It is well documented but not necessarily well-known that the main property developers behind the Empire State building in New York were, for want of a better word, amateurs. John Raskob was an accomplished businessman but had no professional Real Estate development experience. Al Smith was a respected politician and ex-Governor of New York who was more adept to critiquing state legislature than architectural plans. The Great Depression (the intense economic downturn billed as the worst recession in US history) had just set in and after some initial hesitation they decided to go ahead with the project as they believed it would have been more expensive to pull out.
History can be a great teacher…
History can be a great teacher, so this got me thinking about what we can learn from situations such as these since the birth of that building was during a time of extreme uncertainty and a fragile economic backdrop, much like what we currently have in the UK with Brexit. From the outset it’s important to recognise that the Empire State building was not initially a profitable project. But through perseverance and vision, what the developers achieved was arguably more significant than a cash profit. They created an iconic symbol of a powerful city and the legacy of that 102 storey structure has been a great source of pride and inspiration to many both inside and outside of its homeland for decades.
Having intelligence may not always be helpful.
In their Nobel Prize winning work on the psychology of judgement and decision-making, Kahneman and Tversky showed that generally humans are disproportionately more fearful about losing an amount of money when compared to the perceived benefits of gaining that same amount – the larger the amount, the more pronounced the effect. I would further argue that the more intelligent the person making the assessment, the more likely they are to identify and focus on small risks such that these become magnified and appear prohibitive, because they’ll have identified a long list of what could go wrong! In these situations, intelligence is in some ways counterproductive.
The seeds of extreme success are often sown during times of stress.
Many smart people during this period of uncertainty have associated London property with leprosy-like phrases such as “don’t touch it”, but that belies a very narrow view of investments linked to capital appreciation. Part of the benefits of real estate development is that you’re not wedded to normal property price appreciation to generate a capital gain since you should integrate your expected sale prices (which may be lower than current market prices) into your deal model before you agree to do the project. Based on that approach there are definitely deals out there that still stack up as profitable ventures. Savills, the real estate service provider, have found that over the past 5 years, developers of residential property have targeted a minimum hurdle rate of 25% return on capital employed. Whilst this rate may come down somewhat, I’ve seen that a hurdle rate of 20% is still very achievable even with today’s market uncertainties and there is still room for more downside.
The seeds of extreme success are often sown during times of stress, but we just don’t realise it until we look back after it blooms. My view is that during stressful times like Brexit we should feel more empowered to press mute on these risk-averse voices telling us not take action since these times offer us significantly more perspective on what “bad” really means and often times it isn’t as bad (or bad at all) as the naysayers predict – especially over the long-term.
Never let a serious crisis go to waste!
I’d like to think that the lessons I’ve learned from property are transferable to other areas worthy of your resources, so whether it’s a new property development project or a completely different venture of significance that you’re contemplating, I’d encourage anyone to use the political disarray we currently seem to be in midst of, as an catalyst to take a calculated leap of faith without feeling like too much could be lost in the process.
I’ll leave you with a quote from Rahm Emanuel who was President Obama’s Chief of Staff during the 2008 US financial crises “You never want a serious crisis to go to waste. …[it] provides the opportunity to do things that you could not do before”.