Business is a strange world, sometimes it seems that the little startup that looks unlikely to go anywhere hits a chord and then turns into a huge success. Another business, perhaps launched by incredibly successful people, may fall flat on its face.
Many of the people who have built vast fortunes over the years have done so by doing the opposite of what everyone else was doing at the time. For example, I have a client who bought a very ugly house that nobody else wanted in 1992 right at the bottom of the recession. Today, this house is still ugly but, oddly, it is worth more than ten times what he paid for it.
I have another client who bought several residential lettings businesses just after the worldwide financial crash that was caused by Lehman Brothers going bankrupt. Today, each of those lettings businesses are worth three times what he paid for them. Both clients were told at the time that they were making a terrible mistake but, guess what, they certainly had the last laugh.
Brexit brings back the bargains
The rather more recent recession in the UK that was, of course, caused by the uncertainty that followed the Brexit referendum vote, has also had a huge impact on the value of many residential property assets and associated property businesses – but it has also, in the process, created some very interesting opportunities across the country and there are interesting signs of recovery in many market sectors.
The commercial property market is now showing signs of recovery and we have seen that some of the more confident, seasoned investors have already started buying property again.
Several experienced property investors have also said that they think that the prime London residential market will now recover pretty sharply. In my particular sector, I think that one of the greatest opportunities to make money at the moment is by investing in residential sales businesses.
A business called ‘John Doe Ltd’ where Mr Doe personally handles all the valuations and leads all marketing is very unlikely to survive the departure of Mr Doe.
Whilst the value of residential letting businesses has held up quite well, the value of residential sales businesses is still close to an all time low. You can buy a good residential sales-only business for about one times profit at the moment – which is between 30 and 50 per cent of what you would probably have paid before the Brexit referendum. To put this another way, a smart investor can get 100 per cent return on capital and what is there not to like about returns like that?
Getting it right
However, this plan is not foolproof. It is important to buy the right business, of course. A business called ‘John Doe Ltd’ where Mr Doe personally appears in all the marketing material and personally handles all the valuation appointments is very unlikely to survive the departure of Mr Doe. However, a bigger business with a management and sales team in place, alongside an established trading name will have a real value because the brand is bigger than the owner.
One of my smartest clients sold a letting business four years ago for just over £2 million. The business used to provide him with about £200,000 per annum profit. He invested just over half the proceeds in buying six residential sales businesses. All of these businesses are now manager-run and continue to trade under their original names. These businesses together made almost £900,000 of profit last year.
In other words, he had swapped a business that made a 10 per cent return on capital for a business that is making almost 90 per cent return on capital. Even if his sales businesses never have a capital value, his investment will have paid off handsomely and it is my prediction that these businesses will have a capital value again once we get to a more positive phase in the housing market cycle. Surprisingly, I only have one client who has spotted this opportunity so far.
When business recoveries come, they happen very fast and by the time the indices start to show that a market is recovering, prices will already have risen. So, if you fancy a gamble on the residential sales market, my advice would be to be bold and make your investment sooner rather than later.
Adam Walker is a business transfer agent and consultant who has specialised in the property sector for more than twenty-five years. www.adamjwalker.co.uk