The clever clogs are out in force. The smart watering holes may be full of recession talk but, among the misery makers, there is a good sprinkling of counter-cyclical pundits. These are the people who claim to have an infallible way of turning the general gloom into personal gain. In particular, they talk of buying undervalued property assets and of creating a capital base that will be worth zillions come the upturn. “Look at Philip Green,” they say. “While everyone else talks of disaster, he promises big expansion and is ready to buy. It shows you can make a profit out of a recession!” To cash-strapped businessmen viewing 2009 with considerable dread, these cheerful charlies are particularly annoying and deserve a bop on the nose.
Even so, they shouldn’t be ignored. Counter-cyclical activity plays a crucial role in the correction to the market. In a credit crunch, the man with cash can clean up. Nonetheless, caution is essential. First, it will be 2010 before we see any real upturn and so we have to survive the time in between. A nasty mixture of rising unemployment and falling sales will characterise 2009. The second danger for these optimistic characters lies in assuming that, when things get better, the world will return to its pre sub-prime position.
No more the same
But when better times come they will be very different in character. If the property industry is to make money, it needs to prepare for that change. At its heart is the nature of the City of London – long the driver of the British economy. It simply will not return to the pole position that it has held during the roaring years. People came to the UK from all over the world because this was where the really imaginative financial deals were done and the innovative instruments honed and polished. Now that the gold rush has ended, many have gone home and they won’t return. As the world comes out of recession, it will be the new centres that will have the edge. Dubai is only one of the emerging hubs where stock listing and financial activity will intensify, while the development of regional financial centres will become even more important.
So, the property world cannot expect that its overexposure in London will soon be reversed. In 2007, there were 353,000 professionals working in the City. More than 60,000 of those will be gone by the end of 2008. If we add the further attrition that the downturn is bound to bring, this will reduce numbers and activity significantly. No wonder the City has called in management consultancy McKinsey to help it find its way in the new world. As it is, it will be a long time before demand for City office space and high-worth residential property returns. In these areas the London market will be much more difficult than many bargain for by contrast, the fundamental shortage of homes in the South East will mean a much quicker pick-up in the general housing market once the gloom lifts and people get used to the more stringent mortgage requirements.
A different world
What’s more, this retraction in the City is a much more serious reversal than it may seem at first sight. Financial services were growing at four times the rate of the rest of the economy and the influence of that on development was palpable. The recession will have hit Britain hardest because it has hit most sharply the very sector in which we were the strongest performer. The UK without a booming City is a sorry sight. We won’t be the world’s fourth richest economy for long, unless we find a new financial model to replace the busted one. There is no easy or quick fix and that will have real implications for developers’ plans conceived in the heady days of the boom.
The third serious shift will be the increasing urgency of climate change. The present steadying of fuel and food prices is a function of the downturn. When the economy picks up, commodity prices, too, will pick up. Energy- and water-hungry homes and offices won’t sell or let. Financial, legislative and environmental drivers will combine to force demand for eco-buildings. Those who have built to lower standards will lose out. So, there is money to be made in the downturn, but only by those who get timing, market and quality right. It was ever so and the clever clogs, as always, still deserve that bop on the nose.
