Real Estate Investment in Times of Crisis

Macroeconomic conditions have been bad for months all over Europe, and in Italy especially: high financial volatility and instability and the threatening possibility that some countries, like Greece, might leave the eurozone. In such a difficult scenario, can real estate still be considered a safe investment?

In order to answer, we must first distinguish between residential and commercial real estate: housing is a primary need and thus a consumption good, whose purchase depends on priorities other than investment.

Thus real estate investment actually means investing in commercial real estate, which can still represent an opportunity, but only under certain conditions and with the risk, return, and liquidity factors common to all other asset classes.

It is often thought that during economic and financial crises real estate is a safe haven par excellence, because of lower volatility in prices and as better protection against the risk of inflation. But this is a false and dangerous myth, because the value of buildings is strictly tied to the returns prevalent on capital markets, as well as income-generating capability (thus to commercial rentals that depend on the state of the economy). In a negative economic scenario, real estate investment, although with lesser intensity, is also negatively affected by the crisis. But crisis creates opportunities, such as the so-called distressed assets, i.e. real estate burdened by unsustainable debt, real estate developments blocked by refinancing needs, buildings to be renovated, and also unsold units of residential housing stock.

Today more than ever, it must be kept in mind that real estate investment requires, specific knowledge and skills about all three stages: investment, management and divestment. While in the past prices were increasing because of inflation and economic growth, and easy access to credit was the norm, today active management and the major ability to choose worthy assets are required. Already at the preliminary state, one must find buildings able to generate rentals even in difficult economic conditions. Due diligence is in order, to make sure that technical quality and location are rewarding factors. Fiscal costs (both on transaction and ownership) and managing costs must also be analyzed in detail. because the total return increasingly depends on current profitability: in the absence of economic growth and inflation it's imprudent to base investment on expectations of capital gain. Buildings are thus more similar to firms, which require active management, than to financial securities, which pay a coupon or a dividend no matter what you do. Real estate thus requires professional management and a significant capital base to diversify risk.

For a small investor without millions of euros, real estate investment can made indirectly, but buying listed real estate funds which represent income-generating real estate portfolios. This way, and with a few thousand euros, one can benefit from diversification (by type and location), from specialized and professional management, and last but not least from the transparency typical of institutional investors. As for property, also for listed fund there are opportunities today, with market prices on average 55% below the value of real estate held.