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The one reason real estate runs rings around the share market in a financial crisis

Categories: Commercial, COVID-19

You can trade shares in seconds. But spend weeks or months divesting real estate. Why is that a brilliant thing for property investors in a financial crisis?

We’ll remember these days in years to come.

We’ll remember the days spent indoors. We’ll remember racing to the TV to hear another COVID-19 announcement. We’ll remember stories of job losses and businesses tanking. We’ll remember uncertainty. And for us investors, we’ll remember COVID-19’s impact on investments.

Under the Properties & Pathways roof, our unlisted property trusts are holding their value. We’re thankful they can maintain investor return in times of uncertainty.

But on the other side of the coin, there’s been a significant impact to the share market. Shares have plummeted in every economic crisis over the last 100 years (while property performance has gone up). And we know why…

We get a few consistent questions from investors who are new to commercial property investment. They ask, “How can I sell my units if I need to cash out?” Or, “How can I get out of this investment if I need to?” Or, “How do you guys go about selling your property – and when do you do it?”

All these questions come back to one thing that shares lack: Illiquidity.

It takes a long time to buy and sell a property – Why is that a good thing?

Commercial property is a sophisticated beast. And assets take a lot of time to transact.

The due diligence period can take months. And then there’s a settlement process to run. There’s a timing lag between agreeing on the actual transaction and settling on the transaction. And there’s a listing period to advertise and market the property.

All these things make commercial property a slower moving vehicle than, say, the residential property market. And a much slower moving vehicle than the share market.

stock market volatility in economic crises

On the share market, you can buy and sell within seconds. So, shares are fantastic to enjoy the overnight increases of money.

But it can be detrimental – and has been detrimental to a lot of our investors – when we see the flip side.

Shares VS commercial property – Moving the argument from performance and toward values

Take a company on the ASX like the Commonwealth Bank of Australia (CBA). Trading at around 90 cents pre-Coronavirus and stooping to about 60 cents as of this writing.

CBA have rewarded shares many times over the years. But if your money has been sitting with them since mid-February, you would have seen your investment drop about 30 per cent.

It’s sad to see this value drop. But it’s also scary. Because that particular value change happened within 5 days… to bluechip stock.

Back to commercial property investment, but keep CBA in mind.

commercial property illiquidity economic crises

If you’re a landlord with CBA as your tenant, you’re still receiving rent from them. And even if the CBA asks to reduce their rent, your asset’s value is still underpinned by the land and the location. The value of your investment does not disappear in a heartbeat.

That’s really important to understand, because it puts in contrast the volatility of the share market against the stability of the commercial property market.

So, the commercial property market can be more stable than the share market… But surely property has been impacted by COVID-19?

Of course that’s not to say the commercial property market won’t be impacted by economic uncertainty – it very well could be.

We might see a 5-per cent or a 10-per cent impact on valuations, and there’s a lot more work to be done to ensure any struggling tenant will see light on the other side of this pandemic period.

But we’re never going to see that overnight slump the share market has.

That’s because for an asset to be transacted, it requires time: It requires due diligence periods, settlement periods, finance, marketing… All of these things lead to a very long timeline between three and even 24 months, which we hope is enough time to see a correction in the economy.

In that way, the period of time a commercial property takes to transact actually becomes a safety net.

Investor’s aren’t loyal (and that’s okay)

Most of our investors are – by nature of being investors – invested in the stock market. And we understand that; Diversification is and will remain an astute investment strategy.

But investors will go where the investor returns are higher and the stability is greater. And that’s why we’re currently seeing a real divergence in the investor market.

In times of uncertainty, investors are less loyal to their long-term love of shares. We’re seeing them turn to commercial property and commercial property syndicates, backed by land value – a finite, definitive resource.

We’re also seeing their divergence from sure-thing investments like government-backed bonds.

Right now you can buy a government-backed bond with a return of 1 per cent. You know what is as good as buying a government-backed bond? Buying a government-tenanted property, where, say if Centrelink is your tenant, you might enjoy a 7 per cent or 7.5 per cent return.

We’re seeing this in our own portfolio. And it again proves there’s a real disparity between different investment mechanisms and investment markets.

We’ll remember these days in years to come.

But the one thing we hope investors will remember is the strength of illiquidity during uncertain times.

Our specialisation in the commercial property market is a very favourable one during this time of uncertainty. And right now, we’re offering free consultations for all new investors. If you’re interested to know more about investing with us, please get in touch today.