At this time of year I am usually busy helping my consultancy clients to prepare their financial targets for next year. But at the moment there is so much uncertainty that this is almost impossible to do.
On the lettings side, good managed letting businesses have hardly been affected by the pandemic at all so far. It is therefore relatively easy to prepare a forecast for 2021. However, letting agents who operate mostly on a let-only basis have seen their incomes drop significantly and it is hard to see how a business model that only earns a fee when there is a change of tenancy can survive for much longer. Certainly the business buyers feel this way and the value of let-only businesses has fallen off a cliff over the last few months.
On the sales side of the business, the future is very uncertain and despite forty years in the property industry during which time I have worked through four recessions, it is very hard to predict what will happen next year.
Firstly, there is a great deal of uncertainty of what will happen with Covid-19. The scientists might find a vaccine but if they don’t, then the experience of past pandemics is that the virus will be with us for another two or three years. If this is the case, there are several different ways that the government might respond.
Some people believe that the government should continue to prioritise controlling the virus over anything else. Some people believe that the government should begin to recognise that because only 10% of all deaths this year have been due to Covid, greater priority should be given to preventing deaths from other causes such as cancer, heart disease, strokes and mental health. Some people believe that it is not within the government’s power to control Covid and that preserving the economy should be given priority. The way in which the government balances these crucial issues will determine how much longer the lockdowns and other restrictions last for and how much damage is done to the economy during the process.
But this is not the end of the matter because the housing market could respond to an ongoing Covid crisis in very different ways. If the Office for Budget Responsibility forecast is correct, then unemployment could increase to four million people next year. If this happens, the present mini-boom in the housing market could end in a sudden crash and prices could drop by 20% or more. But this is not a normal recession. Most recessions happen because the market has overheated and an external event such as the 2008/2009 financial crisis causes a sudden correction in the market. This time though the market did not overheat and the recession was an artificial one caused by the government’s decision to shut down large parts of the economy. Because of this, some people think that the housing market could carry on regardless of a huge rise in unemployment. Many people have not been affected economically by Covid, interest rates are still very low and there is a strong demand from buyers who want to move from the city to the suburbs, from the suburbs to the country or from a flat to a house with space to work from home. I simply cannot predict which way the market is going to go and this makes it very difficult to prepare a financial forecast for next year. But you simply cannot start 2021 by crossing your fingers and hoping that all will be well. So how can you prepare a forecast?
You need to start with your cost base. A lot of agents have made a good profit this year and have cash in the bank but this is probably not a true representation of your financial position. How much money did you receive last year due to Covid? Add it up now. It comprises:
- Grants from the local authority
- Cash from the furlough scheme
- Business rates relief
- Deferred VAT
- Deferred corporation tax
- Deferred personal tax
- Deferred PAYE
- Fee discounts from the portals
- Bounce-back loans
- CBIL loans
- Other one-off savings
Many of these savings will not be repeated next year and the loans and deferred taxes will have to be repaid at some point.
Once you know your running costs, you can work out how many houses you need to sell in order to break even. But then you need to estimate the key performance indicators that will determine how you are going to achieve this. At a time of such uncertainty, all you can do is to make a best guess at this and then amend your targets every month in the light of experience.
If prices drop by 10%, you will need to increase your instructions to sales ratio by 10% or increase your fee levels by 10% to compensate for this. If the number of valuations drops by 10%, you will need to increase the conversion ratio of valuations to instructions by 10% to compensate. It is only by watching your KPIs like a hawk that you will have the information necessary to make informed decisions quickly enough to enable you to hit your target no matter what next year’s market brings.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than thirty-five years.