Recession Looming? How To Manage Property Investments
The unexpected impact of a recession on housing prices might throw many property owners and landlords into turmoil. During a recession, it is common to witness dropping property values and residences remaining on the market for much longer before being sold. The property market's stagnation makes recessions extremely difficult for investors to navigate. The previous nationwide recession in 2008 resulted in a 15.9% drop in house values, resulting in a £29,000 loss on average house prices. If the drop in housing values from a probable future recession matches this amount of fall, investors and property owners will lose a lot. Signs of an upcoming recession are already taking place. The Bank of England have recently raised interest rates from 1.25% to 1.75%, the highest rate since January 2009. This change could have a substantial impact on mortgages because fixed-rate mortgage holders whose current contracts are about to expire may have to refinance at a higher rate to reflect this change. They may have to pay an extra £222 each month in comparison to the previous year. This decision was made to counter the company's rising inflation rates. The key cause for the sudden rise in inflation is the surge in energy prices following Russia's invasion of Ukraine, which rattled the whole European economy. Energy rates are scheduled to jump from £1,971 to £3,549, nearly doubling from the previous figure, according to British Gas. This can be a huge hurdle for investors wishing to rent out their properties, as premium properties with numerous tenants are likely to falter owing to the fear of the rising energy prices, making it much more difficult for these tenants to manage such a property.
Managing real estate investments during these unpredictable times can be incredibly tough. Price growth can be abruptly reversed in a big slump, as shown during the pandemic. While residential real estate investments are more resilient in a downturn than other asset types. Investors can benefit from a recession in a few ways, though, to limit their losses and seize any available possibilities.
The housing market often experiences much greater damage during a recession than the rental market. During a recession, rental revenue is frequently the most consistent source of income in the property market. Maintaining a well-managed property with occupants will assist you in navigating the economic repercussions of the recession. With the economy predicted to enter a recession this winter, the first action for investors with Buy-To-Let (BTL) properties should be to extend existing tenancies by six months to the fixed term. Finding new tenants during a recession is extremely difficult; therefore, it is critical to retain existing tenants even if certain tenancy payments are reduced to compensate for tariff charges created by the recession. Keeping a consistent source of income during these times is vital for investors.
Securing fixed terms for at least a year is another smart approach to handle the economic crisis. This would add a layer of security against national economic uncertainty and ensure that the property returns to the market during a rebound or peak season once the term is completed, allowing new tenants to enter a contract at a price increase. The month of August is essential for securing the optimum rents because this is often when property rentals are most in demand due to students trying to secure housing for the forthcoming academic year or individuals relocating for employment starting in September. The greatest challenge that landlords face in rental markets during a recession is an increase in eviction and vacancy rates. This is primarily owing to higher unemployment rates during recessions. According to ONS, the quarterly unemployment rate hit 8.4% during the 2008 recession. A diminishing economy means fewer jobs, which causes renters to be unable to pay their rent, prompting the landlord to initiate the eviction process. The only option to prevent this is to lower the monthly rental rate or confirm the tenant's financial stability before signing the contract.
First Time Buyers
While a recession may appear to fuel the collapse of the property market, it is mainly negative to current homeowners. During recessions, first-time buyers have the opportunity to get a home at a cheaper price than typical, provided they have the necessary capital and financial stability. Buyers can usually obtain a better deal on the home they want because there is less competition. Recessions are known for putting people in poor financial situations; a lack of competition in the property market leads to fewer bidding wars, allowing you to get your ideal home at the lowest possible price. When acquiring during a recession, potential seller concessions are also advantageous. A property that has been on the market for an extended period of time with no interest may cause the seller to act rashly, such as offering a verbally agreed-upon price decrease to purchasers.
When purchasing during a recession, there are various drawbacks to consider. The most glaring problem is banks' reluctance to lend money in exchange for deposits. Because of the economic uncertainty, lenders may reduce mortgage approvals during this time period. If a loan for a house deposit is required, the only option to oppose this is to demonstrate your financial stability.
Prioritising cash flow during recessions is essential for navigating economic volatility. While property values are declining due to rising interest rates, it is advisable to explore investments in commercial real estate such as self-storage in the form of warehouses and offices at this period. These can provide significant cash flow because to month-to-month leases that allow rents to be rapidly changed to market conditions. Retail sales of boxes and storage utensils are a low-cost strategy to increase self-storage revenue. The main advantage of this investment is that it protects against inflation.
Contract length in commercial real estate gives a tremendous degree of stability because commercial properties often attract longer lease agreements ranging from three to ten years. Due to the set contract and its length, the economic impact on commercial real estate would be less than that on residential real estate during a recession. As a result, a solid and consistent income will continue to flow until the recession ends. Diversification is another important element to consider. Those who diversify their portfolio with a variety of commercial assets ranging from retail to industrial can safeguard their income and manage risk far better than investors who focus solely on residential assets, which suffer the most during a recession. It is critical for investors and property owners to properly plan investments during economic uncertainty and maintain a steady cash flow to help them through these difficult times.
Novyy is a Community Investing Platform that enables individuals to invest in UK Buy-To-Let, Leading Real Estate Private Equity Funds, and Premium Homes across Europe with as little as £10,000. Novyy users enjoy seamless digital investing like never before, in opportunities that were earlier unavailable to most individuals. This piece should not be construed as tax advice. Please refer to your tax advisor before making any decisions on owning properties through Limited Companies.