Demand - the forgotten metric!

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“Talk is cheap because supply exceeds demand” - John L. Mason 

Welcome to the first supplement of the second half of 2022! I always have to pinch myself to check I’m really awake, the time goes so quickly. We’ve had a rollercoaster start to the year if you invest in stocks, and/or have punted any money in crypto, and, as per recent weeks, economically, things look relatively bleak with a technical recession nearing a mathematical certainty. With bank base rates heading in one direction, and inflation outperforming expectations, there’s a classic macro storm brewing. Classic, in as much as it won’t be the same as the last one, or the next one. Some days it feels like waiting for the trigger - but, likewise, we could easily be in chapter one of quite a long book here. One thing we know for certain is that governments in the 2020s are not going to take significant pain - they might cause MORE significant pain if they get their interventions and solutions wrong, but only time will tell.

Now if that hasn’t cheered you up, nothing will! But, you need to remember - the point of reading or listening to this, the point of personal development, the whole purpose of educating and improving yourself - is so that you can empower yourself and do something about it in these situations, rather than bemoaning it. Start by only worrying about what you can control, and go from there. Will people no longer need housing? Is that what we are facing? No, of course not. We are not facing an existential threat as property investors or developers. Thus, the sensible thing to do would be to work out how to find the opportunities in the upcoming environment, as there are plenty still out there.

There will be those who are far more bearish than I, for example. It happens every time this sort of chat is out there. “This will be 10 times worse than 2008” - if I had a pound for every time I’ve heard that since 2008, especially in the last couple of years - I would be able to call it a day, that’s for sure. So what? So, these are the people you want to be buying property and business assets from. And that’s just stage one.

With this all in the backdrop, and lots to say about this unfolding situation over the coming weeks, I thought today it would be well received to change the subject a little bit, and talk more specifically about demand overall. One of the things that surprises me quite a lot is just how underreported and misunderstood it is, at a high level. We could, as we often do, blame the media. All the headlines are focused around supply, supply and supply. 5 million on the social waiting lists; 340k new homes per year is the latest figure, with 260k private rental units coming out of the market in the past 5 years. We all know there’s no chance of 340k homes happening - planning, labour, materials, incentives - not any time in the near future without a massive strategic overhaul. We would also be reasonable if we concluded that the government simply don’t try that hard to do too much about it - or, perhaps more charitably, are loath to interfere in the market in a major way and would rather let it “clear” itself which it does with ever-increasing prices, of course.

You rarely hear these conversations in the context of demand, and yet, without demand, we do not have a market. It is the yin to the yang of supply, of course. As people with direct exposure to the property market, we should definitely be trying to understand it, in order to inform our long-term strategy when it comes to acquisition, holding and disposal. I’d go as far as to say it is critical. It doesn’t need to grip daily attention - it moves relatively slowly, just as property does as an asset class, but a quarterly review is a good idea.

If we start at the macro level, this is the level at which the government establishes and measures demand in order to help them make informed decisions (yes, really). Long-term trends include fewer people per household, which is partially a cultural shift in terms of more divorces and separations, and partially to do with creation of new stock often focusing on smaller units compared to the existing stock, so there’s a mathematical reason behind it as well. 

They need to consider likely immigration (often somewhat dependent on economic performance, relative to nearby countries particularly Germany and France), birth rates, demographics of people that are already born in the country (the forecast is 866,000 more 15-24 year olds by 2030 than in 2022, much of which is guaranteed of course because they are already born and are already in the UK!) - some of these they can influence, some are much harder for them to exercise any control over.

We can then cascade down one or two levels to regional or area specific demand. Individual local authorities, regions, or counties if you prefer. If you consider that the majority of your returns in a long-term hold portfolio will come from capital growth, then it is important to choose your regions well! Some will follow the path of only investing near to where they live (in which case, you better choose where you live very closely) - those who are more geographically agnostic should be looking at data such as regional population growth forecasts (there’s a strong correlation between population growth and property price growth on a regional or smaller level), investment in the area in both long-term and specific large projects, the current supply of units, businesses relocating in the area, the median wage in the area compared to averages; these are just a few of the many metrics we consider when looking for a target or “hot” investment area. 

Over the years those metrics have also been bespoke in certain situations - it is hard to draw parallels with what took us into South Wales in 2016 - there looked to be a “brexit” discount after the referendum, and then a particular opportunity with the toll coming off the Severn bridge - an opportunity that lasted a good 2 years before many caught on and the prices started to rise, and the stock became harder to buy. I also had a particularly prolific trader contact in the area at the time, and so it was a confluence of circumstances that saw everything line up and those resulting investments have done extremely well when compared to the “average” property in that timeframe.

Investors can then drill down further, and should be encouraged to. From individual cities and towns, to particular sub-areas, “sides” of a city/town, even down to individual streets. You often “see” gentrification if you look closely enough - I’ve never tried to model it, in reality I’d need someone with greater skills than I to do it properly - but roads that abut more expensive roads have a tendency to “catch up”, as long as the surrounding area demographics stack up well. 

Demand can also refer, of course, to use class, tenant type and be drilled down to the individual type of unit. A great area that nevertheless has an oversupply of 1-bed flats, is not where you want to be buying or building 1-bed flats, of course - so a level of detail and diligence is key. There may be strong transient tenant demand and so short stay opportunities might be considerable - and the driving factors behind those opportunities need to be considered, in terms of their longevity (say Birmingham, Commonwealth games 2022, which will obviously create a short-term spike in demand; or Hinckley Point C in Bridgwater, which has offered considerable medium-term opportunity) and also in terms of their probability (we made a considerable number of investments betting on HS2 being maintained on its original course, and, naturally, once you are in you are inclined to stay in, because of frictional costs and because our primarily mentality is to buy and hold for the long term).

That demand also splits further in HMO - for example, demand for ensuites? Demand for larger rooms which are often in short supply - HMO+ style products. Once that’s established, it is then onto the commercials and whether it stacks up to provide the enhanced project. 

When we consider commercial property, it can be much more convoluted - but of course, the flexibility has increased so much in the recent years, with the introduction of class E and the overhaul of the use class system in general. Defining potential tenants, and looking at repurposing opportunities within such a framework can be a profitable opportunity - whether by talking with agents, advertising, networking, etc. 

That’s a whistle stop tour of the underreported side of the supply/demand situation, as far as rental property goes. Hopefully that’s done a little to redress the balance, and as always I’d welcome comments, questions, and (unashamedly) likes and shares!