The high inflation rate has resulted in a 10%-12% increase in building costs, affecting developers’ expected cashflows and project completions.
How To Prepare Your Investment Portfolio For The Upcoming Recession?
Months of stock market volatility, skyrocketing inflation, and rising interest rates have many investors wondering whether a recession is on the way. Many people's portfolios cannot withstand a recession or other economic crises. How can you, as an investor, mitigate or prevent the harm, avoid being wiped out, and maybe even come out ahead? Real estate.
Don’t put all of your money into one investing instrument. Diversification of your strategy is one of the investment advice. However, some people neglect it during a downturn. One of the most common errors individuals make is believing they are diversified because they hold five different S&P 500 ETFs. They have a Fidelity account, a Schwab account, and a 401(k), all of which contain an S&P 500 fund. And they believe that because their custodian is different, they are investing in various things, but when the S&P 500 falls, the whole of their portfolios fall.
The Possibility of a Coming Recession
A recession is almost certainly on the way. It is just the way the world, economy, and finances operate. It’s not a question of if but of when.
Based on historical cycles and trends, the market typically flips every seven to fourteen years. Of course, this may change and gets impacted by other crises, monetary policy, stimulus, and market manipulation. Unfortunately, many investors have no strategy, even if an economic shift might be beneficial if you are in a position to gain from it.
Stagflation vs. Recession
When there is widespread inflation, the Fed responds by hiking interest rates. Several significant rises will chill the economy; nevertheless, to stamp out inflation, they would increase rates to match inflation. Historically, rates have risen from 14 percent to 20 percent.
When the economy slows but inflation continues, we might enter a time of dreaded stagflation, which means that if you don’t lose money in the stock market, you’re losing money if you don’t make the appropriate investments. Every day, the purchasing power of your savings, investments, and retirement accounts decreases.
If your money depreciates by 30% yearly owing to inflation, your $1 million nest fund is now worth just $700,000 this year. It will be $490,000 next year.
We must all get armed for times like this. We always need downside protection and inflation-protected assets. Put out a fairly big bucket if it starts raining gold out there. Unfortunately, most people aren’t paying attention to the holes forming in that bucket and how quickly it might flow away when the economy swings against them.
The imminent risk is that majority of investors are not sufficiently diversified. Many people think this because they have invested in stocks or funds on the recommendation of their broker or 401(k) plan administrator. Unfortunately, this isn’t true diversity.
It is critical to monitor the relationship between the performance of your various assets. While there may be a few exceptions, when the stock market crashes, very much everything crashes. It overcorrects not just for rectification, but also due to panic purchasing. Thus, most people awoke in 2008 to find they lost $70,000 or more overnight.
Stocks are highly correlated. Some people will always believe that investing in them is a good option. The argument is that you require a wider portfolio of assets in your portfolio. It makes no difference whether you own 10 publicly listed stocks or 110.
So, where should you put your money? Real estate investment.
So, How is Real estate a Good Recession Investment?
A recession gets distinguished from a contracting economy. People are spending less money on non-essentials and more on necessities. Companies may postpone recruiting or laying off staff to improve their bottom lines. Stock prices may fall as a result of economic uncertainty. Real estate is undoubtedly the finest asset to deal in during a recession. However, according to CBRE’s 2021 U.S. Real Estate Market Outlook, commercial real estate has done better than others throughout this crisis.
While the scenario isn’t exactly sunny, real estate may provide some security for investors when the economy slows. If you’re searching for an alternative to the market during a recession, these elements might make real estate a viable buy:
- Weak correlation to stocks: Real estate has historically had a weak correlation to the financial market. Even if equities experience more volatility due to a recession, there is little spillover to the real estate market.
- People still require housing: Even though the economy is in a slump, people need a place to live. If demand for rental properties remains stable or even climbs during a recession, and there is a limited quantity of homes available, property investors are best placed to depend on a consistent source of rental revenue.
- Recessions provide bargains: A reduction in housing values does not always precede a recession. However, if a recession enables a hot property market to drop, investors may be able to acquire rental houses at a bargain.
- Real estate can also be used as a hedge against inflation if a recession progresses to stagflation. High inflation and high unemployment characterize stagflation. Real estate prices tend to rise in lockstep with growing consumer prices. Thus, making it a more inflation-resistant investment.
How to Invest in Commercial Real Estate During a Recession?
Investing in commercial spaces is expensive and necessitates having or investing crores, don’t they? The shortage of crores, however, does not stop you from investing in financial structures. You can go ahead with just lakhs too. With fractional ownership, anything is conceivable. An individual can engage in commercial property fractional ownership through Assetmonk for Rs. 10 lacs.
Fractional ownership is an investment technique in which a group of people or corporations each own a section of a property, splitting the expenses of care and acquisitions plus the return. Rather than buying a complete building and putting up all of the money, fractional ownership investing allows investors to purchase a proportional share of assets. Fractional ownership provides a low barrier to entry for new investors with minimal market understanding. A fractional ownership investor should begin investing in luxury properties in large cities without spending too much money.
How Can Fractional Ownership Be A Recession-Proof Investment For You?
- Resilience: Because of portfolio diversification, ease of departure, capital gain, and constant rental income, small investors are now fractional investors of commercial properties. Also, India’s commercial real estate market will expand from 13 to 16 percent soon, making fractional ownership of office buildings a beneficial investment. As a result, India’s commercial real estate market fell somewhat in 2020. Nonetheless, it improved in Q3. Covid-19 has depressed worldwide property values, particularly in Stockholm, Dubai, and London. According to industry insiders, office leasing increased during the same period due to India’s thriving outsourcing economy. Approximately 63 percent of office space in India gets used by MNCs from Europe and the United States. It should signify to investors that the time is ripe to own a piece of the real estate pie.
- Diversification: Do you wish to diversify your property assets but lack the funds to purchase homes in various markets? It is attainable through real estate fractional ownership. For example, shared ownership gives investors in a property while both working in commercial office buildings and renting out your home and earning mortgage payments. Because your money is not connected to a specific property, you may distribute it among several properties, grades, locations, and regions within the same city. You can then opt to specialize in a certain sector or to continue diversifying and profiting from economic ups and downs. It reduces the likelihood of market volatility. Fractional investing enables you to reap the benefits of diversification without putting down substantial deposits on each property.
- Ease of access: One can have access to and put his money in Chennai’s INR 400 crore commercial building through fractional ownership. Furthermore, it is a large commitment that is frequently only attainable to the wealthy. Nevertheless, because of fractional ownership, somebody in Chennai may purchase a comparable property for as little as INR 10 lacs. Such office property can also provide annual rental yields of 6 percent to 10 percent. It earns between INR 60,000 and INR 1 lakh in rental revenue every year. With Assetmonk, a person may invest in commercial real estate for Rs. 25 lacs.
- Long-term lease: Rental unit tenants change out regularly. As a result, the landowner must cover the rent until a replacement is found. Meanwhile, commercial buildings have lease durations of three years or more. The lease contract can also be extended. As a result, commercial buildings give investors guaranteed revenue. Large enterprises, information technology organizations, and financial institutions rent such premium commercial properties. These companies pay their rent regularly. Also, considering the effort, time, and capital allocated to transforming the premises into offices, several tenants have extended their lease terms. Investing in an already rented office building, on the other hand, for huge returns.
- Rental Revenue Returns: Rental money is regularly deposited straight into a bank. You need to wait for the investments to mature before getting your rewards. Due to continued rental revenue and appreciation, fractional ownership of commercial real estate gives a high return on investment. India’s commercial real estate investment has increased at a 16 percent CAGR in the last 5 years. Besides increased value, investing through a reputable fractional ownership firm might yield a 15 percent increase in rental revenue returns within the next three years. It is incorporated in the leasing contract to hedge from rising inflation, guaranteeing that your investments remain steady.
- Real estate Appreciation: Investing in commercial real estate produces a two-fold return. Fractional ownership gives immediate income benefits as well as the commercial property value. You have a stake in commercial real estate. As a result, the value of your investment will rise. Small investors are becoming more financially enticed.
- Liquidity: “Yet, real estate lack liquidity,” you add, “so I’d just invest.” We agree. Real estate has a liquidity issue. But, fractional ownership does not lack liquidity. All conventional property investments possess lesser liquidity compared to fractional property assets. Of course, you’d need to double-check your agreement. However, being able to sell your stake at any time makes trading less dangerous. How so? You may always sell your portion of the property and gift it to others.
Few investors can accurately “time” the market. Finally, investors must stay focused on their long-term investing strategy. Those who begin investing earlier will have a long-term view in which the market will fluctuate.
Investing in excellent real estate in strong markets through professional real estate platforms such as Assetmonk will be best positioned to weather the inevitable economic ups and downs. As previously said, fractions ownership is one strategy to prepare for a recession to help weather any economic storms that may come your way.