Real Estate Investing During Covid-19
Intro
Interest Rates are Low So Should I Invest In Real Estate?
I was recently a guest on TVJ’s townhall where the topic of discussion was investing during Covid-19. The link for the full interview is here https://www.youtube.com/watch?v=mkal2V_LI8E&feature=youtu.be .
For those who wanted to know a little more I decided to go into a little more detail on the key things that I think you should consider as it relates to investing in real estate in Jamaica.
Let’s start with the basics.
What is an investment?
When you invest in something you expect to buy something in anticipation that you’re going to get a return greater that what you put in. Whether you are investing in Residential or Commercial properties, with real estate, your returns come in either of two ways. When you buy a property for the purpose of investment you anticipate that you’re going to get income from that property or you are going to sell for an appreciated value (capital gains).
What is likely to happen with my real estate investment?
Let’s look at those two scenarios in the context of the current economy:
- Buying for Rental Income
– Properties that were listed in US are now converting to Jamaican which means that a lot more rental properties are coming into the market that are affordable. There will be more competition for rentals causing the price to go down, at least until AirBnB opens up again and people feel safer using this option.
– At the higher end of the residential housing price scale – You would have a little more competition because of the influx of new rentals to the market because of Airbnb hosts converting those properties to long term rentals. The high end properties (in excess of US $1,000 US per month in rental) seem to have a larger supply than demand.
– At the lower end, you may not have the returns that will make it viable for you. E.g. if your mortgage is $100,000 and you can rent it for $120,000 then you in essence are earning $20,000 a month which can be eaten up in insurance, maintenance or other emergency home expenses that you have to carry out as a landlord.
– Commercial rental right now may not be as lucrative because of the businesses that were closed as a result of the pandemic. Many had to stop paying rent or close completely because of the pandemic. Overseas, commercial property owners indicate that 20% or more of their clients could not pay rent in May and April. The low confidence people have in going about and spending in the economy as they were accustomed to pre-covid may make it unprofitable for businesses to continue renting physical space. Many have used the opportunity to convert into a digital company, offering goods and service through a website or social media instead.
– So if you are purchasing a property and plan to get a mortgage to finance the purchase, do the math and do your research to see what you could rent the property out for in the area you wish to purchase. If that rental does not exceed the mortgage payment by at least 30% then you should evaluate if that is still something that you want to consider. You should also explore the other option:
- Buying to Sell at a later date i.e. for the property to appreciate.
– The key to investing is usually to buy low and sell high. The same goes with real estate. How will you know if the price is low? House prices in Jamaica hardly depreciate. Although this pandemic is unprecedented, the experts say that a large decrease in prices is unlikely in Jamaica because of the high demand for properties, especially at the lower pricing points (Less than $20- $25 Million).Even in the US it takes a long time for properties to drop. For context, in the 2007/2008 financial crisis in the US, mortgage prices were at a high in 2007 and they never got to their extreme low until Jan 2012. See graph below of the Case-Shiller Index, which tracks housing prices in the United States.
Source: Wikipedia contributors. (2020, May 17). Case–Shiller index. In Wikipedia, The Free Encyclopedia. Retrieved 17:37, May 25, 2020, from https://en.wikipedia.org/w/index.php?title=Case%E2%80%93Shiller_index&oldid=957268962
– The Bank of Jamaica also calculates an index to represent growth in real estate prices in Kingston, and for Jamaica. According to their index, real estate prices on average have risen only modestly between 2013 and 2018. The rate of growth averages 3.3% and 4.4% for residential real estate prices in Jamaica and Kingston respectively.[1] This most updated graph I could locate of that index is seen in the image below. The decline in 2014/2015 was as a result of the National Debt Exchange that took place in that period. The 2008 financial crisis did not impact prices in the way that it did in the United States. It is very important to note that the increase in prices, on average do not beat the rate of inflation over the same period of time.
Langrin, R. Brian (2016)- Constructing Residential Real Estate Price Indices for Jamaica http://boj.org.jm/pdf/Constructing_Residential_Real_Estate_Price_Indices_for_Jamaica_(2016).pdf
– It is very likely that if you are investing for the long run then you will see some level of return on that investment as prices will likely go up. Recall that on average 3-4% increases are what you would likely see (on average in the long-term). The houses at the higher end of the market may see a slight decline, as demand for those wane a bit, but as tourism opens back up over the next few years, those properties will revert to their pre-covid levels of demand.
– To see even greater appreciation you can either buy lower or sell higher. Buying lower would entail purchasing homes in pre-construction or building a home yourself if you purchase just the land. Selling higher means that you put some sweat equity in the house and increase its value by upgrading the property. If the house is in a good location, sweat equity and renovation to the house can provide you with a higher return on your investment.
If you plan to buy and sell within a short period of time, real estate investing may not be the best option unless you are a developer or ‘flipper’ where you can explore building or renovating yourself. Real estate investing is generally for ‘patient’ money.
What about investing in real estate stocks?
Some of the companies that are listed on the Jamaica Stock Exchange and are primarily real estate investment companies are as follows:
– Panjam Investment Limited
– Kingston Properties Real Estate Investment Trust (KPREIT)
– Pulse Investment Limited
– 138 Student Living Jamaica Limited
– Stanley Motta Limited
– Eppley Limited
– First Rock Capital Holdings
Sterling Investments indicates in an article here, that the average income yield generated by publicly listed real estate vehicles was roughly 4.1%. This is about the same return that was indicated by the average appreciation in housing prices, but the difference in the two is the upfront costs associated with investing in real estate.
If you are risk averse and don’t like to see the big dips in prices associated with the volatility of the stock market, then real estate investing may be better for you, but consider the upfront costs associated with purchasing the property.
How does everyone else feel about investing right now?
Persons who are out of work or possibly lost a stream of income may not be able to consider a large purchase like a home right now. The mortgages companies are offering many types of loan moratorium options as outlined in my article here. Persons may therefore find it difficult to get a mortgage now as the lenders tighten up with their lending appetite. Additionally, in a poll conducted on my twitter, almost 70% of the persons who were interested in getting a mortgage decided to either cancel their plans or wait:
If you were considering purchasing a home before Corona, did you continue with the purchase or pause/cancel because of Corona?
— Gilly J 🇯🇲 (@MsGillyJ) May 21, 2020
Additionally, persons are not really buying or selling as they were before because of social distancing requirements related to looking for a house or allowing strangers coming into their house. 50% of sellers who were in the process of selling, put their plans on hold.
If you were considering the sale of a house or property before Corona hit. Did you.. — Gilly J 🇯🇲 (@MsGillyJ) May 21, 2020
In the United States, the rate of new listings of homes coming on the market is up 6% during the week of March 19, but 39% lower than it was last year according to data from realtor Zillow.
There is still a great demand for houses and some persons have seen an opportunity in the crisis. Of the persons that I asked “Did you consider buying a house/property because of Corona, 55% said yes”. 93% said no when they were asked if they considered selling because of the pandemic.
What about interest rates?
In addition to demand for homes being high, interest rates are low.
According to the Bank of Jamaica, the average mortgage rate as of Feb 2020 for Commercial Banks is 7.67% and for Building Societies it was 7.80%. Prices are the lowest they have been in the past 10 years as seen in the graph below. The government (pre-Covid) announced initiatives that were designed to bring rates down even further. The pandemic may however force institutions to raise rates as their income declines from the halt in economic activities.
On the very day the 1st case of Corona hit on March 10, the Minister of Finance announced in the Budget Debate that NHT was reducing its rate by 1 % for new houses and 0.5% for existing mortgagors and asset tax was going to be reduced by banks. The asset tax was deferred for a year, but those two things would have in themselves reduced rates for loans pushing interest in purchasing housing up.
Source: Data Extracted from the Bank of Jamaica
What will happen with AirBnB?
In May 2020 Airbnb laid off 25% of its staff signaling troubling times for the global short-stay industry. Jamaica is not spared as we had 9,000 short-stay listings in early 2019 so let’s assume there were about 10,000 of these properties before the crisis. The persons that are likely in trouble are those who have overleveraged their property purchases (i.e. took on high levels of debt to purchase these properties). Fewer renters and a greater supply could push the price of short-term rentals downwards and the high or luxury end of the market could particularly be negatively impacted.
Housts may be forced to turn short term to long term rentals or shutter their properties entirely. This will lead to:
– Rise in long term rentals
– Drive in rental prices down
– Sale of more properties while prices are still relatively high
– Possible increase in foreclosures in the next 6 months or more.
Effects may affect price of everyone’s home but probably not significantly. As tourism opens back and confidence in the sanitization of the short-term properties is built then thus business will go back to being profitable and more lucrative for many.
Deciding whether or not to rent or buy? Visit my article on this here, which includes a calculator as well.
[1][1] http://www.jamaicaobserver.com/sunday-finance/debunking-the-myths-around-real-estate-returns_174185?profile=1056
[2] https://www.cnbc.com/2020/05/04/coronavirus-will-shrink-us-home-prices-by-2-3percent-nationally-zillow-forecasts-but-deeper-dive-could-be-in-store.html
