Buy low, sell high: Investing can be all about predicting market cycles. But with real estate, there’s more to it than that.
While industry experts say real estate prices have peaked, they note that investing in properties is “recession resistant” and safer than investing in the equity markets. In fact, they say it’s the best time to invest in real estate, even if it may be fully valued.
“We are without a doubt in late cycle… that said, every other asset class seems so overpriced and so expensive,” compared to real estate, said Nicholas Azrack, managing director at Boston-based hedge fund, the Baupost Group, at a recent conference hosted by the NYU School of Professional Studies.
Investment property valuations have reached 35% higher than their pre-recession peak, according to the CPPI National All-Property Index, which includes weighted valuations of residential, retail, office and industrial properties.
“It seems the entire investable universe is pretty frothy,” said Lauren Hochfelder Silverman, Morgan Stanley managing director and head of MSREI Americas. “We look at equities, and they feel expensive.”
Benefits of investing in real estate
Unlike stocks and bonds, investors have more control over their real estate investments because they can improve the property to boost its value. Investors look for “special situations” where they can find, create, unlock or manufacture a property’s value, said Azrack.
For property owners, rental income is also less volatile than the ups and downs of the stock market, said experts. Leases, which can often be up to 15 years on commercial properties, can bring the same monthly rent regardless of economic conditions.
On top of that, long-term returns on real estate exceed average returns on stocks and bonds. Equities are predicted to return 4% over the next decade, according to Silverman, a rate she said is low compared to real estate returns. Average real estate returns range from 10% to 12%, according to an analysis by Mashvisor, a property-finding tool for investors.
“If you look at the families and the companies that have made money in real estate through asset appreciation and value appreciation over time, they are reinvesting in their assets, buying high quality assets in good locations,” said Jeffrey Fine, managing director at Goldman Sachs & Co. “And that's really how the asset class was intended to be invested in and capitalized, so that it is durable and sustaining cycles and is a good hedge against inflation.”
While concerns about a recession in 2020 looms, investors are bullish on real estate. Since the housing bubble burst more than a decade ago, regulations on over leveraging and underwriting have protected the industry, according to Cia Buckley Marakovits, chief investment officer of New York City-based real estate investment firm, Dune Real Estate Partners.
“My grandfather used to talk about depression-era mentality, which was if you lived through the depression, you spent every day of your life wondering when it was going to hit again,” said Fine. “I think part of the psychology of the last decade for those of us that lived through the financial crisis is waiting for the bottom to fall out the way it did before.”
Economists expect to see a slight dropoff in housing valuations next year, according to Dan North, chief economist at Paris-based Euler Hermes insurance company’s North America division. If there is a slowdown, most experts don’t expect it to be too bad.
“I don’t see imbalances and risks like we did the last time, and I don’t expect to see a downturn as dramatic as the Great Recession,” said North.
Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter
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