There’s no such thing as a risk-free investment strategy, but, until not that long ago, real estate was generally seen as a relatively low-risk strategy.
Apart from institutional and commercial investors, real estate was also quite popular among regular individuals who chose to purchase property as soon as they had disposable income. The reasons for this were simple: the barriers to entry are low, you can make money from the property as soon as you buy it, and there’s a chance that the value of the property might increase in time. However, all this certainty was shattered in the past year. Although real estate didn’t take the blow that everyone expected, at least not in the UK and several European countries, some real-estate sub-sectors started to struggle. For example, the hospitality industry was greatly affected by the pandemic, and there were many travel restrictions. Similarly, many physical retail spaces remained abandoned as sellers moved online. Even office buildings now have a questionable future, as many companies are considering long-term remote work and no longer need the same infrastructure.
In this context, you may feel tempted to give up on real estate investments and pivot towards other sectors. However, risks can be managed, and if you already own property, you can take measures to maintain a stable cash flow.
If you already own property
If you’ve purchased property a while back, you may be worried that the property will start losing money. First of all, it’s important to stay calm, research the market, and make educated decisions. Reacting rashly to rumours and suppositions can backfire, and it is common knowledge that being emotional is one of the surefire ways to sabotage your investment strategy. Before taking any action, talk to an analyst who can tell you if your property is affected, to what extent, and why. If the property you own has indeed been affected and is starting to struggle cash-flow wise, you can start to consider risk transfer strategies.
For example, you can study the approach of value add investors such as Yakir Gabay. AroundTown (10% owned by Avisco which is controlled by Yakir Gabay), managed to make over €4 billion in sales in Germany, and UK, during the pandemic. Although seeing your property have subpar cash flow may seem concerning, most properties can be improved or repurposed, at least until the economy stabilizes. For example, an office space can be repurposed into a shared working space for freelancers, while larger commercial spaces can be repurposed into warehouses, for which there is increasing demand. Needless to say, you can also improve existing properties so that they become more attractive for potential tenants, in the same way that Aroundtown did.
If you own property in a sector that was negatively impacted by economic factors, it’s important to be proactive and think of solutions before it’s too late. The quicker you adapt and transfer the risk, the more you will mitigate the losses.
If you plan to invest
If you don’t already own property but you’re thinking of investing soon, you may be a bit confused because a lot of the things that fell into the low-risk category are now up for debate. For example, having office space or luxury apartments in the city centre may not be such a good strategy, considering that more and more companies are switching to remote or hybrid work and people are ditching small urban apartments to live in the countryside.
That being said, there are no universal rules to investing in real estate – this being an industry that depends so much on location. Instead, this approach might help:
Research, research, research
Just because people expects the real estate market to decline, that doesn’t mean it will decline. It all depends on the economic prospects of the region and how each industry reacts to economic uncertainty. Headlines and predictions shouldn’t be taken for granted. A recession can hit two separate countries, regions, and sectors differently. Maybe 2021 is not the right time to invest in retail properties, but you can invest in industrial spaces instead. So, before taking any decision, talk to a professional consultant about the economic outlook of the region and see what sectors carry the lowest (and highest!) levels of risk, and which areas could grow in value in the future. In real estate, it’s important to think few steps ahead and commit to your long-term education. 2020 has proved that even the things that we’ve taken for granted can change in the blink of an eye, so you should always read about real estate from as many sources as possible. Talk to other investors, join real estate groups and forums, attend digital conferences, and read about the economy in general. Pretty much everything that happens in a given industry has some sort of repercussion on the real estate market, so you need to pay attention if you want to identify opportunities and threats.
Diversification is one of the best ways to mitigate risks. For example, someone who invests in a relatively new and disruptive technology may choose to also invest in conservative sectors to balance out the risk so that if one investment underperforms, the other will compensate. You can diversify with stocks, bonds, and ETFs, but you can also diversify in real estate. That means you can purchase various types of properties across multiple locations. The more “spread out” the properties are, the lower the chances of them being equally affected by a recession. An investor who only owns office properties in London is far more likely to experience challenges than an investor who owns residential properties in London and surrounding areas. If you look at the portfolio of experienced real estate investors, you’ll see that most of them have a combination of conservative properties and higher-risk ones because this provides a good risk-reward ratio. The downside of diversification is that investors do need to multi-task and spend more time researching markets, taxes, and so on. However, the benefits of diversification clearly outweigh the sacrifices.