Published: 02/02/2009 4:53 am
A look at what is the best option in 2009 if real estate is your investment choice
The entire world is facing the problem of a financial crisis. Suddenly we are asking questions about real estate. The financial crisis emanates from a totally different origin.
When Richard Nixon came to power, he convinced the world that the US did not need obey the same rules as all other nations, meaning that they are allowed to print money only on the basis of the gold or precious stones they have.
The US, being a superpower, did not need this. A superpower is above this rule. Every war it wins strengthens its position as a superpower. They started to print and print, reaching its peak under Reagan's administration, and continuing sharply in George W Bush's time.
Today every citizen of the US owes the government over US$60! The theory explained above did not take into account the 9/11, the Iraq war, or humiliating defeats in other parts of the world.
The economy was in fact a virtual economy. There was no value behind the dollar and it was like playing Monopoly. People were borrowing and virtual money was spent. It reached a point where debts were traded as a commodity, where property deeds were held by people who could not afford the expenditure. This was called sub-prime lending.
From this point on, many banks, financial institutions and other traders faced gigantic bankruptcies, since the Monopoly game was now assessed in real terms. The actual collapse of the financial system in the US, whose damage has not been really measured yet, has obviously an effect on other countries since we live in a global world. Consequently purchasing power and the slowdown of the economies also put a halt on the real estate speculation.
A safe bet
Coming to the real estate issue one should not forget some important principles: Firstly, it is not possible to deny that the world's population increases by the day, and the land available on this earth does not increase, therefore logically, one can say that demand is by far greater than the supply. And this is unlikely to change.
Secondly, despite the crisis there is another aspect to look at: recent real estate activities have confused people.
Real estate is not jackpot playing. Generally, real estate value appreciates and always will continue to do so, if we do not forget the first aspect mentioned above. Here comes the filter that needs to be considered. Although it is an excellent and safe investment, it should always be related to time. Real estate is not a short-term investment, but it pays well in the long term, compared to other investments such as gold, art, jewels, shares etc.
So what is a conservative and safe approach? If the purpose of dealing with real estate is to own a house or an apartment, then consider it as a long-term investment, to be preserved and definitely not sold today. If you have bought, or are thinking of buying a second house, then two scenarios should be looked at. One, do you want to rent the property and have a steady income?
Most probably, there will be a period of uncertainty for a while, and then a better climate should appear. Your rented property should then be renegotiated at a more appropriate rental value.
Two, have you bought a second residence as an investment and would like to sell it since you have no confidence in the future financial situation. Again the time to sell should be carefully chosen. Today, as we speak, properties around the world have lost between 10-15 per cent of their value. So it is not the time to sell unless you believe that with that money you could afford to purchase a better product, such as the properties which are for sale in the US or in better locations.
Real estate is serious business and should be treated that way. It would be wrong to expect huge returns in the short term.
The examples of successful property purchase in neighbouring countries should be placed next to so many untold stories of people who lost their life savings. Real estate business is a medium to long term business. Choose carefully the location, the real reputation of the developers, the quality of the product proposed and have the patience to consider a 15-year period to depreciate your investment. Otherwise choose something else, such as stocks, precious metals, etc.
Parallel to the fact that it is a long-term investment, one should not forget that the current economic climate will affect the value of money, and that those who have tangible values, will be better off, because of increasing inflation rates and financial loans becoming scarce. Therefore someone who holds property is better off than someone with cash only. The first one gets revaluated, whilst the second loses it purchasing power.
To summarise, real estate is a very good investment provided you take the time to let it mature and that you consider it a 'real' investment in the future.
Saleh Miri is the CEO of Al Sawadi Investment & Tourism Company (ASIT), the holding company for Al Madina A'Zarqa. The views presented here are the author's personal expressions, and do not reflect those of his organisation.