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It has been established many times over that timing the bottom of the real estate market like any other asset markets is not possible. Also, making investments in a soft market is a brave move which most savvy investors are jittery about. Yet, time and again, when the market revives, we hear stories about investors who had been buying at enviable price levels.
What do these investors know and do that gives them the intuition to buy?
Investors who are successful in buying during what appears to be the right time are able to see things objectively and are not emotional during a bull as well as bear market. They know that real estate market cycles are not very short, when the market has softened, that it can take a while before it turns and that no trend lasts forever.
They understand that in a buyer’s market, what to buy is important and that what is more important is who to buy it from. In a bear market, the sellers generally hold on to their properties and prices. Prices are adjusted downward only in case of a strong selling motivation which could be critical for negotiations.
They know that the real estate market stays sideways for brief moments before changing tides and that it takes longer to react; thus, it doesn’t change overnight unlike the equity and commodity markets.
The sign of a changing market first comes in the form of sideways movement before a change in trends. Investors recognise this.
Negative sentiments generally give anyone a chance to play on the price and the purchase agreement terms. Seller terms are usually non-negotiable in a strong upward market and are one-sided in favour of the sellers. In a soft market, they have to get the terms changed to their favour as these would protect their interests and mitigate certain risks. Their intuitive capabilities are a mixture of these “idioms” and market knowledge.
When buying in a soft market, their choice of assets is conservative yet yielding. Here are a few selection criteria which give them an edge in buying, and whenever the market turns, they have already executed the enviable purchase:
Asset with no new supply
There are certain assets which, due to their unique location, view, access and non-replicable values, are non-replaceable. Such assets are nearly impossible to acquire in a boom market. The soft market lends itself to individual situations which give anyone certain opportunities to get hold of such assets at non-premium valuations and sometimes at substantial undervaluation.
Assets with long lease at discounted values and high yields
These assets have a positive holding value. In a sideways market, these provide a very good hedge against depreciation since the yields would maintain the valuation in spite of an underperforming market. The cash flow provided from the yield also goes a long way in acquiring more high-yielding assets. Before you know it, your portfolio has increased and when the market turns, the appreciation becomes quite enjoyable.
Assets discounted before correction
Some assets lack infrastructure and are thus sold at discounted rates. In a sideways market, any improvement in infrastructure and other positive developments generally fail to ignite an increase in prices due to overall sentiment. However, when the market recovers, they make up not only for general market growth but also because the developments get noticed and the demand impacts the price positively. These assets then give a better-than-market performance.
If the skill of objective thinking regarding investment is applied, the results can be exceptionally pleasant and the soft market can be something that you would like to look forward to every few years for you to play your master strokes.
Source: Ashirwad Somani, Special to Freehold
Director, Candour Real Estate