The impact of the crisis is clearly manifested depending on the goals that a particular person sets himself. The investor sells or buys assets for the purpose of enrichment, the consumer – in order to improve comfort. Therefore, for buyers, the financial crisis is fraught with a loss of money, and for investors, this is a way to increase their funds.
American economist Nuriel Roubini, who had previously predicted a 2008 recession, predicted a new crisis in 2020 at The Guardian. Similar concerns have been voiced in recent months by experts on the pages of the Financial Times, Forbes, The Independent, and other authoritative publications. Although experts have been claiming that the business cycle is coming to an end since about 2016, in reality no one knew exactly when to wait for the next recession and whether it was worth it at all.
Real estate experts advise the following to investors who want to effectively invest in real estate in the current environment:
- Be patient
Unfortunately, due to the recent surge in unemployment, it is only a matter of time before the market sees homeowners who can’t continue to make their mortgage payments, or quickly sell their property and get a discount to avoid foreclosure or foreclosure. Unfortunately, during a crisis it is a common occurrence when people who otherwise would have kept their property had to sell.
As stocks increase due to the effects of this crisis, investors must be more selective and patient. Profitable investments that seemed rare not so long ago are likely to become one of many. This is the key to patience and expecting a property with a large profit, which can withstand a possible hit in the cost of resale. Now is not the time to rush into a new deal, it is time for a methodological analysis of properties with large fields before making any decisions.
- Analyze your costs
Whether the global crisis or not, a significant analysis of the property should be the basis of the strategy of each investor. However, during this difficult time, properties should be analyzed with increased risk factors and costs so that you do not go into minus. This is manifested in an increase in the cost of capital for investors using leverage instead of cash.
In addition to changing the external cost analysis, investors should be aware of the concept of a “falling knife” during a crisis. We do not know whether property prices are stabilizing where they are, or will fall significantly. A safe bet is to buy when prices reach the bottom, and not during a free fall, when in a few months the property may lose some of its value. To take this risk into account, the purchase process must be carried out at such a discount that the housing can withstand a reduction in repair costs of at least 10% if the market falls between resale and purchase.
The possible loss of value and higher capital costs of resale mean that some investments that made financial sense last year or at the beginning of this may no longer have the desired rate of return at this stage.
- Do not be tempted by cheap offers
Over the past few years, real estate in the US and Europe has steadily risen in price: in developed countries, prices have more than doubled since 2009. Offers with lower-than-market prices are often explained as exclusive, off market, or because some rich heir is in a hurry to get rid of unnecessary assets. But in fact, the reason for cheapness is always that something is wrong with the object. Do not rush to buy until you find out what the problems really are, and do not make sure that you can cope with them.
- Adequately evaluate profitability
Real estate prices are rising faster than income. In the early 2010s, a good rental facility in Europe worth € 10 million (for example, a hotel in the center of Frankfurt) brought about € 750 thousand per year, that is, 7.5% yield. Now the same real estate is already worth about € 20 million, but rental rates have been growing slower all these years, so the property brings about € 1 million, or 5% per annum.
Increased profitability is generated not on lease, but on loans with a large “leverage”, which is usually available to foreigners on less favorable terms than local investors. When the Germans buy the same hotel, the bank can finance up to 80% of its value at 1% per annum, so that the return on invested capital soars up to 7–8%. And no more than 50% will be credited to a foreign buyer, which is why the yield is at the level of 4–5% per annum.
Value added projects bring developers about 15–20% per annum, of which an investor who simply invests receives about half, that is, from 7.5% to 10%. The developer receives a reward not only for the organization of the project and its management, but also for professional competence, which, in fact, allows you to successfully implement projects with such a profitability.
- Focus on reliable projects
Focus on such projects, which in case of market turbulence are more likely to stay afloat and bring at least a small profit, even in the worst case scenario. The success factors of such projects are a good location, a not too loaned facility (it is desirable that the leverage does not exceed 70% of the budget), a guarantee of rental flow and a strong management team.
- Use the services of competent professionals
Good investment projects are usually sought through professional agents who keep abreast of the market and are the first to find out about interesting offers. When such an offer appears, the investor needs to act quickly. In 1-2 weeks, calculate all the pros and cons of the project and make a purchase decision or the object will go to a more agile buyer.
- Take into account isolated projects
During each recession, there were areas that were hit harder than others. Based on an analysis of recent cycles in the largest metro areas of the United States during the Great Recession, a large gap was identified between the least affected and the most affected cities. The areas that are least and most affected can vary from crisis to crisis. However, an important point is the search for isolating factors. Here are some of the key isolation factors for your search:
- A large number of military and state works
- Institutions that can withstand severe economic fluctuations
- Major developments and new growth projects
For example, Washington DC, DC, is lucky enough to have an isolated market. It is supported by satellite headquarters, large institutional companies, massive federal employment, and key growth factors such as The Parks at Walter Reed, The Wharf Phase, and Amazon HQ2. These isolating economic factors mean that it is less likely that there will be no customers after or even during a crisis. The stability provided by such an isolated market was also one of the main reasons why many started their business in this area.
During the crisis, it is especially important for the investor to exercise caution and not only rely on the scenario of the progress of real estate costs, but also realistically imagine how to handle possible risks. Initially competent selection of an object in combination with the professionalism of a property agent will help to cope with the downside.
Real estate investors should consider a wide range of factors before making a purchase in the face of our current or any other crisis. Investors who remain smart and prudent will survive this crisis and may even come out on the other hand with some well-earned money.
Of course, in the circumstances of recent events in the world, purchasing power will fall, but the need to purchase housing will remain. In the coming years, affordable and smaller housing will be in demand. The reaction of the real estate market to the crisis will be a trend towards a decrease in the average area of apartments in new buildings and an increase in the share of studios and one-room formats. The scale of all changes will be determined by the depth of the recession in the economy and the pace of its recovery in subsequent years.