there was a pretty quick recovery, after the Spanish Flu. And that's what I'm pegging my views on, is effectively what happened in the last major global pandemic, Spanish Flu. As opposed to what happened with the global financial crisis, for example. And the other piece of good news really is, from what I can understand, asset prices seem to bear up quite well. Now, there was a difference in Spanish Flu, and COVID-19, in terms of who it affected. Not going to get into that too much in this podcast episode, but if you want to hear more, that will be in the Zoom call.
So that's a little bit on the pandemic side, but just coming up a little bit to look at some of the common threats to our property portfolio, generally speaking, as a result of recessionary pressures. So I've cited the top five, if you like, which are high levels of gearing, a low net cashflow, exposure to sudden interest rate rises, lack of tenant demand, and house price crashes. Now, we may not see all of those now. As I mentioned earlier, different recessions have different characteristics. I'm just really listing some of the common threats to our portfolio. And because I'm talking about bulletproofing our portfolio, of course we want to make it bulletproof against different types of recession, which have different characteristics, and therefore affect us in different ways too. So they're some of the common threats, and in terms of the primary defenses ... I'm listing primary and secondary defenses. I'll talk about primary defenses on the podcast. I'll expand into secondary defenses, which goes into a bit more granularity, or detail, on the Zoom call. So if you want to see the secondary defenses, tune into the Zoom call, in other words.
So primary defenses, if there's high levels of gearing ... if we have high levels of gearing, the obvious antidote to that, is to try and reduce our debt levels. And then we can reduce our debt levels, in a number of different ways. What I mean by that is, we can look at it on an average basis, and so each asset has a low to value, and that's relatively consistent. Or we can mix and match across the portfolio, and indeed, that's my approach. So I have some assets with zero debt, for example. I have other assets with modest to medium levels of debt, and I have some assets, which have been recently added value to, and refinanced. And I've got a relatively high level of debt.
The average, overall is pretty comfortable, but I've got some of the medium to higher end, and I've got some at well, low to zero end. So reducing debt levels is one. The antidote to low net cashflow, is to invest for yield, or more importantly income. Yield is a clue, net income is actually the answer that we should aim for. So don't just be blinded by gross yield. Net yield, or return on cash investment is actually a better measure, I would suggest. So a lot of people, in the past have looked at capital growth, but if we've got house prices crashing around our ears, that's not much use to us, is it? So income is ... or cash, as they say, is king.
Exposure to sudden interest rate rises, well, fixed rate for long. So personally, I try after I've refinanced say a BRR style project, or Bill to Rent style project, I try and fix for five years or more. It's hard to necessarily get the most competitive product going beyond five years, five years, I think it brings some stability to my portfolio. If interest rates do drop, which technically they have in recent times, yeah maybe I'm losing out. But for me, it's more of an insurance. So I personally prefer to fix rates for the long term. So this is to protect us against sudden interest rate rises, remember.
Now, I'm not really forecasting that, at the moment, that wouldn't really make any sense, I.e., sudden interest rate rise. We're going to see more the opposite, so it's not necessarily directly relevant today. But generally speaking, this is ... I'm doing my bulletproofing portfolio, of course, in general terms. If we've got lack of tenant demand, well yes, we probably have. Regardless of strategy, we might have reduced tenant demand, or at least reduced affordability, from some tenants at the moment. People are being laid off, for example, or even furloughed, or are being asked to take pay cuts, pay deferrals, et cetera. Zero hours contracts are not working. All of the above.
Well, look at our assets, individual assets, I.e., our properties, and look at multiple uses, or multiple exits. There are a variety of ways that we could repurpose our properties. And there are a variety of ways in which we could exit. I'm not going to get too much into the detail, because it's not really for this type of forum. Again, come on the Zoom call, you can ask me questions about that, and I'll share my views. And if there's house price crashes ... maybe crashes is a strong word, correction or softening of prices might be a better phrase. I'm expecting some softening in the short-term of house prices, in the UK, but not crash as such. Depends what your definition of a crash is. I think a stock market crash is defined as a 20% reduction.
I don't think I'm seeing that sort of reduction. I've definitely seen a lack of transaction volumes, but not necessarily radical or drastic price reduction. But the hedges, really to that, are again long-term fixed rate. And why is that relevant? Because what some members have, is a minimum loan to value clause, in their loan agreement. But don't believe me, just look at some of the ones you've got, just see if there's anything buried in the small print. And then, the other thing is liquidity. So cash is king. Again, get liquidity, meaning access to short-term funding, or facilities, that you could call upon in your time of need. So they're the main defenses, if you like.
I mentioned in the presentation, secondary defenses, which I'll go into a bit more detail, but I won't cover that here. I also wanted to really talk about ... Yeah, I'm going to skip the next slide, which talks about decision-making, and whatnot. But I really wanted to get into ... just to touch on really, I've got a 20 point checklist, on how to bulletproof your portfolio. I'm just going to sample a number of those, particularly for the short-term. So there's some fairly un-sexy, and less obvious things we can do. So for example, stay up-to-date with our management accounts, at least monthly.
Do rent and bank reconciliations and a cashflow forecast, again that sort of frequency. Make sure we've enhanced our rent collection and void procedures. So there's a couple there. Build our personal liquidity buffer. Check those terms and conditions, like I've just mentioned, with the loan to value. Potentially assess each property for repurposing, review our alternative exit options. So for example, I had a property that went void, and I've decided not to re-let it, but to sell it. I've had some short-term serviced accommodation go empty, or just falling off the cliff really, of bookings in the short-term. And I'm repurposing to sort of a short-term, mid-term let, or mid-term, short-term let, whichever way you want to put it around.
Claim any payment holidays, grants, and taxes that are open and available to you. One word of caution on payment holidays. My broker circulated a note today, saying that some lenders might prejudice us, in the future. So whilst there may not be a detrimental effect on our credit file, as a result of a payment holiday ... mortgage payment holiday I'm talking about here, there could be a prejudice view towards us refinancing with that same lender, or a new finance application with that same lender. Each lender will have their own policies, so it's not a blanket approach, so just be careful about that.
Probably actually wise to have a chat with your broker, unlike me, but have a chat with your broker, before you take action. But generally speaking, try and claim all that's due to you, is the summary. Defer or ditch nonessential expenditure, and do an insurances assessment. There's various types of insurance that we have available. There's a number of empty properties at the moment, which could be vulnerable. There could be risks that we need to protect, at this point in time. There could be tenant insurances, which would pay for rent arrears, during this point in time as well.
So there's the top 10, if you like, or the short-term 10. There's an additional 10, medium to longer term, that I've also shared in the presentation, but I don't plan to go through that, in terms of the podcast today. But I did say I wanted to finish on a high, didn't I? So there's some potential opportunities, so it's not all doom and gloom. But of course, bulletproofing our portfolio is precisely to be defensive and stabilize our position, first and foremost. If we don't have a stable footing, we can't move forward, we can't spring forward and take advantage of opportunities. So it's only right and proper, that we try and do things correctly. And that's the point of everything I've been talking about until now.
But if we've got all of this in place, or if we're in a privileged position, for example, we're sitting on cash, or access to financing, in various ways ... capital in various ways, then there's a number of opportunities that might be open to us. So the very first, and obvious one is that there might be an opportunity to buy at a discount, at the moment. People who are selling at the moment, may need to sell. And maybe it's very difficult to actually sell, to complete a transaction. So if you're sitting on cash, and you're ready to execute, that means that perhaps you can take a view on whether you have a viewing, maybe on a survey. And maybe with the detail of the legals, you should be able to negotiate, let's say a few points of discount, for each and every one of those particular elements, to drive a good deal, at this point in time.
So yes, cash talks, and so does quasi cash. And what do I mean by quasi cash? Perhaps pushing finance, perhaps personal lending, et cetera, can come out. I'm going to touch on the alternative financing in a second, so I won't dwell on that. Then we've got some emerging trends, and I kind of touched on this a bit, didn't I, last week? So we've got remote, or homeworking is a trend. We've got prop tech, which would be virtual, online AI, et cetera. We've got the need for personal space now. It's funny, I was talking to someone about serviced accommodation. And there's like two schools of thought here. There's people who want to get out of serviced accommodation, because they've been completely spooked by what's gone on.
And of course, with bookings falling off the cliff for two or three months, it's understandable. But on the other hand, if you look at it differently, people would travel for ... maybe they have to travel, say for business reasons, let alone leisure reasons, and maybe they prefer a bit of personal space now. Instead of going into one of these large hotels, where there's all sorts of people and things, milling around in the atmosphere. So a bit of personal space, serviced accommodation could actually be quite a surprising one. I think that one might bounce back.
And then of course, we've got the health, wellbeing and sustainability agenda. I don't know about you, but it's just great to see the lack of pollution that is evident. We're seeing wildlife and birds coming back into our environments. I don't know how long that's going to stay for. I hope it does, but it's a trend. What am I saying here? It's just look out for these trends. I'm not necessarily prescribing solutions, maybe apart from the personal space, serviced accommodation one. But I think it's a case of watching the trends, seeing what we can do.
Then we've got, if you like, the rise in alternative financing. Now, as institutional lending squeezed down a bit ... hunkers down a bit, maybe reduces loads of values, maybe reduces the criteria, maybe reduces the number of products that are available, for example. Or, extends the time period, or extends the criteria to qualify. It's probably going to give rise, in my opinion, to alternative forms of financing, such as crowdfunding, pier to pier. Now, there are not new, they're just not mass market yet. And then we've got SASS providers. I've sat on a few SASS calls recently. SASS is Small Self Administered Scheme, pension scheme.
And the average SASS trustee is sitting on 300 and odd thousand, as a fund to invest. So they need to get a return on their investment. Then we've got family offices, or family funds, family trusts. Private or joint venture finance. Crypto currency, and the blockchain, if you like. Some of that is very emerging, I realize, but I think there is going to be a rise in these alternative financing methods. So it's another trend, but it's also an opportunity for us, so don't necessarily think, "I can't get access to funding, because ABC Bank is no longer lending." There are alternatives, and so I've signposted you just some of those.
And then of course, we've got different types of partnering model. So I'm talking about a commercial arrangement here. So in times where the market is stuck, we need to be a bit more creative. So vendor, and owner financing could come back into vogue right now. The use of options could emerge once again, not just land options, but property options too. Assisted sale, same sort of thing. Joint venture wrinkle models, and so on. There's going to be opportunities to partner in a more creative way, just because of where you're at right now. So look out for those opportunities, and be ready. I think that is probably my watchword, be ready to take advantage.
Obviously, be ready to bulletproof your portfolio, but once that's bulletproofed, be ready then to capitalize on the opportunities. And maybe here's a thought, going back to something I maybe alluded to earlier. Even if we've been blighted a little bit, in the short-term, because of this COVID-19 situation ... let's call it that. The years ahead provide an opportunity for us to recover, so it's not all doom and gloom. I really want to stress, I think in stock market crashes in the '30s, there were people jumping off buildings. Now, I'm not trying to ... How do I put this? I'm not trying to downplay mental health issues, by making a comment like that. What I am trying to say is that there's a future. There's a future ahead of us. And even if maybe things are difficult right now ... I've been through difficult times before. I'm going through some challenges right now, with just trying juggle all the different things in my own portfolio, particularly the development side of things, and the service accommodation side of things. But there's a future out there. So in other words, an opportunity to turn around, an opportunity to grow again.
So that's it really. I think there's a call to action in my presentation. There's a copy of the slides, I've got a bunch of giveaways, which I've mentioned the personal balance scorecard, or the wheel of life, which you can reach out and have, as well. There's a couple of other ones. I'm not going to dwell into it too much. You've probably picked it up as I went along. And there's a few extra ones. If you've managed to listen to the ... or watch the presentation on Zoom, including the replay, there's other offers, if you like, I'm going to put out there, for people who actually invested that time. So look out for it, in other words.
Join in the Zoom call, at one PM on Wednesday, the 22nd of April, the link is in the show notes. And if you don't come and watch it live, try and get hold of the replay. You'll probably have to contact me, podcast@thepropertyvoice.net to get hold of that. But there you go, that's very much on my mind, and very much in my heart at the moment, to share this. You'll probably see me splatter it all over social media, obviously with the Zoom call. With the podcast today, I might repurpose this sort of content in different ways, because I think it's really, really important. And in fact, actually, I think ... I'm not going to go too far into this, but I think sometimes the bad times are what make and shape us. So don't be too disheartened, there are opportunities ahead.
One final one. There's the magazine article that I write for YPN each month, this week focuses on coronavirus, and it talks about learning from the past, and looking ahead to the future. So if you want a copy of that, you can just write to me, podcast@thepropertyvoice.net, and I'll gladly share a copy of that. It's going to print towards the end of the month, so slightly ahead of publication date, but yeah, you can have access to that, freely. So that just gives a bit more color, and context around some of the things I've spoken about, earlier in the presentation I shared today.
But there you go. Hopefully, that's been useful for you. By all means, contact me if you want any resources, but look at the show notes, on the website, which is thepropertyvoice.net. If you want to talk about anything from today's show, or property generally, or indeed to find out about my 30 day Property Jumpstart Program, just reach out to me, podcast@thepropertyvoice.net, and I'd be more than happy to hear from you. I guess all that remains to be said, I think, if I've covered all of the bases, I think I have, is thanks very much for listening once again, this week. And until next time on The Property Voice Podcast, it's ciao ciao.
That's all from me this week, remember if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you! The show notes can be found at our website www.thepropertyvoice.net
Thanks very much for listening again this week, so all that left to say is ciao ciao!