Should I Invest in Real Estate in Today"s Market?
FALL 2010 UPDATE What follows are some random thoughts on the Income Property marketplace as I see it, and from what I've heard on the street.
By no means am I an economist.
And I don't think that anyone can accurately predict the future.
The Commercial Property Market is very dynamic and constantly changing.
But it is interesting to hypothesize and to see how close we can come to predicting the future.
Use these thoughts as an add-on to what you've already experienced and are currently experiencing.
The more views you can get, the better you will be at understanding this dynamic marketplace and be able to make up your own mind as to how the future will unfold.
With that in mind, here goes: I've been told by several economists and market pundits that the current economic climate can be characterized as an "Atypical" Recession with an "Atypical" Recovery.
Okay, but what does this really mean? Obviously, in simple terms, it basically means that we are not in your typical recession and recovery scenario.
Although we've been seeing an improving economic recovery since the market meltdown of 2007-2008 there are signs out there that this recovery is slowing down, possibly even on the verge of faltering, and the recovery is definitely becoming an uneven one.
Globally, all is not well.
Distinct markets have their own problems such as in Japan where they are possibly looking at a deflationary environment, and everyone is aware of the U.
S.
problems where the housing market is still on its rear end.
However, we can generalize by saying that we are in a low growth environment with significant debt loads both for the government as well as for individuals.
Overall, according to these experts, we can expect to see low consumer demand out there, which will eventually translate to excess capacity.
The economies of developed countries will continue to go nowhere.
The market pundits say that because the recovery is atypical it is not going to work itself out in just a year or two.
Disinflation has been mentioned as a possibility.
Not exactly a rosy picture.
The US has just recently announced the implementation of Quantitative Easing whereby the Federal Reserve will go out and buy Treasuries.
This means the US will be printing a lot of money in order to do this.
I guess Ben Bernacke figures that he can print his way out of a recession.
Japan is also set to start printing Yen.
You're going to start seeing currency destruction all over the place as countries begin playing fast and loose with their currencies.
This portends massive inflation down the road.
The stock market is actually predicting high inflation down the road as is evident in the recent runup in the price of gold (investors are putting their money in gold so it doesn't erode when inflation starts up).
As I write this article the headlines are rife with the new highs that gold is hitting.
Some other thoughts: Investment advisors have told me that with all of this uncertainty, investors out there are searching for certainty.
Therefore there is a huge demand for safety, i.
e.
safety of capital along with the requirement for income and yield (because of what the investor/consumer has gone through in the last 2-and-a-half years).
There is a huge allocation shift going on here.
Remember
Therefore the consumer/investor wants and needs to reduce risk in their portfolios.
Therefore the Demand & Need for Income! Savings have been impacted significantly (due to the recent setbacks in the housing and stock markets).
People are living longer yet retiring earlier.
Those people retiring have been shocked to learn that their retirement income has been impacted to the point where they need to return to the workforce.
People are looking for SOLID RISK-ADJUSED RETURNS.
People are going to save, not spend! Investors are now looking for Stable Cash Flows, Solid Balance sheets, & growing dividends.
So what does the future hold? My best guess and personal viewpoint is that we are halfway through a 3-4 year deflationary period that will be followed by high levels of inflation.
Therefore one needs to find BOND substitutes that will do well in an inflationary environment (you will need to grow your top line while your cost of capital increases).
Investments that can be acquired at a good value, that can provide stable dividends, and dividends that can be increased over time will be the ones that investors seek out.
In other words: BACK TO THE BASICS OF INVESTING.
Where to look for these investments? My answer is: BRICKS & MORTAR INVESTMENTS! Specifically Investment Real Estate.
Why investment real estate? IT'S A SAFE ASSET.
Here in Canada investment real estate is viewed as a Safe Asset Class (SAC), however it can be turned into an unsafe one (ie.
the US Housing market where valuations were pie in the sky, mortgages were offered at greater than 100% of the inflated underlying value, and the mortgages were non-recourse to boot!).
IT PROVIDES STABLE CASH FLOW STREAMS THAT CAN GROW OVER TIME.
Well-positioned real estate will always be in demand.
If bought at a fair value then it can provide years of stable cash flow streams.
Being well-positioned would also bode well for future increases in the rent, as well as future appreciation of the property itself.
IT'S INFLATION PROTECTION.
Well positioned investment real estate provides an excellent hedge against inflation.
As prices in the marketplace increase so do the underlying rental rates.
Thus your cash flow increases as inflation increases.
We all know that the price of a property is a reflection of the income it produces.
Increase the income of the property, and you increase it's value.
ALL-TIME LOW COMMERCIAL MORTGAGE RATES.
Any historian of commercial mortgages will know that we are in a period of all-time low commercial mortgage rates.
The time has never been better to secure a great rate for your investment property.
The market pundits are predicting that these rates will probably be around for the next couple of years.
Take advantage of these great rates now, or kick yourself in later years for failing to act.
According to the experts, the most successful strategy moving forward will be: "Investments that are REASONABLY PRICED that have the ABILITY TO PAY CASH DISTRIBUTIONS & THE ABILITY TO GROW THOSE CASH DISTRIBUTIONS.
NEW MANTRA: "Safe Income at a reasonable price" (SIRP) Equity investors have gone through the ringer twice.
They need to get away from those volatile price swings.
They've had enough of the proverbial flyers.
Again my answer as to where to invest is in well-positioned real estate acquired at a good value.
These types of properties will be your bond substitutes that will do well in an inflationary environment.
They produce Stable Cash Flow streams that can grow over time - and provide you with Inflation protection.
Remember you need discipline in not taking on massive leverage (say a maximum 50% Loan-To-Value Ratio).
The focus needs to be on value.
Buying well-positioned investment real estate at a good value will give you the best chance for growing your cash flow streams over time as well as increasing your equity for investors.
The market analysts tell me that Canada, Australia, and the Scandinavian countries all have good investment real estate fundamentals What kind of returns can one expect? We are seeing a 5-8% Return for North America Income Property.
In Canada specifically we are seeing an 8% return.
This is based on a 6% Yield on an Income Basis and a 2% Appreciation & Cash Flow Growth Yield.
For all of the above reasons I feel that now is the time to invest in real estate.
There are various ways to in which one can invest in Investment Real Estate.
You can start off small by purchasing Units of a publicly traded Real Estate Investment Trust or REIT as they are referred to (be sure to do your homework or seek out an investment advisor before investing).
If you want a larger slice of the pie, you may want to look at private Real Estate Syndications whereby your money gets pooled with others to buy a quality asset that would otherwise be out of your reach.
The remaining option would be an outright purchase of a property on your own.
By no means am I an economist.
And I don't think that anyone can accurately predict the future.
The Commercial Property Market is very dynamic and constantly changing.
But it is interesting to hypothesize and to see how close we can come to predicting the future.
Use these thoughts as an add-on to what you've already experienced and are currently experiencing.
The more views you can get, the better you will be at understanding this dynamic marketplace and be able to make up your own mind as to how the future will unfold.
With that in mind, here goes: I've been told by several economists and market pundits that the current economic climate can be characterized as an "Atypical" Recession with an "Atypical" Recovery.
Okay, but what does this really mean? Obviously, in simple terms, it basically means that we are not in your typical recession and recovery scenario.
Although we've been seeing an improving economic recovery since the market meltdown of 2007-2008 there are signs out there that this recovery is slowing down, possibly even on the verge of faltering, and the recovery is definitely becoming an uneven one.
Globally, all is not well.
Distinct markets have their own problems such as in Japan where they are possibly looking at a deflationary environment, and everyone is aware of the U.
S.
problems where the housing market is still on its rear end.
However, we can generalize by saying that we are in a low growth environment with significant debt loads both for the government as well as for individuals.
Overall, according to these experts, we can expect to see low consumer demand out there, which will eventually translate to excess capacity.
The economies of developed countries will continue to go nowhere.
The market pundits say that because the recovery is atypical it is not going to work itself out in just a year or two.
Disinflation has been mentioned as a possibility.
Not exactly a rosy picture.
The US has just recently announced the implementation of Quantitative Easing whereby the Federal Reserve will go out and buy Treasuries.
This means the US will be printing a lot of money in order to do this.
I guess Ben Bernacke figures that he can print his way out of a recession.
Japan is also set to start printing Yen.
You're going to start seeing currency destruction all over the place as countries begin playing fast and loose with their currencies.
This portends massive inflation down the road.
The stock market is actually predicting high inflation down the road as is evident in the recent runup in the price of gold (investors are putting their money in gold so it doesn't erode when inflation starts up).
As I write this article the headlines are rife with the new highs that gold is hitting.
Some other thoughts: Investment advisors have told me that with all of this uncertainty, investors out there are searching for certainty.
Therefore there is a huge demand for safety, i.
e.
safety of capital along with the requirement for income and yield (because of what the investor/consumer has gone through in the last 2-and-a-half years).
There is a huge allocation shift going on here.
Remember
- There have been 2 massive bear stock markets within 10 years
- We have seen the biggest housing collapse in US history (US consumers have seen their single biggest asset severely impacted as well as their sense of security)
- Job destruction in the US has been the greatest since the depression.
Therefore the consumer/investor wants and needs to reduce risk in their portfolios.
Therefore the Demand & Need for Income! Savings have been impacted significantly (due to the recent setbacks in the housing and stock markets).
People are living longer yet retiring earlier.
Those people retiring have been shocked to learn that their retirement income has been impacted to the point where they need to return to the workforce.
People are looking for SOLID RISK-ADJUSED RETURNS.
People are going to save, not spend! Investors are now looking for Stable Cash Flows, Solid Balance sheets, & growing dividends.
So what does the future hold? My best guess and personal viewpoint is that we are halfway through a 3-4 year deflationary period that will be followed by high levels of inflation.
Therefore one needs to find BOND substitutes that will do well in an inflationary environment (you will need to grow your top line while your cost of capital increases).
Investments that can be acquired at a good value, that can provide stable dividends, and dividends that can be increased over time will be the ones that investors seek out.
In other words: BACK TO THE BASICS OF INVESTING.
Where to look for these investments? My answer is: BRICKS & MORTAR INVESTMENTS! Specifically Investment Real Estate.
Why investment real estate? IT'S A SAFE ASSET.
Here in Canada investment real estate is viewed as a Safe Asset Class (SAC), however it can be turned into an unsafe one (ie.
the US Housing market where valuations were pie in the sky, mortgages were offered at greater than 100% of the inflated underlying value, and the mortgages were non-recourse to boot!).
IT PROVIDES STABLE CASH FLOW STREAMS THAT CAN GROW OVER TIME.
Well-positioned real estate will always be in demand.
If bought at a fair value then it can provide years of stable cash flow streams.
Being well-positioned would also bode well for future increases in the rent, as well as future appreciation of the property itself.
IT'S INFLATION PROTECTION.
Well positioned investment real estate provides an excellent hedge against inflation.
As prices in the marketplace increase so do the underlying rental rates.
Thus your cash flow increases as inflation increases.
We all know that the price of a property is a reflection of the income it produces.
Increase the income of the property, and you increase it's value.
ALL-TIME LOW COMMERCIAL MORTGAGE RATES.
Any historian of commercial mortgages will know that we are in a period of all-time low commercial mortgage rates.
The time has never been better to secure a great rate for your investment property.
The market pundits are predicting that these rates will probably be around for the next couple of years.
Take advantage of these great rates now, or kick yourself in later years for failing to act.
According to the experts, the most successful strategy moving forward will be: "Investments that are REASONABLY PRICED that have the ABILITY TO PAY CASH DISTRIBUTIONS & THE ABILITY TO GROW THOSE CASH DISTRIBUTIONS.
NEW MANTRA: "Safe Income at a reasonable price" (SIRP) Equity investors have gone through the ringer twice.
They need to get away from those volatile price swings.
They've had enough of the proverbial flyers.
Again my answer as to where to invest is in well-positioned real estate acquired at a good value.
These types of properties will be your bond substitutes that will do well in an inflationary environment.
They produce Stable Cash Flow streams that can grow over time - and provide you with Inflation protection.
Remember you need discipline in not taking on massive leverage (say a maximum 50% Loan-To-Value Ratio).
The focus needs to be on value.
Buying well-positioned investment real estate at a good value will give you the best chance for growing your cash flow streams over time as well as increasing your equity for investors.
The market analysts tell me that Canada, Australia, and the Scandinavian countries all have good investment real estate fundamentals What kind of returns can one expect? We are seeing a 5-8% Return for North America Income Property.
In Canada specifically we are seeing an 8% return.
This is based on a 6% Yield on an Income Basis and a 2% Appreciation & Cash Flow Growth Yield.
For all of the above reasons I feel that now is the time to invest in real estate.
There are various ways to in which one can invest in Investment Real Estate.
You can start off small by purchasing Units of a publicly traded Real Estate Investment Trust or REIT as they are referred to (be sure to do your homework or seek out an investment advisor before investing).
If you want a larger slice of the pie, you may want to look at private Real Estate Syndications whereby your money gets pooled with others to buy a quality asset that would otherwise be out of your reach.
The remaining option would be an outright purchase of a property on your own.
