Real Estate

What is My Safest Real Estate Investment Strategy During Covid-19?

May 29, 2020
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With mortgage interest rates at historic lows, and heightened demand as investors flee the stock market, Cayman Islands real estate investors with quality portfolios could be well positioned to ride out the uncertainty.

Although the real estate market has historically fluctuated over the years through various booms and busts, the overall trend, certainly in the last 30-odd years, has been for an increased investment in real estate and I see no reason for this trend to reverse as we navigate our way out of the current coronavirus pandemic.

People want historical clues to help them put this latest crisis into context. There is a lot of talk about 2008’s global financial crisis because of the severity of that market shock, but it’s different. In 2008 the real problem was created by greed and a lack of oversight in the banking industry, resulting in excessive leverage. The solution was a massive rescue package to re-capitalize them.

But this time the issue isn’t financial. Cutting interest rates isn’t going to do anything because interest rates are already at or near zero. My best guess right now is that we’re looking at a recession – technically two quarters of negative growth – but all bets are off as to how long it will actually be.

It is usually a recession that causes investors to abandon the stock market and shift capital into real estate. When stock markets suffer, the real estate industry typically flourishes. The probability that we will see at least two more years of very low interest rates is likely to accelerate this move. 

Across the world, consumer confidence is at or near record low levels. Many jobs are either lost or under threat and many people do not have the stomach to make major spending decisions such as buying or moving house.

So where does this leave the property investor? One thing we can be sure of is the balance of supply and demand has tilted suddenly and dramatically in favor of buyers and I expect a buyer’s market in Cayman Islands real estate for sale for the immediate future until an economic recovery takes root.

With mortgage interest rates dropped down to historic lows, coupled with heightened demand due to investors fleeing the stock market, and a tight housing supply, investors with quality portfolios could be well positioned to ride out the uncertainty.

This creates opportunities for people who have some cash. Signs are already emerging of selective purchases of high-grade real estate stock. If you are an investor with little or no debt and cash in hand, this is a good time to push forward. It is a buyers’ market, so good assets are out there.

High levels of exposure to debt sink a lot of investors in uncertain times and it’s hard to see how real estate investors with high debt will emerge from 2020 in a good position. If you carry a lot of mortgages and loans, my advice is to clean out your portfolio by selling your least profitable assets, in the least profitable sectors, taking a possible hit, but reducing debt and exposure. 

Optimistically, there will likely be enough pent up demand to see positive growth by the end of the year as lockdowns are removed and the real estate market resumes activity. The recession could then be over. 

A change of focus is possible in the retail and commercial real estate market, however, if recent trends continue. If these types of properties become less attractive due to retailers moving online, and employers following a shift to working from home, converting empty offices and shops into apartments could accelerate.

Analysts in the real estate industry are cautiously optimistic for those who invest in Cayman Islands property. They say real estate will continue to offer good risk-adjusted returns during this crisis, just as it has in earlier ones.

Owning real estate makes a great hedge against inflation right now, and it’s worth at least considering diversifying into some rentals again, with caution as the watchword. Success will depend on selecting rental properties in mid-range popular areas that attract reliable tenants. Your choice of property management agency is going to be crucial here.

A good management agency typically doesn’t cut corners when screening for the best tenants and if your properties are in the best neighborhoods you should be feeling safe. Good, reliable tenants will be very helpful in an uncertain economy.

There may not be a significant drop in home prices generally, but I do think there will be some opportunities for distressed sales, particularly as debt-ridden investors clean out their portfolios.