By Jan Večerka, chief executive and founder of BrikkApp
The coronavirus is currently devastating the economies of nations around the world, with many countries attempting to precariously balance health and economic interests. As a result, nearly every industry has taken a hit as people simply can’t afford as much in light of the current crisis.
But what does this mean for the real estate market? Simply put, is it safe to invest?
Though property sales in the UK are currently down, there have already been signs that the COVID-19 situation can lead to even higher confidence in real estate investing. In fact, property is a much safer investment than you might think during this crisis. Here’s why.
Compared to other forms of investment, real estate is stable in the long-term. Stocks, for instance, carry with them a lot more volatility and are much more affected by economic crises. On the other hand, in commercial real estate, the influence of COVID-19 won’t be seen until much later because of the nature of the market.
Another benefit investing in real estate offers is the fact that, unlike stocks, they are a physical asset that you can actually use – even if the overall value depreciates, you’ll still be left with a physical asset. Real estate is simply a much safer option for those willing to invest.
Let’s look at the most recent disturbance to global economics, the 2008 financial crisis. While each market was different, most real estate markets fell between 20% – 25%, including the UK at 20%. Stocks, on the other hand, fell much more rapidly in just a few weeks and didn’t recover quickly. By 2009, the Dow Jones fell 50% – the biggest drop in the stock market since the Great Depression.
Of course, we’re still relatively early in the pandemic so we don’t have enough information to accurately predict how things will play out – we don’t know how long the economies of the world will be shut down, when people will be able to leave self-quarantine measures, and when people can begin spending money again. Therefore, it’s hard to predict exactly how the real estate market will look like in the near future.
However, we can use market reactions to previous pandemics as indicators for the future. SARS and H1N1 both caused short-term volatility in the real estate market, but the market stabilized within three to six months in each case. Even in disaster scenarios such as the current one, real estate remains relatively stable and will continue to be one of the best places to invest in.
How to lower risk when investing
Even though real estate has a good risk to yield ration, there are still several best practices – in times like this, the less risky you can make your investment, the better.
New equity projects could be a good place to invest as, if property prices go down, you stand to receive solid returns on your investment. The best bet is to search for investments that are safer and to invest in several low-risk properties through crowdfunding.
Debt investment opportunities are perhaps the safest form of investment at the moment. While you’ll get a much lower return on investment than other types, there’s also a much lower chance that you’ll lose money. During crisis scenarios such as this one, low risk is always the preferred option. Mezzanine debt, which is essentially between equity and debt, offers higher risk than senior debt but is still more stable than most equity investments.
We expect to see banks significantly reduce their financing of new developments, meaning there is a new opportunity for alternative financiers to fund properties. Central banks are already announcing they will be lowering interest rates and interests on savings accounts.
Future of real estate investing
Crisis changes things: With every crisis, society shifts to become more productive. This is the same within any industry. Economic crises tend to have long-lasting effects on the way people approach decision-making. When it comes to real estate, we won’t be able to see the exact effects of COVID-19 for months, if not years.
In response to the digital age, the general trend in every industry is a need to go online and form a direct relationship between customer and product. The same trend has been occurring in the real estate industry, where more people have been choosing to get rid of the middleman and invest directly online.
Direct online investment, beginning in 2012 in the United States and rising rapidly in the rest of the world, is likely to only continue to grow during the next few years. While still relatively new in the UK, the country already hosts over 40 real estate crowdfunding platforms – and this is only expected to grow.
Commercial real estate is struggling to adapt to the effects of social distancing, with COVID-19 effectively exacerbating a trend that was already advancing rapidly. Also, with people less likely to hold significant capital than before, real estate crowdfunding is a much safer investment. When the smoke clears after COVID-19, crowdfunding will likely hold a higher share of the real estate market.
Four months into 2020 and nearly the entire world has been forced into some kind of economic hardship. However, for those with the capital to spend, real estate is one of the safest forms of investment during these difficult times.