Whether markets are flying high or under pressure, short-term speculators and so-called “flippers” tend to get a bad press. They are often accused of taking advantage of short-term situations to line their own pockets, dragging prices lower as markets peak but do short-term speculators have a role to play in the worldwide real estate market? Are they really the devil-incarnate or do they add much-needed liquidity to investment markets?
Whether you wait one week, one year or a decade, it is never wrong to take a profit. The idea that just because somebody may have a short-term profit in front of them and decide to take it, is wrong and bizarre. For many people investing in real estate is a long-term investment, ignoring short-term fluctuations and focusing on the future. There is nothing wrong with this investment strategy as it has the potential to bring in significant rental income and long-term capital appreciation. However, short-term dealings are an integral part of any investment market.
Liquidity is vital
Whether we like it or not most property transactions, both domestic and commercial, are carried out by investors/investment companies. The buy to let market in the UK, as one example, is huge and large commercial property investment companies own great portfolios of office blocks. If market liquidity was to depend upon long-term investors we would see a significant drop in both transaction numbers and liquidity – and possibly prices. The simple fact is that estate agents can calculate the perceived value of a property based on rental income, etc, but if there are no buyers at that level, how low do they go before they find any interest?
It is not just property where liquidity is vital, it is vital in any investment market, but the perceived long-term nature of investment in property perhaps makes short-term investors and so-called “flippers” even more important.
Those looking at short-term property investment may attempt to poach a property from a distressed seller, acquire a property which needs significant work, or they may be jumping on an uptrend with the intention of selling at the peak. Many people forget that whatever strategies short-term investors use, whether in real estate, stocks and shares or any other asset, there are risks. In many cases, investing on a short-term basis increases the risk that their timing may be off, markets move against them or other issues impact the value of the assets they have acquired.
The idea that short-term investors are somehow taking less of a risk than traditional long-term investors is quite simply wrong.
Over the last few years we have seen some wild swings in both property market prices and demand. After the 2016 Brexit vote many investors holding shares in property collective investments, such as investment trusts and unit trusts, decided to sell up. Unfortunately, short-term investors stepped aside while the risks increased, prices came tumbling down and unfortunately many property collective investment managers were unable to liquidator their property assets. As a consequence, there was a short-term freeze on redemptions while the market “returned to normal” and eventually property trusts were able to take out further debt against their property assets, or liquidate part of their portfolio, to cover fund outflows.
This is a perfect example of how the property market struggled when short-term investors decided to sit on the sidelines and view the aftermath of the Brexit vote from a safe distance. In simple terms, liquidity dried up, prices fell and those collective investment funds able to sell their property assets in the short term were often forced to accept a “below-market price”.