Why you shouldn't rush into investing in cheap real estate
Winston Churchill once said, "never let a good crisis go to waste". As COVID-19 continues to ravage certain asset classes, fund managers and their clients are moving quickly to exploit what could be a once-in-a-generation disruption of standard investment models.
At this point in the cycle, the real estate market presents a target-rich environment. While residential sales have rallied well, especially in the capital cities, other categories such as commercial and retail property are taking a hammering.
But no opportunity is without risk, so it's worth taking a deep breath before getting swept up in the rush for cheap real estate assets.
Over the course of 2020 and into 2021, owners of income-producing assets were forced to sell at a discount when they found themselves with unsustainably high amounts of leverage while income has slowed. Meanwhile, we've seen some prudent lenders tighten access to credit increasing inflationary looms and central banks signal future rate hikes.
The trickle-down from these disruptions has exposed fresh toe-holds in the market for enterprising investors.
On the whole, it's a great time to be investing in Australian assets, particularly while international markets remain quite volatile due to the unpredictable nature of COVID-19 outbreaks.
So how do you identify a real estate bargain that could pay off?
Investors should ask themselves the following questions:
- Irrespective of the current crisis, would you want to own the asset in the longer term?
- Which sectors will be repriced in the short to medium term, and present buying opportunities?
- Expecting uncertainty to continue, does the return represent a good balance with risk and are you protected from any downsides?
- Is it a quality asset that is more likely to recover well from a crisis?
- Does the investment have a clearly defined exit strategy?
There are many pertinent risk factors to consider before rushing in to snap up a bargain. No matter the attractiveness of the asset or size of the opportunity, completing detailed due diligence is a fundamental first step.
It's also necessary to understand how the asset came to be devalued in the first place, such as banks being less willing to lend, and if those market conditions are likely to be fleeting or long-term,
The true window of opportunity for these types of investment strategies is only starting to open up and there is still plenty of scope to capitalise on this crisis. Investors just need to be willing to think their way through each opportunity and take the time to make sound, emotionless decisions based on the facts.
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