Like everything else, both residential and commercial real estate will get affected by this crisis. If anyone tells you otherwise, take it with a pinch of salt. The industry is not immune to macroeconomic shocks. But, it’s not all doom and gloom.
The effect on the residential real estate market is unlikely to be as severe as the shocks we’ve seen in the markets and here’s why:
- There’s only one place people can stay in this crisis – and that’s at home.
- Having said that, with layoffs and employees being asked to take their paid and, in some cases, unpaid leave, this will undoubtedly slow down demand in the sector. People will default on mortgage payments and some tenants will leave. Prices will fall further.
- For the investor, with interest rates falling and capital to invest, she will find it an opportune time to purchase quality assets at a discount.
- Rents will fall, but rents will still get paid (or deferred). For the investor looking to safeguard his assets, getting a passive income during these times is still a much better option than getting nothing in return. Yields will fall, but you will still get something for your investment. Most importantly, hold your investment if you can. Do not get emotional.
- However, this entirely depends on the specific country in question. Here in the UAE with expats making up close to 90% of the residents in the country, the economy cannot afford to have a massive exodus. There are and will be additional packages in place to support the economy. The UAE Central Bank announced a Dh256bn stimulus package to ensure the economy can weather this storm.
- In comparison if you look at a country like the US, where about 78% of workers live paycheck to paycheck and over 10 million Americans are now filing for unemployment benefits, the situation looks extremely dire. In this case, prices are expected to fall severely, but this also depends on how long this current situation drags out.
Finally, unlike other industries, the shocks to the real estate market are expected to lag because by its inherent nature, real estate is illiquid. When the going gets tough, people dispose of assets that are easier to sell.
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