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The fact that the property industry is notoriously cyclical is widely known yet viewed differently. For some, cycles represent a form of volatility that enables the shorter-term investor to profit from market fluctuations as they occur. In extreme circumstances, this would be considered to be speculating and I know as many people who have lost money speculating as those who have gained.
Yet investors with a clear strategy and long-term plan simply accept, foresee and plan for cycles in the industry. They look for longer-term sustainable growth rather than take additional risk by trying to accumulate wealth through taking advantage of shorter-term spikes or dips. They are true managers of their property portfolios and have a much greater chance to succeed.
Investing in property has a very simple purpose: to create wealth over the long term. However, your property investment portfolio needs to be nurtured, maintained and managed to ensure its wealth-creating potential and capabilities are achieved as it rides the inevitable cycles that occur in the industry. Adopting a short-term vision and reacting unreasonably to inevitable industry slowdowns will lead to underperformance in the longer term.
Consider one of my clients. As the owner of a portfolio of apartments purchased early 2011, the past four years have been extremely lucrative for him. He asked whether to sell his property assets as the market had slowed. Rather than make a hasty decision that might be regrettable, I constructed a recommendation for his consideration.
An easy decision would be to sell his entire portfolio for a substantial profit, but the question remained: where should his newly gained wealth be invested? There was no answer as there was no plan.
We found that by retaining his portfolio, my client would continue to receive an average of 6.8% nett rental returns per annum on the adjusted value of his properties over the next five years. Notwithstanding the recent cooling of the market, we estimated that he could expect a capital growth of at least 6% per annum over the next five years for an estimated nett total return of 12% per annum.
The review included careful analysis of current maintenance requirements, future capital works, market factors, regulatory developments, industry forecasts and trends, alternative opportunities, risk factors, and relevant future events.
When I asked my client what alternative investment could provide the same return without taking on greater or excessive levels of risk or incurring new investment transaction costs, none could be identified.
The example of my client clearly illustrates that property portfolios require careful management. We all know the market has cooled, but this is hardly a reason to make rash decisions without doing proper analysis.
Wherever you look around the globe, yield and total returns are getting harder to find and the value of established property portfolios with good occupancy levels and projected tenant retention are increasing in comparative value all the time. The investors who hold and nurture their existing property asset portfolios will do very well over the next five years, particularly those who have diversified their holdings to include some of the more affordable asset types.
Not everybody is comfortable with managing a property portfolio. However, there is expertise available. You should consider engaging a good property manager who will ensure that you maximise returns.
Proper management is essential and you need to ensure your portfolio is in good hands.
Source: Mohanad Alwadiya, Special to Freehold
The writer is Managing Director - Harbor Real Estate