Should I Invest? The Macroeconomic Perspective
Investing in Real Estate is listed as one of the top options for both preserving capital and increasing one’s wealth over time. In today’s globalised market, the investor can take advantage of opportunities presented virtually anywhere in the world.
To be able to truly see results, you must start with understanding and assessing the risks. Taking calculated risks is what puts and keeps the investors in a profit position.
First, once you have set your main reason and goal at investing, you must try to detach yourself from the emotional charge associated with buying property. Buying in the country you grew up in or living as an expat should be because the numbers add up.
Understanding the Rental Yield Ratio when analysing your market or desired area is a great way to start developing your strategy (for more on this subject, see the brief explanatory article Here).
As a rule of thumb, lower yields equal a lower risk and it means you will invest more money to produce the expected revenue, the projected earnings are more reliable and your investment sits in a stable environment, more protected. Subsequently, a higher yield usually equals a higher risk factor, you will earn more per unit invested but overall the chances of negative events that would trigger capital loss are higher.
The risk can be categorised as external and internal. The external refers to the country itself and its economic and political situation, while the internal risk refers to the project itself.
Today we shall focus on understanding some major external or macroeconomic risk factors, directly linked to the country itself. Unpredicted change in legislation, political and social unrest, currency or financial crises, represent the main triggers for insecurity.
Credit ratings are a great basis for your evaluation. Look for data from global agencies such as S&P (find a helpful chart Here) or The Economist Intelligence Unit.
Rising Inflation is a main culprit for an increased country risk rating. An acceptable level for inflation is 5%, and when this metric goes up, currency, imports and exports, lending, purchasing power of the consumer or your tenant’s morale are all affected. Rental rates are directly proportional with the inflation rate, so on the flipside they raise with growing inflation, therefore would keep your earning stable. On the down side, you may find it difficult to find or keep your tenants.
The long-term residential rentals and land have a low sensitivity to inflation, office spaces and REIT’s have a medium sensitivity. Hotel units, short-term residential rentals and industrial premises (such as warehouses) have a high sensitivity.
Another important indicator of risk is wild currency fluctuations. A country gets a higher risk rating when its currency rises or falls by more than 20 per cent. This has a higher chance of occurrence when the country relies on trading commodities (see the recent example of the falling Russian Ruble due to falling oil prices). Political instability, poor economic management, social unrest or warfare will trigger big currency volatility. This volatility leads to a drop in GDP, production, exports and purchasing power. Your investment property and revenue will be worth less, and tenants will be hard to come by and keep.
You also need to take a look at the demographic numbers of the country or region. A negative population growth is another indicator of high risk. People migrate to affluent regions in search for better opportunities. An exodus away from your investment property will leave you high and dry. Subsequently a massive influx of population due to war (for example) might destabilize a certain area and reduce your investment and earnings.
Political instability is perceived as another driving factor that jeopardizes your investment as it can be the determinant for an array of issues.
Increasing taxation on property and rental revenue, legal restrictions on owning certain type of assets or on building, and making proof of funds are all hindrances that limit capital flow and push investors away.
In conclusion, investing in property can be very rewarding, used as the only strategy or as diversification to your portfolio. As long as you stray away from emotional purchases, assess the risks and do your due diligence, you should be able to get and keep ahead.
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