Contrarian commentators such as Bill Bonner in the Daily Reckoning have long been saying that rising asset prices are too good to be true but now there are signs that this is becoming less of a minority view. On Monday, Bloomberg published a wire article on the danger of flows of investment into developing economies.
Along with concerns about the US property market the biggest economic worry at the moment is probably the soaring price of shares in China. For example, the CSI 300 Index has risen by about 75% so far this year. The Chinese are piling into their stock market like Americans in the roaring twenties and a possible dramatic correction seems to be becoming more likely. As far as investors in property are concerned this may well be a time for caution. Generally speaking, the possibility of investment bubbles bursting makes it all the more important to look for value. Investors should be looking more carefully at the returns generated by lettings and giving relatively less attention to possible capital gains. In current conditions itâ€™s also probably wisest to consider markets that have a track record, that is, not ones where price rises have been recent and dramatic such as Northern Ireland. Also, it pays to check just how fast the pool of properties has been growing.
Data about rental values should be readily available on the internet as should some indication of vacancy rates for commercial property. The important thing is to research carefully being mindful that values can go down. There’s plenty of in-depth analysis available Deutsche Gesellschatt fur Immobilienfonds (DEGI), & King Sturge.
In times of slow growth or recession the wise investor will give greater weight to the necessities of life. In terms of property this will mean passing over the kinds of property that figure largely in people’s discretionary spending such as holiday apartments or hotels but maybe concentrating instead on investment instruments such as REITs specialising in retirement homes. This approach is going to put a question mark against many well established markets such as Spain but also newer Southern European property markets such as Bulgaria’s where prices have risen 60% in the last 24 months. Investments looking to profit from the surge in â€˜capital cityâ€™ tourism in Central and Eastern Europe would also become more problematic.
In terms of finance, property investors need to be cautious in sourcing funds through variable rate loans and mortgages that could leave them squeezed between rising finance costs and falling asset values. Don’t forget that you also need to be wary of exchange rates moving against you if the currency of the country you’re investing in takes a tumble. Currently, the US looks risky in this context but the Euro zone a relatively safe investment. The Chinese Renminbi exchange rate looks safe enough now but remember that the Chinese government will take any action it deems necessary to prevent political unrest at home.
If anyone has good advice as to what really will be the writing on the wall for investors, we’d love to have your comment.