The wheel of history teaches us that, as in nature, in real estate too there are four seasons. In recent years the wheel of seasons in real estate indicates that we are in winter. The winter season in real estate is a complex season made up of high interest rates, inflation, market conditions, supply and demand challenges, and more. On the one hand there is a decline in market activity, and on the other hand there are investors who are in fact looking for opportunities and know how to exploit the low competition to find properties at attractive prices. The past teaches us that alongside the challenges and risks that lurk, such times have always played into the hands of experienced developers with available capital.
As long as interest rates were almost zero, developers, investors and property owners enjoyed almost unlimited access to sources of capital, mainly under the auspices of banks and financing bodies, who generously spread out funds and contributed their share to the supply of available and cheap capital. But about three years ago, with the start of a series of interest rate hikes around the world as part of the fight against the inflation that erupted, reality was turned on its head: money became expensive, limited and far less accessible.
Financing bodies tightened their belts, sources of liquidity dried up, the cost of debt rose, the flow of investments slowed and cash flow difficulties began to surface in all parts of the market. The combination of things, and the vacuum that was created, mainly strengthened the power of the veteran and experienced investment managers who hold reserves of liquid cash in real estate funds. The reason for this lies in the fact that real estate transactions and projects require especially large sums, and the vast majority of those transactions are based on taking loans and mortgages, which are priced in accordance with the interest rate.
The equation is simple: the higher the financing costs, the lower the available return. Besides this, when the ability to take out a loan is no longer within the reach of many, there is also a decline in the volume of transactions in the market - and from there the path to price declines is short. But this has another, no less significant effect. Developers, investors and property owners who bought and invested in real estate in a low-interest environment, when financing costs were remarkably cheap, are in part falling into distress in the recent period.
This is the place to note that the recent interest rate cuts in the US do not herald a sharp turning point in the real estate market, since this is still a relatively negligible easing against an interest rate environment that remains high in the US, and moreover it is possible that the rate cut comes too late for many of the borrowers.
However, it seems that it is precisely the complex situation and the decline in the volume of transactions in the market that will create, over the coming period, the conditions for a supply of exceptional investment opportunities, ones that can be found mainly in times of slowdown, crisis and trough. Markets experiencing price declines can offer attractive investment opportunities (for example, cities in the US experiencing demographic decline or economic difficulties). Look for properties offered for sale at below market price (for example, an old office building in central London that can be converted into a boutique hotel). Such properties can be the result of the seller's financial distress or simply a lack of awareness of the property's true value. However, it is important to carry out comprehensive due diligence and make sure that the declines are temporary and not a lasting trend.
So what do you do?
- Follow macroeconomic trends in the markets in which you invest. Use market studies, reports and information from reliable sources to understand the direction in which the market is moving. Knowledge is power.
- Be flexible and adapt your strategies to changes in the market. For example, if mortgage interest rates rise, consider buying properties with cash or postponing the investment. If you have equity, prefer to use it to buy today from property owners who are in distress.
- Use professional advice in the field of taxation and implement strategies to reduce tax liability, such as using offshore companies or building an efficient investment structure.
- Build a detailed business plan that includes a forecast of income and expenses. Take into account all property-related expenses, such as taxes, fees, maintenance and insurance. Make sure to keep cash reserves in case of unexpected expenses or a decline in income. Avoid taking on unnecessary debt and aim to reduce existing debt. Rising interest makes debt more expensive and makes managing cash flow harder.
International real estate investments can be profitable, but in these times they require careful planning, prudent risk management and identification of opportunities. By adhering to the points mentioned and relying on suitable professionals, you can increase your chances of success.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית