Real Estate Investment in Times of Crisis
What does the crisis mean for real estate investment? Are real estate objects or real estate stocks cheap? This could be a very important investment issue in the coming years. Many experts expect inflation to rise because of the crisis. Although, prices may fall in the short term as many people remain out of work. Or they will save more building reserves for similar crises.
But later, in 1-3 years, that may change. There may be a rise in prices, a devaluation of paper money. A more severe negative real interest rate than at present. (Because of the huge expansion of central banks’ money supply and the necessary inflating of debts.) The traditional inflation hedges are real assets, like real estate investment, or precious metals. Possibly farmland, machinery, also other commodity market assets. (For example, there are countries where industrial copper is also used as an inflation hedge.) Equities can also provide protection against inflation if the company can pass on price increases to consumers.
What Are Cheap and Expensive Stocks Like?
Our chart shows three real estate stock indices, one American, one German, and one Asian-Pacific, since the fall of 2016. What’s interesting about them is that it looks like all three fell a lot in March. But the German index is still nearly ten percent higher than at the end of 2016. It spent 2016 and 2017 below the actual level (look at the red line). The U.S. index barely changed, and the Asian region index fell only nine percent during this period.
This means that while these real estate stocks have fallen sharply this year, they may not be cheap yet. It would be a mistake to buy only because prices are much lower than at the February peak. Perhaps they were too expensive in February?
Lack of Alternatives and Visible Risks
But that doesn’t mean a real estate stock isn’t a good investment either. Real estate investment could be favorable if inflation rises. But since the beginning and spring of 2019, they have also been well affected by the policy of further easing by central banks. (Low-interest rates, bond-buying programs, growing money supply.) And now, because of the crisis, central banks are pouring so much fresh money into the market. New historical real estate stock records would come as no surprise.
Maybe inflation won’t go up much at the end. But a safe investment alternative with a positive real interest rate is mission impossible on the market in the coming years. This is also enough for the rise of real assets.
But let’s not forget the risks. In the case of a prolonged, deep crisis, the situation in the real estate market could be much worse. Tenants may become insolvent, buildings remain empty. Constructions could come to a halt, real estate companies’ profits could disappear. A wave of bankruptcies may follow.