3 lessons learned - starting and scaling a property investment and development business
A recent article reflecting on lessons learned by Anna, Co-Founder of Landmark, published in www.property-investor-news.com July 2018 At any scale, and in any industry, starting and growing a business is challenging, and a steep learning curve. Starting out and scaling up in property investment and development over the last few years has seemed an especially challenging journey, thanks to the many regulatory, political and economic changes affecting the property market. My business partner, Stefan, and I started our first property business together 3 years ago, and our property development business 2 years ago. So, no surprise it’s been a sharp learning curve, with plenty of challenges! Over this period, we have built c. 60 units of accommodation worth £8m+, having raised c. £3.5m equity to fund the projects, and we are currently working on c. 40 more. We also sourced c. £5m+ worth of property (20+ flats and houses). I’ll be the first to say, it hasn’t been an easy ride! Over the last 3 years, I have learned more than I did in 3 years at Cambridge, 5 years in the city (whilst investing on the side) and the rest of my life, combined. Perhaps the most significant thing I have learned, though, is the importance of attitude… seeing ‘learning opportunities’ (challenges!) as a chance to grow. Carole Dwek described this as a ‘growth mindset’. It’s not something most people get taught at school, but when the going gets tough, it’s worth thinking about! The point of this article is to share some of the most important - and specific - lessons we have learned, directly and through the experiences of those we have been close to or worked with. Similar themes are relevant across industries and business sizes, but are especially relevant for those who are starting out and scaling up in property investment and development. Strategy and strategic flexibility The first lesson we learned was the importance of strategy, and strategic flexibility. When we started our business, we knew - having worked on the City as Strategy Consultants for 5 years each - that we needed a clear goal, and understanding of our starting point (resources, money, time, skills, and what made us different and better). We were clear on the strategy we would use to get us there, and prioritised carefully, with targets and key performance indicators for weekly, monthly and quarterly activities… What we learned was the importance of flexibility, and knowing when to pause, pivot or persevere. For example, not long into our first business, the market changed dramatically. In a few short months we felt the impact of stamp duty surcharge, new and less favourable buy to let income tax regime, and the threat of an unclear but looming brexit. Potential buyers lost confidence. Our personal goals and priorities also changed: we were working very hard (we still do!), and quickly realised it would be better for us to use our skills, time and effort to build our own equity, not just other people’s. We wanted to take our existing skills, knowledge and experience, and pivot, to align better with our revised goals and the more complicated and challenging investment landscape. So, we altered our strategy: from sourcing buy to let opportunities for busy professionals passionate about property but short on time or experience, to developing property, with and for the same type of clients. Some of the strategic partners and other agents we worked alongside at the time have stuck with their original model. A recent conversation with one agent we worked with 3 years ago highlighted to me the extent to which the market has changed, beyond any investor or agent’s control. This very capable agent told me that buyers now are now so hard to come by for the type of relatively vanilla buy to let investment properties we were sourcing, it feels hardly worth keeping the business going. After several years of simply doing what he had done successfully for the previous 8 years, and struggling, he is now looking at new industries and a new career. This hammers home the point: a great strategy yesterday may not be a great strategy tomorrow. Seeing things aren’t working how you wanted because your goals or the market have changed is not a reflection of capability. Market forces are beyond any individual’s control, and paper goals change when the strategy becomes reality. Don’t be afraid to flex! Demand at all parts of the market can dry up, so it makes the most sense to focus where there is the most demand. Even if this means roughing it in previously unloved commuter belt town or regional town centres, or taking the long view when your first preference was to sell! Strategy is important, and it’s covered comprehensively in business and property textbooks and courses. But flexibility is, too… in response to changes in circumstance, goals and the market. Understanding real end users, having multiple viable exit strategies, and accepting the reality of the current market or business circumstances, is more important than emotion or glamour. Attitudes to risk The second lesson we learned is the importance of risk, and attitudes to it. When we first got started, we knew property development was inherently risky. Anything with potential profit and value is a question of, and source of, risk and reward… We knew that we were relatively risk averse, so sought to identify, monitor, minimise and mitigate risks wherever possible. For example, we sought to minimise planning risk (which is not just a question of ‘yes’ or ‘no’ but, also a question of timing, and extent of profitability) by negotiating - for example buying with planning, offering ‘subject to‘, joint ventures with vendors and overage clauses. We have learned some important lessons around risk, since then. Firstly, that a sensible attitude to risk is not enough: we realised we had to develop more sophisticated processes and procedures for identifying, monitoring, managing and minimising throughout. This includes everything from thorough analysis and due diligence before the start of the deal to ongoing supplier audits, covering every stage of the deal. Developers can go bust and come dangerously close from not seeing or dealing with difficult issues early enough, for example suppliers going bust or trade teams walking out. We learned that a week spent identifying potential issues could save a year of dealing with them! Secondly, we learned to look for the worst case, from gross development value to contract terms, and to be realistic rather than optimistic. Ultimately, potential returns are irrelevant if they are all contingent on a weak or inadequate contract promising a great build cost but excluding crucial elements required to comply with building regulations, or on unrealistic valuations (for example, prime London valuations based on optimism or history, which could be hundreds of thousands of pounds off the RICS definition (‘the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing, wherein the parties had acted knowledgably, prudently and without compulsion’). Too often, we are sent ‘deals’ where the build cost is unrealistic, or end product is priced at the top of the market, or based on a recent ‘for sale’ (ie not yet sold) development by a major home builder, which is not a realistic or accurate comparable for a 10 flat scheme by a little known developer, and does not address the potential downside or take into account the worst case. As a result, we never rely on someone else’s assessment of gross development values, especially if they are motivated by the best case scenario. Instead, we have developed an objective and thorough approach to analysing deals, ranging from multiple conversations and valuations from both national chain and local independent agents, to stress testing low, medium and high case costs and revenues. Thirdly, we learned to be clear on our attitude to risk, and processes around it, and never to be afraid to ask questions. Anything that looks too good to be true, probably is: from 100% funding to above-market fixed returns on ‘debt’. Questioning everything is not about being cynical or pessimistic, it’s about being realistic and understanding the downside, because risk-adjusted returns are far more important than returns. People The final key area of learning for us has been the importance of people, partners and teams, and managing them well. We had, and have, huge goals. It would not be possible to achieve these alone, so working with others is vital. What we learned is that people, partners and teams can be the source of the toughest issues, as well as the greatest results. Trust is not enough, oversight is crucial, with clear daily, weekly and monthly activities monitored carefully to ensure smooth progress towards the end result - from budget vs actual spend to delivering on time. We also learned not invest time or effort, or to work with people or businesses based on reputation alone, and not to relax diligence processes based on perceived credibility of the team. This is especially important in a market where participation and accessibility, for example through crowd-funding, is growing rapidly. Great headline potential returns, marketing, team reputation or a concern about missing out do not eliminate deal risk or the need for thorough due diligence and a clear understanding of the downside. Value, opportunity and the most important lesson we’ve learned... Strategy, risk and people can be a source of real value, as well as challenges and learning opportunities. But, as I mentioned at the start, perhaps our biggest learning has been around the importance of having and cultivating a ‘growth mindset’, because no investor/developer gets it right all the time. Real life ‘learning opportunities’ are inevitable, and go deeper than any textbook or course! If our experience over the 3 years of our property investment and development businesses is anything to go by, the learning curve can be a real rollercoaster as you’re starting out and scaling up, especially in a complicated and fast-changing market. As we look to grow our business over the next 3 years (with bold targets, as well as the benefit of learnings from our first 2-3 years) we are sure of one thing: there will be plenty more challenges, and plenty more learning opportunities!