Traditionally, real estate has been a rock solid investment during most times and one that consumers and investors alike can relate well too. Recently, however, prices on properties world wide have dropped significantly and apart from the distress it gives homeowners, who find themselves unable to meet their mortgages and/or sell their houses, it has thrown into doubt to investors, private as well as institutional, the validity of real estate as an investment.
This post looks into what the experts say and expect moving forward.
Eric Ames from Seeking Alpha has this to say :
…..real estate appreciation is not a reliable wealth builder. No one can predict which way prices will go next, and people should not rely on appreciation estimates when evaluating the worth of an investment opportunity. Investors should look instead at the cash flow numbers. Cash flow is something tangible, and it doesn’t require a call into the psychic hotline to predict.
In addition, properties that command better cash flow typically do not drop in price as much during market fluctuations. Dramatic price drops happen when people sell in desperation. They have to get out from under the house, so they drop the price until it sells. What motivation does an investor have to drop the price on their rental house if it is bringing in money every month? The answer is that they have very little motivation to do so, and so they probably won’t.
So while I agree that property appreciation shouldn’t be counted on anymore, that doesn’t make real estate a bad investment. Primary residences and rental properties are two entirely different animals and should be looked at independently when evaluating the merit of real estate as an investment. Investors can still make great money in the real estate market if they focus on the right things.
Mr Ames concludes vis-a-vis the US Housing Market that:
Is it the best path to wealth for Americans? I think the answer to that question is yes and no. I think it can be for the right person, who is willing to put in the time and energy. For the person who tries to cut corners, real estate investing is likely to be a painful and costly experience.
Bloomberg has an updated view and insight into Dubai’s troubled real estate scene which paints a very dark picture and perhaps future for Dubai itself, far beyond its real estate investments:
The property bubble in the desert emirate, home to the world’s tallest building, most expensive hotel suite and largest manmade islands, is bursting as scarce credit and slumping oil prices have international investors scurrying to dump assets. That may shatter Dubai’s goal of creating a sustainable economy by building the Persian Gulf hub for finance and tourism, forcing it to depend on oil-rich neighbor Abu Dhabi for financing.
“Dubai is more precarious than it has ever been,” said Christopher Davidson, author of “Dubai: The Vulnerability of Success” (2008, Columbia University Press). “If the property industry collapses in Dubai, it will be finished. Dubai’s relative autonomy will come to an abrupt end.”
The emirate’s push into luxury property developments and tourist attractions was diversification on “paper sand,” said Davidson, a professor of Middle Eastern affairs at Durham University in the U.K.
The same article goes on to conclude that Dubai’s investment honeymoon is over :
Real-estate values surged fourfold over the past five years, fueled by a supply shortage and an influx of expatriates. Rising commodities prices drove inflation, which accelerated to a record 11.1 percent in the U.A.E. last year. Dubai opened its property market to foreign investment in 2002.
Borrowers tapped mortgages for as much as 90 percent of a property’s value to buy homes on the manmade fronds of the Palm Jumeirah and villas with gardens or golf-course views in developments such as Emirates Hills, The Springs and The Lakes.
Now the credit crunch is coming to Dubai. It’s being aggravated by oil prices that have tumbled 68 percent since reaching a record $147.27 a barrel on July 11.
That will mean less interest in buying third or fourth homes in Dubai, said Gabriel Stein, a director at London’s Lombard Street Research, which provides economic analysis.
“There are bound to be white-elephant developments,” he said. “If it was built on the premise of ‘build it and they will come’ then that will now turn out to be a mistake.”
Banks are tightening lending or freezing it altogether. Amlak Finance PJSC, one of the U.A.E.’s biggest mortgage lenders, said Nov. 19 that it had suspended new home loans. London-based Lloyds TSB Group Plc stopped offering mortgages for apartments in Dubai on Nov. 11 and reduced the amount it will lend for villas to 50 percent of the price, from 80 percent.
The cost of a seven-bedroom villa on Palm Jumeirahdropped to as low as 19 million dirhams ($5.2 million) last month, from 30 million dirhams in September, according to the Dubai unit of German real-estate company Engel & Voelkers AG.
Matt Woolsey gives a quick global round up of a dire real estate scene in his latest article :
The sun isn’t shining for homeowners in Malaga, on the Costa del Sol.
Foreign buyers have stopped purchasing homes site unseen. Vacation home-seeking Spaniards, heeding the government’s warnings about a recession, have also pulled back. That leaves 54,000 vacant and unsold new properties throughout Malaga province, according to the Spanish Ministry of Housing. That’s 34,000 more than in all of boom-bust capital Phoenix, Ariz., based on Trulia.com figures pulled from Arizona’s multiple listing services, despite Phoenix’s 200,000 person larger population base.What’s more, 93% of Spanish mortgages are of variable rate, according to the European Mortgage Federation, thus pegging them to the growing Euribor rate. In 2003, that dipped to 1.94%; it’s now 4.27%.
And he continues :
As the real estate industry limps into 2009, such barometers are expected to remain bleak. To illustrate, Forbes.com assembled a series of snapshots of global real estate markets.
In some places, like the Baltic states, recent overbuilding is leading to softening. In Dubai, the slowdown stems from concerns about a declining oil market and in Spain and Florida, massive mortgage bubbles are driving down prices and upping defaults.
Of course, spots under sunny skies and sandy beaches aren’t the only ones suffering. Since the U.K. property market’s apex in March 2008, prices are down 13.4%, according to Knight Frank, a London-based real estate firm. Its head of residential research, Liam Bailey expects that in 2009, “U.K. residential prices will fall 30% from their peak, taking values back to September 2003 levels.”
This is also happening in the U.S. and Ireland. Both countries’ housing markets have lost more than 10% of their value in the last 12 months. Across both, prices have fallen to 2005 levels, according to Zillow.com, a U.S. data firm, and the Economic and Social Research Institute, an Irish research group.
Many economists believe the bottom has yet to arrive. For that, they are looking to the 2003 level, which is the technical point at which price booms began around the world.
But even that can’t be trusted.
“Nobody is going to buy buildings when they can buy first mortgages or second mortgages with 19 or 15% returns,” says D. Kenneth Patton, professor at NYU’s Schack Institute.
When transactions for buildings instead of mortgages return to favor, look for deals to take place in the U.S. This is because many investors see the American market as a good long-term play.
“Foreign investors have always targeted the major U.S. cities as being one of the best places to invest,” says Richard Kessler, chief operating officer of Benenson Capital Partners, a New York real estate fund. “I think when they come back into the market, they’ll come back into those marketplaces; the New Yorks, L.A.’s and San Frans.”
Until that point, however, expect another painful year around the globe.
Forbes throw light on the Asian real estate scene which is also witnessing a drastic drop and exodus of investors:
The real estate markets in India and China are fizzling. Over the last five years, prices for homes in China doubled. Now the number of sales and home values are falling in many parts of the country.
Oversupply and a slowing Chinese economy are playing a role. Also hampering real estate values is China’s ambitious stimulus plan to encourage the construction of new, affordable housing. Real estate investors worry the increased supply will push down prices further. (See “Olympian Bust?”)
India’s real estate market is following a similar course. It boomed over the past five years and now is slowing. High inflation and tightened credit are throttling the Indian economy. The restricted credit is also making it harder and more expensive for buyers to finance acquisitions.
The author goes on to give examples of billionaires from both countries who have suffered massive losses due to real estate:
Nobody’s more aware of the real estate market’s woes than KP Singh. The Indian billionaire is still worth $7.8 billion, but that’s just a fraction of his worth earlier this year. In March, we pegged his fortune at $30 billion. Shares of DLF, Singh’s real estate company, fell steeply over the past year.
A sudden wealth evaporation also struck Yang Huiyan of China. In 2007, Yang Huiyan topped our list or China’s richest people with a fortune of $16.2 billion. She’s no longer at the top because her fortune fell to $2.2 billion.
For those investors and individuals with cash on hand, however, there are some amazing buying opportunities out there right now and most of these bargains will only get better as this author expects the real estate prices globally to continue to drop significantly during 2009, and probably beyond.
Asian Investments, Investment News, Middle East Business, Real Estate Investment
investment properties, Real estate crisis
