Real estate is still a popular investment pick. Here’s what you need to know about buying in a downturn

Real Estate

The coronavirus pandemic has made us all a lot more familiar with our homes. But it has also thrown up a great number of questions over the future of the property market. 

While global markets were thrown into turmoil in the early days of the outbreak, the property market, broadly speaking, has remained resilient. As of April, the median U.S. house price rose 8% year on year to hit $280,600.

That’s good news for investors. Real estate continues to rank as the top investment pick for the majority of Americans (35%), ahead of stocks and bonds (21%), savings accounts (17%) and gold (16%).

But the coronavirus has shuttered construction sites across the globe, adding to existing supply shortages. And with many industries and individuals now facing uncertain futures, the phrase “safe as houses” has been shaken.  

CNBC Make It spoke to the experts to find out just what might lie ahead for the future of real estate.

Buying a home

Buying a home is often seen as one of the most important and prudent financial investments you can make. 

During times of economic distress, that conventional wisdom can be thrown into question. The 2008 global financial crisis, which originated in the property market, was a major knock on confidence. However, financial experts broadly agreed that this downturn will not hurt housing in the same way.

“In most historic recessions, the property market has either remained largely resilient or was only impacted across certain real estate sectors,” noted Dhruv Arora, CEO of digital wealth manager Syfe.

Close up of a young man paying his bills

Geber86

Notwithstanding the short-term difficulties of conducting in-person viewings, that means that now remains a reasonable time to think about buying a home once cities and states reopen.

With interest rates slashed in a bid to stimulate global economies, the cost of borrowing has become cheaper, which could make mortgages more affordable for those with adequate finances. The same goes for refinancing a current home.

Trent Wilshire, economist at Australian property site Domain, said that could encourage more people to get back out into the market. It is already starting to happen in Australia, where lockdown measures are easing, he noted.

“Transactions will start rising again in coming weeks but are still likely to be sluggish compared to late 2019/early 2020,” he said. “We’re already seeing a pick-up in recent weeks, with new ‘for sale’ listings rising the past few weeks and rising enquiries on Domain from potential buyers.”

That said, the nature of the coronavirus pandemic remains uncertain, and it’s important to look into the specifics of the local and national market of the city in which you’re looking to buy.

Buy-to-let real estate

A buy-to-let property can offer a great source of passive income, via rental payments, and capital growth, through price appreciation. It can also offer an alternative route onto the property ladder for first-time buyers who are unable to buy in their preferred area. 

Those fundamental attributes remain true in the current climate. Indeed, the economic slump has likely exacerbated existing trends, which have priced many young people out of buying and inflated the renters’ market. 

The best investment opportunities will be in those places where the labor market is the least damaged.

David Lebovitz

global market strategist, JPMorgan Asset Management

That offers opportunities for those in a position to invest. However, with the global economy on the rocks, so too is the renters’ market. Prospective landlords should be cautious that some tenants may struggle to make their payments

“It’s all going to be about location. The best investment opportunities will be in those places where the labor market is the least damaged,” said David Lebovitz, global market strategist at JPMorgan Asset Management.

As with residential homes, buy-to-let properties suffer the same logistical hurdles right now in terms of conducting viewings and processing sales.

Commercial real estate 

Commercial real estate, which encompasses the hard-hit hotel and retail sectors, potentially poses the biggest risk for investors. 

So far this year, the commercial real estate market has fallen almost 28%, with hotels & resorts and retail spaces down 48% and 40%, respectively.

Syfe’s Arora said the drop-off will take some time to correct. That recovery is likely to be “gradual” — or U-shaped rather than V-shaped — as economies embark on phased reopenings, he said. 

Marina Bay Sands Mall in Singapore, Republic of Singapore

Inti St Clair

However, where there are downsides there are also opportunities, Arora noted.

“As always there will be investors who look at the long-term potential of these real estate sectors,” he said.

Sectors with “strong fundamentals,” such as industrial, residential and specialized real estate, show particular signs of resilience, said Arora. Meanwhile China — initially at the forefront of the outbreak and now leading the charge on economic reopening — offers cues as to which sectors thrived under the pandemic, chiefly health care and logistics.

“We still see value in direct real estate as a source of income, and more broadly, as a portfolio diversifier,” added Lebovitz, highlighting direct purchases and real estate investment trusts (REITs) as some of the best options.

“We believe it is about combining REITs and direct real estate, particularly given that REITs provide greater exposure to more forward-looking sectors,” he said.

Building the foundations 

Before embarking on any financial investment, real estate or otherwise, it’s important to get the foundations right.

Typically, financial advisers recommend setting aside roughly three months’ salary in cash to tide you over in case of an emergency. In the current economic environment, six months’ worth might be a safer bet, however, according to personal finance expert Ramit Sethi.

“An emergency fund is money saved for any unexpected expenses. It gives you the piece of mind knowing you have a hedge against the worst financial disasters,” he writes in his blog “I will teach you to be rich.”

Additionally, it’s important to set aside extra funds to cover the legal and transactional costs associated with buying a property. 

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