Profitable investment strategies for all economic environments
When investing in property, it pays to understand the property and economic trend cycle. This will help you to invest in property at the best time, and shape your investment strategy as the economy shifts through its cycle.
In this article, you’ll learn about the simplified cycle of growth and decay in an area. You’ll also learn about the best investment strategies to use in each phase of the cycle.
The four phases of area growth and decay
There are four phases of every cycle:
1. Regeneration (also called recovery, or upturn)
This is when it’s fine to buy back into an area. The investment is coming, and the area will begin to look like somewhere people want to live again.
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It can be difficult to identify the start of this phase because it still feels like a recession. There is little demand for property, and new construction hasn’t yet taken off. Rental prices are either flat or falling slowly.
2. Upcoming/ Growth (also called a boom, or expansion)
This is the stage where the economy is booming and massive capital is available to invest in everything from roads, shopping centres, residential developments, and business expansion.
It is now that people can see that investment is producing positive returns. Demand for commercial, office, and residential space is growing as the local economy expands. There are more jobs, and people are moving into the area. Rents are rising, and construction levels are increasing. At some point during this phase, demand and supply will be in equilibrium.
3. Established (also called oversupply)
The growth cycle comes to an end and the area experiences a plateau while the area is still benefitting from all the investment previous during the growth cycle. However, it is short-lived, as no new investment is being introduced.
The balance of demand and supply of homes shifts to oversupply. You’ll notice that homes take longer to sell or rent, and commercial and office space will remain empty.
4. Decay (also called slump, downturn, or recession)
The momentum is lost, and things are going downhill now. The roads are looking worse for wear, new buildings are not being built, and it’s not economical to tear down the old ones. Jobs growth is limited, and you may even find that people are moving to newer areas. It could be that unwanted elements are entering the neighbourhood, and crime is increasing. This is the time you don’t want to be buying into an area, unless, of course, the regeneration phase has already begun – look for local authorities and government budgeting for this.
In this phase, supply outweighs demand. Rental growth will turn negative – either nominally, or in real terms when measured against inflation. Offices and residential will be offered for rent with discounts or incentives. For brave investors, bargain prices will be available – it is often easier to buy at a discount to market value in this phase than any other.
How long does each phase of the cycle last?
I have not put times on these phases because it will vary in each area. Generally, more affluent areas will remain at the plateau stage for many years, and it’s perfectly fine to invest there. Poorer areas could remain in the decay stage for years. It all comes down to government and local authority motivation, economic prosperity, and how powerful local lobbyists perform.
What investment strategies to use during the cycle
OK, so you now have an appreciation for what each phase of the general cycle looks like. The question now becomes, what investment strategies should you consider during each stage?
1. Regeneration phase investment strategies
In the early part of this phase, there will still be some great bargains available. Undervalued and unloved properties can be bought, but these will need a great deal of work on them to bring them up to scratch. When considering whether to invest in off-plan property or existing property, you should investigate renovation and refurbishment costs comprehensively – I know of many investors who have struggled to break even on a renovation project because they didn’t do their due diligence properly.
2. Growth/ Upcoming phase investment strategies
You will notice more development in this phase of the cycle because demand is taking off. It will be easier to find tenants, but you must always concentrate on investing in every person properties.
In this phase, the opportunities to buy at a substantial discount will be fewer. As this phase matures, you should take care not to invest in overinflated valuations.
3. Plateau phase investment strategies
As supply begins to outweigh demand, investors can once again buy at discounts to market value. However, prices will stabilise during this phase before starting to decline. Once again, investment in a property that is likely to receive the highest rental demand could prove fruitful, as values will remain most stable, or rise gently.
4. Decay phase strategies
As recession kicks in, underprepared investors will seek to get out. Some will need to sell at any cost, and these are the real bargains from which to benefit when leveraging your investment capital.
However, when buying in this phase, you will need to be patient. You know the recovery and regeneration are on its way – you just don’t know when.
Investing in property is a long game. It pays to have patience, but it also pays to know which strategies work best during which phase of the cycle. In my award-winning book, “The 3+1 Plan: The Insider’s Way to Achieve Financial Freedom with Just 4 Properties”, I expand on the property and economic trend cycle, and the strategies to use during the entire cycle. You can download the book for free by clicking on this link:
To discuss which property investment strategy would be best to meet your goals, get in touch with Gladfish at +44 207 923 6100. We’ve helped hundreds achieve their lifestyle objectives with property. You could be the next.
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