Why Invest in Property During Recessions
At the outset, here’s a word of advice – Invest in property now during post-Covid times or forever live to regret your decisions. You might think that since we are real estate consultants it figures that we are obviously asking you to invest your hard earned wealth in our own best interests. Well then you should atleast listen to the advice of Warren Buffet the world’s most famous investor when he says,
Invest when fear, doubt and uncertainty grips the mind of the public and sell when wild hopes and speculative fever melts away all reason and common sense.
Truer words were never spoken!
Post the Coronavirus pandemic that has ravaged most sectors of the economy and plunged markets into recessions all over the world, smart investors are right now salivating and picking up real estate properties at incredible value propositions by sellers who have been devastated in their other lines of businesses. The emotional sentiment of the crowd is allowing such well-heeled investors to buy cheap now and sell for a dear price later. In India we have been through the boom period of real estate in the past and right now we are at a bust stage. This is why the current period is so full of potential and money-making possibilities. Let us see what happened in the Indian housing market during the boom periods of the earlier part of this decade and what we are experiencing today in the year 2020.
- Boom – Builders brought to market millions of housing units every year.
Today – Housing rates have fallen due to oversupply of inventory and negative buyer sentiments.
- Boom – Buyers would crowd the offices of builders and property resalers to accept their above-asking price bids. In Boom times sellers set the prices and no matter how high Buyers were more than willing to pay those sky-high prices on the assumption that any price would look cheap when compared to 12 months later.
Today – Majority of property investors and home buyers are cautious, uncertain and fearful. Responses to property launches remain muted. Just to attract more walk-in and lookers, builders are slashing prices and doling out huge discounts and buyer concessions plus incentives such the recent one to absorb stamp duty etc.
- Boom – Interest rates averaged plus or minus 6 %.
Today – Interest rates of 4 – 5 % prevail atleast for the time being.
- Boom – Inflation seemed to be under control even one looked far into the future.
Today – The GOI faces billions of dollars of deficits, borrowings and the money that has gone into fighting the Covid-19 virus is likely to push inflation (and interest rates) to much higher levels in the first half of the next decade.
- Boom – Properties would sell for 30 – 100 % above their construction costs.
Today – You can buy properties at 20 % to even 70 % below their cost.
- Boom – During times of boom, thousands of borrowers would overborrow to purchase properties they couldn’t afford leading to large loan defaults over the subsequent years. Loan appraisers, banks and financial institutions would approve any market value figure that property buyers, loan representatives and sellers wanted.
Today – High unemployment rates post Covid-19 pandemic has led banks and financial institutions to tighten credit. Due to this, two and three generation households have increased manifold. Loan representatives and appraisers must now comply with strict new regulations laid down by the RBI that inhibits collusion and reduces loan defaults in the future.
- Boom – Most property sellers could demand anything and get it.
Today – Financial distress is the norm today and there have been thousands of short sales and foreclosures since the pandemic began. This has created an abundance of properties that are being sold by desperately motivated builders and home resellers. Right now buyers and not sellers are setting the price for properties.
- Boom – Properties were being sold for far higher than the amounts that rental income would justify.
Today – Property prices have fallen to the point where rental income yields from properties especially in upmarket areas of Mumbai and other metro cities in India match or substantially exceed the income yields available from other financial instruments such as bonds and stocks in the form of interest and dividends. Property investors who are able to scoop up distressed properties from sellers and banks can expect to achieve positive cash flows within a few years after the market stabilizes.
- Boom – Lakhs of investors stretched themselves financially and overpaid to buy properties that they were ill-equipped to manage.
Today – Many of those same bullish and optimistic investors have unfortunately awoken to the reality that to be a safe investor you need to have reserves of cash and credit apart from knowledge and experience. You also need to have an effective and professional operating system and a strategy whereby you are able to attract and hold on to high quality tenants.
- Boom – Practically all economists were forecasting blue sky prosperity without any recession in the future.
Today – You cannot watch the news on any TV channel or open the newspaper without catching news reports that are talking about gloom and doom.
The world has seen many boom and bust cycles and all the above ten points that we have discussed have happened during those times. Were those so-called bad times actually good times to invest in property? Yes absolutely, there is no doubt about it! History will tell you that any investor who brought property and land during these recessionary times earned extraordinary profits for their foresight. Now, the Covid-19 pandemic-induced recession is the right time to buy a winning ticket. We have seen that history rarely repeats itself. As an investor you have been handed a rare opportunity to buy properties at below-market rates right now.
Let me also inform you that you might think the real estate market is “bad” right now. But you are mistaken. We have been receiving loads of calls from savvy and experienced property investors who have been calling us dime a dozen looking for good deals and we have and are in the process of closing many big ticket deals! Right now the Mumbai real estate market is one of the best property markets that I have ever seen in my career! Relative to income and cash flow, property prices in Mumbai are looking great. If you compare it to the risk-adjusted potential for capital gain then too, property prices in Mumbai and all over India are looking great. If you have the money what are you waiting for?! Now is the time to buy property – not when the market recovers after a year or two! Buy now or regret forever 🙁
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