How to understand real estate cycles

  • October 30, 2018

How to understand real estate cycles

‘There is no such thing as bad weather, only different kinds of good weather.’ said John Ruskin, and he was definitely right. Based on our 20 years’ experience in international real estate, investors can always benefit from a solid opportunity after evaluating the markets and the real estate cycles.

Knowing real estate markets intimately takes time and effort as well as in-depth research of all the different aspects that ultimately affect markets fluctuations. Copperstones offers concrete market intelligence that will help you recognise a good investment versus what to avoid. If you are ready to diversify your investment portfolio, contact us on 08445 555 555 to book your first free meeting with our investment consultants. Before taking that next step and upgrading their portfolio, every investor needs to study real estate cycles and how to actually benefit from each of them.

These are four phases in a real estate cycle.

Phase 1: Recovery

Known as the bottom, or ‘trough’, recovery is typically the most difficult to identify. Why? Because the market is still slow while the wounds have ‘secretly’ started to heal. Rental growth can seem flat and new builds are few and far between, so a lot of the time, the market can still look like it is in a slump. However, to those closely monitoring the data, upward trends in property viewings, the reduced pace of previous decline or a break in the downward trend are all signs that the market is coming out of the downturn.

For example, the Dubai market is now in recovery. Signs of growth are barely visible but in reality, this is the chance for investors to snap up core assets in a prime location and then ride the market up to expansion. In regards to London realty, the situation might look similar but investors and landlords have many options. This is the time to repair or add value to your assets. If you have available funds then invest in a new build which is durable to market fluctuations due to the low maintenance costs or in an off-plan property. By the time the market is hot again, you will have a new build in your portfolio which will have increased value and rental yield.

Phase 2: Expansion

The expansion phase is easy to trace but can be hard to navigate. Expanding markets are transitioning up and are faced with growing demand. Vacancies will be low, rents will be on the rise while demand is climbing like never before.

A growing demand for property and an exponential construction growth could also be reflected at the GDP growth. The expansion phase is prime time to deploy value-added tactics. Investors and funds who know what they are looking for can secure neglected properties that require TLC or are mismanaged at a discounted price, then bring these assets into full productivity before reselling for considerable profit.

Phase 3: Hyper supply

Found yourself overwhelmed in a sea of ‘great deals’ and ‘opportunities’ only to realize that you lack strategy? If yes, then this hyper supply. The economy has shifted into decline however the market is still adapting to the new changes. During hyper supply, the Copperstones advisory team suggest investors look for solid assets with stable tenants and long-term leases already in place. The best thing about real estate is the eternal value of it and hyper supply is the best time to champion this. Fixed-term assets with high performance or panicked sellers are the two main characteristics of hyper supply. Whichever side you choose, always have a strategy in place.

Phase 4: Recession

The natural result of hyper supply is often a recession. When players in the market don’t recognise the downturn or measures to tackle the asymmetric boom weren’t applied, hyper supply falls into recession. Heavy supply continues only now that demand is low and rent prices fall. This is bargain time for many who are following an opportunistic approach to their asset portfolio. Distressed bank-owned properties, vacant land developments, teardowns and construction projects at bargain prices will attract the interest of patient investors with available funds during this time. Whoever is investing the recession is in for the long-term since a highly detailed strategy is required. Flirting with steep discounts, investors and funds will have to wait an undefined amount of time to see their assets uprising. When a market is in recession, we work hard for our clients by minimising long void periods and manage their properties efficiently.

For the final takeaway, our investor consultants would like to highlight that different markets can be in different phases simultaneously. As a leading off-plan agency in London, our listings expand in the UAE and the US, where landscapes change rapidly. Cycle duration varies heavily while asset class and geography play a very important factor. The key is to be vigilant and to understand the nuances of each market and the best strategy to implement in each given situation.