Property has long been the vehicle of choice for a majority of Irish investors, although the past two to three years have tested the substance of every portfolio. It may surprise those people outside the property game to learn that most portfolios of professional investors have stood up to the recent challenges. In fact, losses through certain classes of shares and particularly through poorly administered pension funds have eclipsed losses on one-off residential investments.
Admittedly, no property professionals were prepared for the dramatic fall off in buyer volume fueled by a volatile market and curtailed access to credit. Cash investors in the lower end of the market (max. €250,000) kept the industry open throughout 2008 and 2009 until first-time buyers made their tentative return in mid-2009.
It is not difficult to reason why investors are now creeping back into the market, to the extent that finance allows, (clearly, neither buyers nor investors are enjoying the same supports as previously afforded by mortgage providers). Poor performance of personal pensions in recent years has brought about the very real certainty that many of us will not have enough money to provide for our retirement. The need to take responsibility for our individual future finances has never been greater. Historically, property investing offers the best means of building substantial long term wealth in a safe, stable and predictable manner. Investing in property is a long term wealth building strategy and, as such, short term fluctuations in property prices are irrelevant and have little effect on the investments ability to generate strong returns over time. For professional investors, their investment portfolio provides not only their main source of income, but also the means for further investing whist simultaneously building capital appreciation in the longer term. Statistically, property as an investment provides better long term growth than pension funds and comes with the added benefits of reduced taxation (against rental income and capital gains).
As property is a tangible asset, with many variables, it is possible to enhance the returns. The property will be subject to prevailing market forces but there are many ways that the investor can control some of the variables. For instance, upgrading décor, efficient management of the structure and the tenant relationships will improve the rental potential. Also, choosing the right property day one is half the battle. A cliché is generally a cliché for a reason and there is a lot of truth in the adage “The day you buy is the day you sell” (i.e. that is the day you make your money). Selecting property in an area of planned infrastructural development is likely to yield higher capital growth. The essential truth is that if you buy a residential investment property well, you should not be overly dependant upon the market conditions when you sell. That is how professional investors consistently achieve growth in their portfolio. Remember, a cheap property can always be bought relatively cheaply, the skill is in buying a quality property cheaply – this is where the true investor comes into his or her own.
One of the principal advantages of investing in property over other assets is the ability to leverage (link through to Leveraging post), i.e. to use part of the bank’s money to finance your investment. Excessive leveraging (110% + mortgages) became popular during the boom years but is not likely to be seen for the next few years. At the moment, investors are competing for finance, with banks selecting only the keenest deals. As credit is still restricted, it is essential for investors to present their deals in a professional manner.
I speak with buyers and investors every day and I understand that most people are frustrated with so-called property forecasters calling the bottom of the market (popular belief is that we are at or close to the bottom). In reality, the market is far more unruly than that. Prices in Kildare will not magically rectify themselves just because Wicklow sellers finally got real. There will be no welcome signpost announcing the markets arrival at the bottom, in fact, most buyers will drive through this one-horse town without even slowing down, this is because the bottom in any given area will not become apparent for at least three months. By the time this news is broadcast, prices have started to lift, motivated sellers are less motivated to accept lower offers and the window of opportunity starts to gradually shrink. In fact, (here is a head-on-the-chopping-block statement…) I genuinely believe that hindsight will show January 2009 as the lowest point in the economy with growth in certain areas of the property market as early as the first half of 2010, some 6-12 months earlier than anticipated. We can see this more clearly in concentrated pockets around the country.
Finally, I will leave you with a piece of wealth trivia: Many U.S. university studies have looked at the world’s billionaires and could find no pattern of shared backgrounds, gender or levels of education achieved. The most common denominator was property! The majority made their money through property; those who did not later invested their acquired billions in property…
Until next time,