Location vs Timing: How to invest outside your comfort zone

06 Sep '20

By Mariano Capellino

The international buyers of real estate usually look for Premium locations: places they would like to live in or visit as tourists. But this bias excludes more than 95% of the market, where it is usually possible to find the best opportunities for investment.

Miami Beach, Salamanca in Madrid, Manhattan in Nueva York, Vila Nova Conceição in Sao Paulo, Vitacura in Santiago, Puerto Madero in Buenos Aires. If you want to know the most exclusive cities around the world, you simply access Google. Investing in the real estate market requires further analysis and, even though the locations above may become safe haven in the long term, the success of a real estate investment relies almost exclusively on timing.
It is necessary to go beyond traditional models. In this sense, it is essential to use discount rates during the acquisition process as a fundamental variable of the business, in addition to the (rental) income and the appreciation rate of the asset. Therefore, it is essential to be aware of the dynamics of the market and its cycles: understating the right moment to enter and exit.
In Premium locations, those cycles have special characteristics, different from the other locations, where the analysis must be conducted more carefully as their sub-cycles are shorter. Miami is a good example. Because of its safety, luxury and glamour, this is one of the favorite markets for Latin American investors, who have been investing in the best zones of the beach such as Miami Beach or Brickell for decades. But these locations are just a small portion of the market, and they behave differently.

After the crisis in 2008, during 2009/2010 the Premium locations in Brickell hit historic lows of approximately US$ 2300/square meter. Rapidly, a large group of buyers that decided to take advantage of such opportunity generated the recovery in the price curve and, in the year 2013/14 the value reached US$4300/square meter. Meanwhile, in the rest of the residential market, prices continued to fall reaching US$600/ square meter in 2012/2013 and they are still under their historic highs of US$1800/square meter.
The discount rate, the rental income and the recovery rate in middle-income homes became very attractive and those who invested in them got a great deal. While those investors who stayed in premium assets since 2015 started to suffer a price adjustment that has lasted for 5 years. Today, Brickell is about US$2800/square meter with rental income of almost 0.
The indicators for each segment are different. For instance, in the case of residences in prime locations one of the most important variables is foreign capital inflow, while other homes depend on the recovery of the economy, the access to mortgage loans, interest rates, etc. In general, when prime assets have already recovered their value, the rest of the market is just hitting rock bottom and starting their recovery process.
The global crisis of the pandemic caused strong declines in certain segments of some markets, such as hotels, stores and offices in Spain. The million-dollar question is when they will recover. At this point, it is very important to understand the market, the experience, the expertise and the professional work involved in the selection and negotiation of thousands of assets in banks and auctions so that only some of them can be acquired.
Inmsa´s purchase index of the assets selected and negotiated in almost 20 years of work focused on the USA and Spain is not higher than 2%. In order to operate in a certain market, it is necessary to know it. As the saying goes, time is money. Knowledge too.
(*) Founder and CEO at INMSA

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Source: Ámbito

 

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