Understanding the Real Estate Cycle
The real estate cycle is a common concept among real estate investors that allows you to better decide when to make capital improvements or moves in your property investments. This cycle has four major phases — recovery, expansion, hyper supply, and recession.
Understanding this cycle can help you understand market trends as well as risks that can arise, as this provides reliable information about the possible returns of your investments. Moreover, the real estate cycle can predict the income and appreciation performance of your assets, allowing you to better decide when to make significant moves — both in the macro and microeconomic scales.
Let’s learn the Four Phases of the Real Estate Cycle:
1. Recovery
During the recovery phase, the real estate market is at the bottom of the trough (lowest point). There is typically a high rate of unemployment and no new construction underway where usually prices for real estate start to stabilize.
Tip: Provided you move early in this phase, there’s still an opportunity to buy bargain-priced properties that are in various states of financial or physical distress. It is also good to invest in core properties because these can be highly profitable, especially if the targeted property has a significant amount of lease roll over in the next few years.
2. Expansion
In the expansion phase, the general economy is improving. The job growth is strong and there is an increased demand for space and housing. The phase is also when the general public will start regaining their confidence in the economy and the property market will start generating demand once again.
Tip: So while the market is booming, it’s advantageous for you as an investor to invest into developing or redeveloping properties that cater to the current market tastes and sell for more than market value. This is because the current demand for space and leasing momentum helps properties stabilize more quickly upon delivery at rental rates that could set high market prices. Moreover, Core property investors who want lower risk may benefit from a high tenant retention rate and continuing increases in rental prices.
3. Hyper Supply
During the hyper supply phase, the equilibrium between supply and demand in the expansion wave often tips over into excess — which leads to oversupply. This is because most real estate developers and investors alike get enticed by the recent years of the expansion growing. This phase is marked by rising vacancies, and rent growth may remain positive, but at declining levels.
Tip: But as an investor, this is a time to hold strong. Because in this phase property owners will often liquidate their inventory out of fear that their properties will go vacant or unsold. So, this is a great time to take an opportunistic approach i.e. buy and hold strategy. This prepares you to have the best properties already in stock when it becomes an ideal time to sell again in the next real estate cycle.
4. Recession
We’re already familiar with this phase because the Philippines is currently experiencing an economic recession due to the COVID-19 pandemic. In this phase, supply exceeds demand by a wide margin, and property owners suffer from high vacancy rates. Also, not only is rent growth not present, some landlords are forced to offer reduced rental rates and discounts to attract renters who are also suffering from the economic downturn.
READ: Take a look at the Financial Crises in the Philippine Real Estate Sector to better understand the economic downturn brought by the COVID-19 pandemic
Tip: As an investor, it’s a great idea to save up a rainy day fund for the next recession. A recession provides the opportunity to purchase distressed properties at cheaper rates or huge discounts. In fact, the Bangko Sentral has lowered the interest rates for loans including home loans to help the Philippine economy. Moreover, there will be an increase in real-estate owned properties, which are properties that have been foreclosed upon and repossessed by lenders. You can hold these properties and sell whenever you gain confidence or if the economy begins to recover.
Related post: The Real Estate Buying Process in the Philippines
