We only need to look at the current situation in China to see a real estate market which was pumped up on cheap finance and blue sky expectations. We saw the same with the Japanese real estate market which 30 years on is still struggling to grow. So, why is it that fast and furious growth real estate markets struggle in the long term and what does the future hold for China?
No investor would turn down the chance to make a fast and furious buck in a growing real estate market. The chance to lock in a short-term return is an opportunity that rarely comes along but many people grab them with both hands. However, this is all good and well if you’re timing is right and you buy at the bottom and sell at the top. What about those who get sucked in towards the top and are left with difficult to sell property when the market turns?
We saw this to a lesser extent in the Dubai property market which had performed admirably in the decade before the 2008 worldwide economic crash. Many naive investors believed that the Dubai property market would ride the waves of the economic turmoil gripping the world when in reality it tumbled back to earth when investors ran for the hills.
If your timing is right with short-term market movements there is the potential to bank a significant return in a relatively short space of time. However, the risk factor associated with any short-term investment increases significantly compared to the long-term growth strategy taken on by many individual and corporate investors.
The UK market as a whole has performed admirably for many years now and while London is head and shoulders above the rest of the country, there are some significant rental returns on offer. The fact is that the UK property market continues to grow as the population expands and the number of new builds remains nowhere near the amount required. This constant squeezing of the UK property market is pushing prices higher, which is the perfect scenario for long-term investors.
Finding value in any investment market is not easy but finding short-term value in the property market can be very difficult. If we look at the Chinese real estate market we see a situation where many investors continue to “bottom fish” believing that prices have hit rock bottom. Quite how they are valuing Chinese property, other than they have fallen far enough and must bounce, is debatable as the whole situation has changed. There is now a deluge of unsellable property across many areas of China, finance costs are starting to rise and large real estate conglomerates of years gone by are struggling to survive.
If we look at the economy, as well as the basic real estate supply and demand figures, it is difficult to see where any short-term improvement could emerge in China.
For every success story we hear about short-term real estate trading there are dozens more investors who have lost their shirts. Timing is critical with any investment but with a short-term investment, perhaps pressure on your finances and blue sky expectations it can be difficult to contain your emotions. History shows us that the more successful real estate investors are those who take a long-term view, work on cold hard facts and do not go out to make a short term buck. They seem to know when to buy and when to sell, leaving some for the next investor, and if an investment goes wrong they will simply dump it, call it a day and learn a lesson.
How many investors of today take that approach?