Crisis Management in Real Estate

With all of the uncertainty right now, navigating any kind of investing is a challenge. Real estate is no exception. One the one hand, many people are weary of putting money into investments given the current situation. On the other hand, for several reasons that will be explored further, that uncertainty could also be opportunity. 

One of the first things people often do when faced with uncertainty is look at examples from the past to try to understand what can maybe be expected. Unfortunately, nothing of this nature or scale has ever occurred. Some people have tried to forecast the current situation by going back to 2008 or other recessions, but that is problematic. 

The single largest reason that looking at past recessions is not useful is that the source of them differs dramatically. Most major recessions that have impacted the real estate industry were triggered by forces from within the market. That is not true today.

Unlike those instances, the current market volatility is caused strictly by external forces. This means that it is unlikely to follow the course of past recessions. The biggest factor impacting the market now is comprised of biology, psychology, and governmental policy. New scientific developments, governmental decisions, and the human response to both are determining the real estate market direction.

Many expect that in the short term the market will be impacted negatively. The impacts being felt early are in the context of the short term threat. As many people lose their income, we may see in the coming months an increase in vacancies and defaults on rent. It is expected that this will be most felt in areas whose local economies are strongly comprised of entertainment and leisure industries, as these voluntary expenses are often the first to go when individuals fall on hard times.  

Looking at longer term expected trends are that prices will decrease temporarily. A combination of two forces is at work here. As mentioned earlier, as vacancies rise property values are impacted. Another factor that will hurt prices in the longer run is a decrease in foreign investment. As travel between countries is more and more limited it will become increasingly challenging for investors to see properties abroad, making them less likely to make significant investments. 

The challenges to the real estate market as a result of the pandemic are clear, but it is important not to lose sight of some of the benefits. Real estate is arguably the most stable invest option as global stock markets fluctuate between freefall and attempts to rally to previous values. This makes real estate an increasingly tempting investment for those with the means to invest now. 

One factor favoring real estate is interest rates. Rates are extremely low as governments try to encourage spending, making it an excellent time to get financing for a property. Many individual investors are pulling money out of the stock market to avoid being further hurt in market declines. Intelligent investors will be looking to see where they can get a return on a less volatile investment. In many cases, real estate is the answer. 

Another factor favoring real estate is more unique to the current crisis. As mentioned earlier, borders closing are blocking foreign investors from getting into the market. While that may seem bad, it creates opportunities for local investors. Often foreign investors are more willing to have a lower profit margin, meaning they are willing to pay higher prices, driving up the market. This makes entering the market now an even better idea. 

Currently, there is no consensus on how the COVID-19 epidemic will affect the economy. Some speculate that the impacts on the economy will end with the threat of the virus. Some economists even speculate that there will be significant growth once restrictions are lifted as people resume their lives. As the cause of this decline was incredibly sudden there is reason to believe that so too will be the recovery. At this juncture it is challenging to tell. 

What we do know is that the UK housing and real estate market were very strong before the virus hit. Six months of consecutive market gains made it an excellent market to invest in. There is uncertainty in the short term, but in the longer term we know that the demand for property will resume. Real estate investment now requires conservative assessment of short-term returns and the ability to absorb risk while the pandemic is ongoing, but investors in a position to finance such an investment may be in an excellent position to make strong returns in the future.