After this Coronavirus crisis and lockdown, what will be tomorrow’s challenges for real estate market ?
It will be at the time of investment!
It is accepted from now on that the crisis that we are navigating through will have a considerable impact on our society over the short-, medium- as well as long-term. That which seems at first glance purely to be a sanitary crisis has rapidly mutated by its spread into an extremely deep economic and structural crisis.
No-one would presently dare to state with precision what will be the consequences of the voracious progress of the newly-infamous “COVID-19”. However and even if the future is still far too blurred to speculate, all seem to be agreed on one point: a return to the past is impossible. Real Estate and lockdown, what are the consequences of such a mixture ?
Our ways of consumption and our habits are going to change fundamentally. It will be the same for our view of investment overall and this will necessarily have an effect on the property sector.
In this post, we shall strive as best as possible to establish the probable general outline of the “post lockdown” scenario for the real estate investment sector. We shall attempt to recommend to you what strategy to adopt, for if several traffic lights seem to be on green, there is a strong chance that the period to come will prove to be a real opportunity for the investor. Yet for how long?
Even though there may be numerous niches in property upon which the current crisis will have a devastating effect and for which we can only discourage the investor from getting involved in, we shall see at a later stage that real estate investment in its purest form, namely standard residential, could boast a more than promising future.
It has been accepted from now on that growth in the real estate market will contract over the past year and the one to come. Experts are openly speaking of a market correction in the order of 3 to 4% for 2020 and a drop of +/- 2% for the 2021 year, giving a total contraction of +/- 6%. This will be expressed very clearly by the inevitable passage to a re-balancing phase by the market between supply and demand.
Up to now, nothing very encouraging in regard to the future is emerging. Yet, where some may see ill omens, the investor endowed with financial vision will perceive a true opportunity! In fact, three themes are there to be exploited by the investor, who wishes to enter the real estate market after this long lockdown or at least, seek growth in his portfolio:
- Towards a new balance in the market.
- A correction in sale prices.
- An ever wider choice of potential tenants.
Towards a new balance in the market:
This balance may be seen as accelerating due to two opposing effects, which would sometimes veer towards an increase and sometimes towards a decrease. Over the short-term, we are at risk of seeing supply briefly becoming more abundant than it was before the Coronavirus crisis, to which could be added “general” demand in a slight decline. Effectively, it is likely that certain assets that were not intended to be disposed of return to the market despite it all.
Certain owners, more affected by the crisis than others, must judge their portfolio more than they previously intended.
In parallel, numerous first-time buyers, who harboured ambitions of acquiring their first home, are presumably going to postpone their projects until better times and remain tenants for several years yet. Even though at first glance this prospective situation does not appear to be good news, in reality, it is completely the opposite.
In fact, do not forget from whence we came and which standards pertained over recent years: A market in total imbalance, for which its rules were dictated by an enormous demand for an extremely limited supply. An aggressive market pitting into competition a very large panel of investors, all driven by the unique need to acquire at all costs and as such, set against ever lower interest rates.
Thus, like dearly-sought rain beating down on dry and arid soil, the solution (within reason) of new opportunities could only relieve the pressure which arrived very gently at its peak. Henceforth, the investor wishing to acquire a new asset would evolve in a better climate with regard to the spectrum of widening possibilities, being positively embellished.
A correction in sale prices:
It is quite natural that this re-balancing is going to impact upon prices in the market. If supply increases and demand decreases, nothing else than a correction in the prices demanded could occur. Once more, this could not be considered as a windfall for the investor.
Acquiring a property with the aim of keeping it and making a return over the short/medium term must not be at the expense of the added value, which could be hoped for over the medium/long term.
On these grounds, a significant fall in sale prices should be an opportunity to be embraced, if the acquisition is made with an eye to building assets.
Furthermore, for those who are already owners and foresee a projected loss of capital, it is useful to recall the difference from numerous other financial products, that property grows in value over time. Investment projects often come to fruition 10 or 15 years hence. Suffering a correction from now on over one or two years is regrettable, but not catastrophic.
An ever wider choice of potential tenants:
Seeing property as an investment product cannot be done without bearing in mind the opportunity serenely to take advantage of the fruits of capital employed. Any market in which the ability to nurture yield correctly is limited is clearly not a sector to be exploited. From this viewpoint, and besides the possibilities that exist in terms of added value, the investor should always be attentive to the property being able to respond correctly to the greatest demand on the rental market.
Therefore and if you work on the principle of numerous households, who have the objective of acquiring their first asset, remaining on the substitute bench for several years more, one can only deduce that they are certainly going to benefit from the quota of potential tenants. Even though this rapidly expanded demand will subside sooner or later, it should be considered as a good omen for those acquiring a residential property in the months to come.
On the basis of this statement, one can only predict a bottoming-out, which could prove to be profitable for the opportunists among us.
However, it is to be expected that this accumulated windfall period will quickly subside.
History has taught us that several rallies after an economic crisis, whether as a result of a stock market crash or flutterings in the real economy, are always followed by a long period of slow and hesitant growth, or a decrease in savings said to be “a precaution” (of which property forms an integral part) sees itself intensifying.
It would also be right to think that the conservative attitude of tomorrow’s investors would serve to cause them to throw themselves massively into property, which would have a further impact upon the stability of the market. Furthermore, the “continual*” fall in market prices could see itself boosted by interest rates, which are only stagnating (even if a small rise made itself felt) and would reinvigorate the spirits of avid first-time property buyers.
Finally, and in the knowledge that Belgian savings accounts account for a little less than 300 billion Euros, one could fear that a not inconsiderable share of this astronomical sum may be injected into the real estate sector after the lockdown.
In conclusion, whereas the majority of sectors are straining to recover their previous form, property well and truly risks taking an ever greater place in the assets of Belgians. However, in advance of such a gold rush and already much desired, one could hope for a period of calm supported by good opportunities.
*In our view, this fall predicted by the experts coming from banking sources will only be marginal and for a very short period.
