How safe is Real Estate investment?

The term investment and portfolio structuring usually makes people think of stocks, bonds and commodities. While real estate is not at the top of the investment options that come to mind, it is one of the long established investment options that investors prefer for diversification and risk reduction.

Is real estate safe?

In the wake of the Covid-19 pandemic, many people are wondering whether real estate is still a safe asset to invest into. The answer to this question is the same as it would have been before the pandemic. Real estate is safe if you make your investment after carrying out proper due diligence, it can be risky if you invest without proper due diligence.

Prior to the pandemic the real estate sector was heading in an upwards trajectory and as the economies open, a similar trend can be seen, showing no change due to the pandemic. In fact the pandemic may have triggered a boom for the real estate sector.

Overview of the real estate sector

Prior to the pandemic, the real estate sector was on an upward trajectory. The pandemic caused the sector to come to a grinding halt like other sectors. Mortgage rates fell to facilitate the home owners during the pandemic but the after effect of low mortgage rates turned out to be extremely beneficial for the real estate sector.

As mortgage rates fell, the market started showing increased demand for home purchase. This happened because the Covid-19 stimulus packages and lockdowns ended up increasing the savings of individuals, this created pent up demand which ended up driving the demand as soon as the economy opened.

Another reason for the real estate sector boom is the entry of first time millennial buyers into the market. They were driving the real estate boom prior to the pandemic and now that the economies are opening up, the millennial demand is registering again.

The work from home phenomenon has also fueled up the demand for real estate, particularly in the low density suburbs. The market is currently experiencing a boom where more homes were sold in the last year, since 2006.

According to the average residential real estate prices are up by 15% compared to the same quarter last year. It must be noted that in 2020, when the pandemic paused the economy, the real estate sector did not decline, instead it simply flatlined. The prices remained at a stand still and began to show an upward trend around about the end of the third quarter. So the real estate sector never crashed or gave negative yields.

The commercial real estate sector is showing a similar trend but with a slightly different story. The rise of remote working has triggered a transformation where many businesses are now opting to reduce their office working spaces. While one may assume that this would have created more vacant commercial office spaces, instead there has been an uptick in demand for office spaces by small businesses and startups.

In addition to this businesses are demanding office spaces that are not just suitable for remote working but also properly ventilated and more sustainable. With many developed economies creating policies to meet their net zero emissions targets by 2020, sustainability in commercial real estate has become a consistent theme.

The focus on remote working and sustainability is also affecting old buildings that do not fulfill the standards being demanded by businesses. As a result old buildings are either going for new modifications or being repurposed as apartments and living spaces.

Outlook for 2021

The outlook of the real estate sector for 2021 is largely positive and it is based on the following factors:

  • Limited supply of houses driving up demand and price;
  • Increased savings driving up demand for residential real estate;
  • Low mortgage rates and government incentives to invest are encouraging people to spend more.
  • Due to these three contributing factors, more houses were sold in the last twelve months, since 2006 and the next twelve months are expected to overtake the last twelve months.

    The most encouraging factor is that these are not localised trends. Real estate sector in almost every country is showing the same trend due to similar contributing factors. According to Freddie Mac, housing prices are set to grow at a rate of 6.6% in 2021 and by 4.1% in 2022.

    According to the currently available data, both short and long term trends for the real estate sectors look good. Prices are set to rise because of shortness of supply. The strain over the supply, complimented by rising prices in the construction and raw materials sector will keep the real estate market prices high. Read these factors together with the reopening of the economy and increased demand for both residential and commercial property. This creates a very attractive outlook for investors interested in real estate.

    Due Diligence

    However as stated earlier, never invest without carrying out proper due diligence to minimise the risk of any loss. Real estate sector can give a lot of dividends if investment is done after proper due diligence.

    Make sure that you:

  • Research the area before buying any property. Areas with a bad reputation or slow moving property prices will slow down the rate of return. Whereas areas with shorter vacancy periods, that are closer to urban centres always have the best value.
  • Carry out proper maintenance on your rental property, to keep its value high and to prevent stacking up on maintenance costs.
  • Take out relevant insurance policies to minimise the risk of loss from theft or damage to property.

  • Carry out basic tenant due diligence to avoid problematic tenants.
  • In addition to this it is important to remember that real estate is a slow moving asset. The upfront investment is higher for real estate as compared to any other asset, unless you are investing into REIT.

    Rental property income comes regularly but if you have invested into real estate to earn through capital gains or through property flipping, then you should see this as a medium to long term investment and be prepared for any unforeseen event that may either reduce or increase the value of the property.

    The real estate sector is a safe investment based on the current data and trends. Any investment made after due diligence and appropriate market research should turn into profits, as the market is showing extremely good indicators.

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