Following the COVID-19 economic shake-up witnessed in 2020, uncertainties in the real estate sector had not been so elevated since the 2008 financial crisis. Considering the world is facing the first global pandemic in a century, investing becomes an increasingly difficult task, especially for those with limited capital and investing. However, several important factors need to be taken into account, some that will very likely determine the outcome of a real estate investment.
The favorable/unfavorable scenarios for investing in rental properties
Whether the outcome for rental properties will be favorable or unfavorable depends on a series of factors that are highly influential for the industry and the broad economic activity. As a result, interest rates, government spending, the pace of economic recovery, and the potential for growth in a real estate area must be put into question.
Faced with a major economic backlash, central banks around the world had been cutting interest rates at a fast pace since the first quarter of the year. This had put pressure on mortgage interest and had supported further spending, even on rental properties.
Now that rates are near or at all-time lows, real estate investors are more incentivized to buy properties, rent, and sell later at a higher valuation. “Even though some investors still worry about the economic impact, interest rates are acting as a major tailwind for the real estate recovery”, according to Ofir Eyal Bar, real estate investor with stakes in Western European countries and South Africa.
The only risk for interest rates is inflation. However, it will need to overshoot and remain at elevated levels for an extended period of time to make central banks start normalizing their monetary policy. Already the FED announced a major shift towards average inflation targeting and some analysts other central banks will need to follow suit, to keep their currency weak as compared to the US dollar.
As the impact of monetary policy decreased, fiscal spending had become the main engine for sustaining economic activity. Even though governments borrowing money to keep the economy going is not sustainable in the long run, it can act as a bridge until things get back to normal, after the pandemic will be part of the past.
For now, governments are committed to spending as much as its needed, but stretching too far in the future will raise more questions on how the already massive global debt-to-GDP will be financed. Government spending will be supportive in the near term for the whole economy and the real estate industries across the world, as well.
Whether this is the right time to invest in rental properties will also be dependant on the pace of economic recovery. “The current consensus is for a V-shaped recovery of the global economy, but as the favorable scenario is priced in, there’s a lot of room left for disappointment”, according to Ofir Bar, who advises real estate investors to be cautiously optimistic in the near-term.
The estimated for the economic damages had been exaggerated on the downside by most of the analysts, as the actual figures managed to surprise on the upside. The second quarter of the year had been better than expected in most of the countries that imposed lockdowns. Still, there are plenty of risk factors looking forward (stronger second wave of the pandemic, no cure for the disease, debt crisis) that can undermine the current path to recovery.
Potential for growth
Despite the global picture, there will be always real estate areas performing below or above the averages. As a result, investors have the difficult task of finding where is the greatest potential for growth in rental properties. Countries that had been hit the least by the pandemic, have low unemployment, pending infrastructure projects, efficient leadership, and healthcare systems, are very likely to have an impressive performance in the short to medium-term horizon.
Whether people like it or not, the evolution of the pandemic will dictate how most of the economic sectors will perform, including the rental properties areas. Investors should be keeping a close eye on all major good or bad news because it will have a major impact on the broad risk appetite.
An acceleration in new cases will force stricter social distancing measures and even in the absence of a new lockdown, that will definitely weigh on the pace of the recovery. On the other hand, a cure being found and approved, at first for emergency use and later in 2021 for the broader public, combined with stable new COVID-19 cases will keep the recovery going.
There are multiple factors to consider when it comes to investing in rental properties and investors will carry the hard task of monitoring developments closely and then making investment decisions based on the feedback they get.