Never underestimate the power of the investment herd

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On a regular basis new hotspots emerge all around the globe, some appearing for no apparent reason. Very quickly momentum buyers, often referred to as the “investment herd”, jump aboard the bandwagon and prices are pushed higher and higher. We have seen this happen time and time again and while many criticise momentum buyers for effectively “pumping and dumping” markets, they do leave something behind.

New emerging markets

While there will be occasions where momentum buyers effectively enliven and then kill a market stone dead, in the vast majority of situations they will have unearthed positive elements going forward. This could be improved prospects for the local economy, joining the European Union or some other potentially groundbreaking issue. So, while the momentum buyers may well push prices “too high” in the short term and “too low” when they sell-off they will at least bring the market to the attention of long-term buyers. This could be referred to as stage two of the development of a market…..

Dubai property market

While the Dubai property market is probably a “special situation” because of the enormous amount of investment funding in the region, it is a prime example of momentum buying. Just before the turn-of-the-century the Dubai property market came to the attention of investors and it certainly became something of a hotspot. Even in light of the 2008 US economic crash, which impacted the worldwide economy, there were still some experts suggesting the Dubai market would not be impacted. When the contagion within the real estate market hit Dubai, short-term investors dropped their assets like a stone, leaving many long-term investors significantly out of pocket.

So, we saw the so-called “pump and dump” element of the emerging market and then once markets began to settle down we saw long-term investors returning. Dubai is a real estate market which has enormous potential going forward and enormous overseas investment.

Regulatory structure

Very often relatively new real estate market hotspots will come from nowhere and then suddenly they will be headline news. As we saw in Dubai, just prior to and just after the worldwide economic crisis, the regulatory structure was minimal to say the least. This is a characteristic of many new/hotspot property markets which are not able to handle the power and funding the herd mentality can bring. It is only just lately that the Dubai authorities have got their house in order and introduced a regulatory structure which will help allay investor fears in the short, medium and longer term. It took a while, it wasn’t easy but after Dubai was highlighted by short term investors, who came and went, the market is now set up for long-term growth.

Changing markets

If you look back over the years you will see many examples of the hotspot investment strategy which has revealed an array of property markets with good long-term prospects. They have been volatile in the early days, with large swings in investment flows, but once the local economy begins to catch up and long-term investors take an interest, this can change any real estate market. Finding a hotspot is not as easy as many would have you believe, there need to be good underlying economic prospects together with potentially game changing situations, but very often the investment herd can foresee this and leave behind a growing, prosperous and lucrative real estate market. Short-term investors have their uses!

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