The Investment Market Is on a Roll. The Stakes Are High.
22 March 2018
So, tread carefully. Here’s why…
It may have been the most widely discussed topic at MIPIM last week: The European investment market – especially in the UK and Germany – is setting one record after another, but how long can this growth cycle continue?
In the past, the kind of price levels we’re seeing served as an indication that we should tread carefully. In hindsight, of course, it’s always easy to look back and see the tipping point. Predicting the future, however, is impossible. Will this market cycle perform differently than past cycles? Should we begin to play the market more conservatively? Do we need to become more defensive with our deals? There’s nothing to say that this cycle will follow previous patterns and no way to foresee its peak, so how do we defend against these unknowns?
We don’t think there’s a reason to be bearish, but in the current market we do think you need to look before you leap. Most investors want to target the core sector, but it’s hard to find offers. In turn, the scarcity of supply creates pressure to move quickly, perhaps too quickly – and that’s exactly what we’re seeing in today’s market.
Dealmaking in fast-moving markets can lead investors to buy properties without thoroughly vetting them. Although it might seem like you’re going to miss a deal if you don’t jump at it, you’re better off being patient than finding out about serious risks and liabilities after you’ve signed the contract. This rings especially true in the opportunistic and value-add sectors.
Do the legal contracts pose a risk? What about cash flow from tenants? Did the previous owner keep the asset in good condition? A thorough due diligence will answer all your questions and give you enough information to accurately judge the risks and liabilities of your investment.
The rule that’s so easily forgotten in hot markets is: What goes up, must come down. So, seek high-quality properties that will retain value when the market turns. And even though you might be tempted to jump at an opportunity, slow down enough to conduct your due diligence without cutting corners.
Read a related article, The Future of Real Estate: "Smart Cities" Will Require Smart Development
See how my own company is helping investors conduct better due diligence and improve business agility.