Investing in Real Estate during an uncertain environment

OPINION:

At present we are being bombarded with various opinions on what this global pandemic means for the economy and subsequently the merits of investment.

With any investment, timing can be vital.

We find ourselves in interesting times, I say interesting rather than the current buzzword, ‘unprecedented’, because I tend to disagree with those in the ‘unprecedented’ camp.

Movement in the Australian Stock Exchange (ASX) has been volatile since 21st February 2020, a date that is widely accepted by the investment community as when the COVID-19 effect first appeared.

On that day the ASX closed at 7,139 and fell to a recent low of 4,546 on the 23rd March 2020, since that time it has rallied somewhat but has been characterised by unpredictability.

What about other markets?

They all fell. Defensive stocks, government backed securities, hybrids, property. The lot.  
We can observe our most recent global crises for a clue here and this is also why I believe that our current situation is not ‘unprecedented’.

“In October 2008 all markets – gold included – fell sharply as the credit markets seized up. At the time gold was being sold as investors sought funding to shore up losses in other markets. The U.S. government began working on bailout plans in October 2008, which was the depth of the global financial crisis.”  
Debbie Carlson, Kitco Metals Inc.

Sound familiar?  We have already seen bond spreads wider than during the Global Financial Crisis (GFC), a marker of fear and uncertainty.

Property markets

I remember when the GFC impact reached our shores, discussing its impact with clients and undertaking many valuations of security property assets. Many were worried, most were at least concerned.

Let me provide an example.

In early 2009, Client ‘A’ was a High Net Worth individual earning in excess of $400,000 per annum.

He was married with two children in private school and was considering the purchase of a holiday home in a coastal area.

We had a valuation of his home (located in Melbourne’s inner East) on file no more than 12 months old that ascribed a value of $2.8 Million to the property.

As part of our due diligence on the possible transaction we revalued his home.  A valuer for the same lender came back with $2.2 Million.  This triggered a candid conversation and one which I draw on in these current ‘interesting’ times.

In short, this client backed himself.  He considered things carefully and was confident that the real estate he was buying was good value (due to market conditions) and his own home would rebound.  Most importantly he was confident he could meet the repayment obligations.

I am pleased to report that this client has since acquired the property next door to his holiday home and also extensively renovated his own place.  I might add we re-valued that property prior to the renovation at $3.5 M in 2017 using the same valuer.

This is merely one example, there are many variations on this theme and also examples of where people got spooked and fled the market, only to buy in again at inflated values later.

The thing that most of us should have learned in the GFC is that property markets, like all markets can go down. It is the purpose for which you are investing that needs to be considered as well as your own capacity.  In my example this client had a long term view and confidence in his ability to repay so has managed to reap the rewards.

Currently, low interest rates are making investment in quality property more affordable.  The general consensus is that interest rates will remain low for some time.

It is also evident that there are some good buying opportunities emerging, as Jarrod McCabe from Wakelin Independent Property Advisory, stated in a recent webinar entitled, ‘Covid 19 and property investment on the 31st March 2020.’

‘I think it is probably inevitable that there is going to be some form of contraction (in residential real estate prices), to what level at this stage it is probably a little but too early to tell.’

He went on to say that a clear picture is likely to emerge after the Easter break.

How are Lenders Responding?

As part of my professional practice I hold daily conversations with decision makers across credit markets.  These men and women are charged with assessing applicant’s ability to borrow to support personal, business and investment proposals, including real estate.

Some of these conversations are now feeling eerily like the beginning of the GFC, funders are tightening their assessment criteria and applications that may have sailed through pre-Covid 19 are now being carefully scrutinised.  Several sent out revisions to policies last week.

I can hear some of you thinking, ‘but the Government is backing the economy’.  I would urge you all not to fall into a false sense of security just because the Treasurer has opened up his (or someone else’s) chequebook.  It is always the case that debt obligations are just that, obligations.

Money apparently does not grow on trees.

What does this all mean?

What no one can predict with accuracy is how long these ‘interesting ‘times will stay.
The way in which you choose to react will be the litmus test.

When the cloud passes over and better times return we will all no doubt reflect on how we did react.  Whilst you are ‘ in the moment ‘, remember;

• Markets will rise and fall.
• Good property is still good property and the same for bad property.
• Test your credit capacity if needed as the rules are changing.
• Trust good advice and good instincts, you can rely on both.