I am making the most of my coronavirus social distancing time by writing a book for investors in the new build residential property market. It includes lessons on the real estate and property life cycles, and importantly for investors – the best time to buy. I’m drawing on my 20 years of professional experience in the property market and 10 years leading one of the worlds largest agencies international sale businesses as well as my personal experience in property investment. Each week I am writing a chapter and blogging about the key themes.
In the first chapter, I want to get back to basics. Many investors get too caught up in the moment, they constantly worry about whether today is the right time to buy or sell or where is the latest property investment deal is. In doing this they get detached from logic and common sense. Perhaps in times like today, it is more important than ever to take a step back! There are two things I can tell you for certain and these are, that 1) the market has, and always will move in cycles and 2) the world will never run out of property to buy – so there is no need to panic either way…
Real Estate Market Cycle & Property Life Cycle
If you are a property investor trading in the new build residential property market, you need to recognise that there are two markets to consider and also the relationship between them. They are the real estate market and the lifecycle of a property. It doesn’t matter if you own a property investment in London, are thinking of buying property in Australia, or New Zealand or just considering a foreign property investment, the property market cycles all operate in the same way.
Real Estate Market Cycle
The real estate market moves in cycles, it has done since the beginning of records and always will. The key is understanding this and recognising which part of the cycle you are in. The real estate market cycle has 4 phases:
Phase 1 (Recovery) – the first stage after a recession or economic slowdown, there is low demand for housing and high vacancy rates. Property prices will be low, general housing market activity will be subdued. There will not be a great deal of trading in the land market and interest rates will be low, but it will also be difficult to obtain mortgage finance.
Phase 2 (Expansion) – The market will show signs of recovery growth and expansion, economic GDP will stabilise and grow, new construction activity will increase. Confidence will return to the economy; property prices will begin to increase and rents will begin to grow. Interest rates will remain low and lending will ‘free up’.
Phase 3 (Hyper-Supply) – new construction will accelerate and more development sites will come on to the market. New supply of housing will start to outpace demand. At this point new construction projects will slow down, however, w a significant amount of work will be underway or committed. This is because development projects take a long-time to come on stream and it is very difficult to simply turn off the tap (think of a high rise building, you can’t simply stop building and just sell half). At this point price growth will slow and so will rent growth.
Phase 4 (Recession) – at this point the economy house prices, jobs, rental demand and construction decline. Default rates on mortgages, loans and consumer credit increase. You’ll be able to find out the latest data from government resources such as the Office for National Statistics. In the land or development market many sites simply don’t sell. In the residential market house prices are over inflated by rampant property market speculation and the ‘new build premium’ will start to narrow.
Property Life Cycle
Along side the real estate market is the property life cycle, for most property markets ‘new land’ is simply not available and most residential development comes from redeveloping land. Property has a life cycle which is characterised for the residential market in three phases:
Phase 1 (Land Identification) – developers/agents will track potential development sites, as the market grows existing land use will become less economically viable (such as an old industrial site in a location surrounded by residential development). Eventually, the revenue which can be generated re-developing and selling the site will be greater than the cost of buying in and developing it. Eventually the landowner will ‘sell’, and the developer will develop the property.
Phase 2 (Development) – the site will be taken through the development process, a developer will obtain a consent to re-develop for residential, they will build the development and will sell the property to a residential user.
Phase 3 (Useful Life) – the new asset will be used for its intended purpose and the asset will be held by a user for a residential use. And ultimately the asset will become economically obsolete and it will be redeveloped or refurbished and improved.
The important thing to remember as a property investor is you must have knowledge of the property market and understand that these two cycles exist and that they both drive each other. For example, the better the economy is the more development will take and the more development sites will become available as it will become economically viable to develop them. The market will ultimately end in a recession or period of economic contraction and the cycle will repeat.
As an investor you need to recognise which part of the cycle you are in and respond accordingly. And remember, different countries may be at different points in the cycles, meaning that when you are ready to invest, it might be an opportune time to invest in property in the UK or to consider buying property in Australia or New Zealand, but a bad time to invest in Thailand or Malaysia for example. Professional property investors will typically have an understanding of multiple property markets and consider multiple countries when they are ready to buy, to ensure they catch the cycles at the right time.
I will go into more detail about the property market and both these cycles in my book but in the meantime, I welcome any comments or questions. If you have questions, the chances are other investors are thinking about the same thing ….
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