Moving Beyond Cyclical Headwinds - Taking the Long-term Approach to Real Estate Assets
August 7, 2023

In the current economic climate investment opportunities come with greater risk. Saving one’s hard-earned money in the banking system is not appealing any more. Real estate has now become more enticing as it promises greater returns. However, investing in real estate too, should be approached with some key strategies in mind.

KPMG Australia notes that the commercial property sector is seeing some demand on the back of firm economic growth and the tight labor market. However, office spaces are seeing softer demand as an avenue for investment, given that a large part of the workforce is still working from home.

The firm, in its recently released report, says that capital market conditions have been affected by rising market interest rates, which in turn is affecting commercial property markets. Real estate debt is pegged to accumulate as a result and 2025 is expected to see many of the real estate loans maturing. Investment Management firm PIMCO says in a report that of these maturing loans, at least $1.5 trillion are in the U.S., while Europe will see about 650 billion euros worth-of-loans and the Asia-Pacific is tipped to see $177 billion in maturing loans. In this backdrop, PIMCO says that they “believe in positioning portfolios for select equity investments in sectors with strong secular tailwinds, such as residential real estate, logistics, and data centers”.

It is no secret that in the US the trend to work from home is still more popular than it is in Asian countries where people are happier to return to commercial office spaces. Perhaps this is largely due to the fact that in Asian countries like Singapore and Malaysia, home spaces are relatively compact and restricted and as such, are inconducive to comfortable and efficient work. Due to this reason, although investments in commercial properties in the US have declined, they seem to be picking up in Asia.

Development projects are the way to go

Globally, however, investors are interested in more development projects, with urban development projects and housing projects being a key area of focus. Furthermore, Direct Investments in varied commercial properties are pegged as the way forward due to their versatility in opportunities, such as storage facilities, shopping malls, apartment buildings and the like.

The benefits of such commercial investments are varied. They allow for a steady cash flow due to long-term leases and in turn, a better Return on Investment (ROI).

Experts see investments in Commercial Property rising in certain parts of Europe and Asia due to the optimistic sentiment on the back of post-pandemic hybrid and work-from-office trends. Take for example the shared work spaces and serviced office spaces that have now become popular in these regions. Meanwhile globally, there has also been an increased demand for healthcare properties that can house state-of-the-art hospices and preventive medicine research offices. Further, adding on to the portfolio of real estate prospects, are shopping centers and malls. Although online retail ventures gained ground during the pandemic, now physical shops are once again becoming more appealing and thus, the demand for reasonably-priced shopping spaces is also increasing. This makes investment in shopping complexes quite lucrative.

Forbes strategizes on four key investment areas in real estate. Of these, three are especially good long-term plans. The first recommendation is that potential buyers invest in single-family homes with multi-unit zoning (housing more than one unit on a single property) to be rented out in a suburban area that has been earmarked for development. This is usually preceded by a general development of infrastructure such as roads, schools and healthcare services. As the demand for better schooling and job opportunities increase, so does the demand for housing in these areas. When considering university education, for example, investors should be looking at student accommodation as an attractive real estate investment.

The second real estate investment Forbes recommends is the purchasing of a multi-unit property close to a proposed new development of a commercial district. The benefit in this is that if one does proper research and buys the property ahead of the new development, one can make the purchase at a reasonable price and then enjoy a rewarding ROI as the property prices go up with the area’s development.

Car parks are also a worthwhile investment in such commercial areas. Forbes observes that it is key to buy such property during an economic downturn and then reap the rewards of parking tolls as city traffic increases. Seeking properties close to hospitals, shopping malls and restaurants is advised as over time, this can bring in quite a good income that can be sustained across many years.

Due diligence needed as always

However, investing in real-estate also carries a risk that many would not want to take. Experts in the field advise those looking to invest in real-estate to minimize this risk by buying existing properties rather than investing in new construction as these can be burdened by pending government approvals, etc. Although the returns may be lower, so is the risk factor. They, however, suggest that if you have the money to both buy and build, to go ahead and do both. Diversification of one’s investment is always best.

In a nutshell, look out for location when investing in real estate; areas that are being developed will bring in more people and in turn, various service providers. Also remember to avoid getting into too much debt to finance your real estate goals. With fluctuating interest rates, this is a significant risk.

New constructions and existing properties both carry their own set of risks. Assess both and make the best investment- review property deeds, maintenance costs, taxation, etc., in both.

Also do a cost-benefit analysis of renovation, and mortgaged loans in addition to an evaluation of expected cash flow from rent that takes into account repair costs and refurbishment.

Overall, real estate is a super investment in these uncertain times. Rather than tying up one’s hard-earned money in banks and financial institutions that bring little returns, investment in property is definitely wiser. However, no investment is ever completely fool-proof. Doing one’s due diligence is always necessary. Seek advice and diversify to cement the long-term benefits on such investments.

(Anouk De Silva)

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