Top 3 Reasons for the Stampede? Plenty of room for expansion, income in a yieldless world, and foundation metrics are solid.
Why are investors rushing into real estate?
In 2019, real estate continues to be one of the most opportunistic asset classes. This is not just my opinion, but that of 500 global asset managers expecting this asset class to increase investments.
It is one of the few sectors that continues to provide a healthy income-growth combination that can be safely leveraged with cheap capital or 100 Investor Financing LA to generate long-term attractive total returns.
Reason #1: Real Estate Cycle Has More Room for Expansion
Historically, the entire real estate market cycle has had an average duration of about 18 years, and it is now only the 11th year.
In addition, the current one was very mild in magnitude with unspectacular returns in its expansion phase compared to the two previous real estate cycles.
It leaves us optimistic that there is still a long way to go to the current real estate cycle. To reach the historical averages, with sharper annual appreciation, the real estate market would need to keep rising for another 7 years.
Reason #2: Income in a Yieldless World
Currently, almost all assets are historically costly. Interest rates for bonds are very low. For stocks, P / E ratios are costly. And cap rates for real estate are on the low side.
Nevertheless, as discussed earlier, the potential for real estate to generate strong returns and income for investors remains good. Ultimately, it’s all “relative,” and while a decent property can produce a 10% cash leverage on cash yield–comparable stock investments with similar risk profiles–it’s unlikely to come even close to that.
Reason #3: Fundamentals Remain Favorable
On the back of constant financial development, real property prices continue to increase. This is the immediate consequence of ongoing development of NOI in an setting where cap rates stayed relatively constant in the face of powerful demand for investment in land:
Today, most sectors of property are higher than last year. We have Self-Storage, Industrial and Manufactured Housing – three industries that we overweight within our diverse real estate portfolio at High Yield Landlord – leading the pack in terms of price appreciation and complete returns.
Increases in real estate prices become unsustainable if they continuously surpass NOI growth. Today this is not the case with demand growth outstripping fresh supply in most property industries-allowing landlords to continue to raise rents and achieve NOI development.
It is not surprising then that properties are still appreciated. The lower the rate of vacancy, the higher the rent increases can be enforced-pushing higher and higher property values.
We expect the appreciation to continue with the economic expansion likely to continue in 2020 and the strong foundations of the property market. The good thing is that even if we’re wrong and going into recession tomorrow, it won’t be a disaster for real estate investors who enjoy long terms of lease and steady cash flow.