With the advent of the COVID-19 outbreak and the political turmoil at the homefront, markets have not responded so kindly to the news. The FTSE Malaysia KLCI has descended from its pre-COVID peak 1615 points in Dec 2019 to its current 1480 points in early Mar 2020.
Even amidst the prime ministerial transition, the government have announced a stimulus package worth RM20 billion in order to prop up the tourism and manufacturing section.
On 3 Mar, the Malaysian Central Bank further announced another overnight policy rate cut of 25 basis points, down to 2.50% from the previous 2.75%, in order to further support up the Malaysian economy.
Investors are understandably concerned as global markets are in the red for weeks now, with wavering signs of recovery in the near term. However, property investors should think twice about selling off their properties to make room for cash.
Here are some reasons why real estate is a great investment tool amidst these worrying times.
1. Stable Income
Stock prices rise; stock prices fall.
So does the inconsistency in dividend yields and capital gains you receive from investing in the equities market during volatile times. In fact, many investors might be slapped with unrealised losses when investing stock in these periods.
However, real estate is different in the sense that your rental income remains consistent regardless of the stock market performance. Historically, rental rates have not been heavily affected by market conditions as rent is an integral part to everyday life, similar to how fast-moving consumer products like sugar, salt and cooking oil are less affected as well.
But that does not mean that rental income is guaranteed recession-proof. In addition to the regular risks that come along with real estate investment, investors should pay attention to these factors:
Will my tenant still be able to afford to pay rent amidst this economic slowdown?
Is my tenancy agreement expiring?
If so, am I able to command the same, or higher rental rates?
Despite these considerations, rental income generated from real estate is still a gross gain in income for investors. There is minimal risk that your property will lose much of its value due to a temporary event, such as the COVID outbreak, as long as you do not plan on selling it in the near term.
2. Minimised Risk
Speaking of risks, real estate is much more resilient during economic slowdowns and downturns due to its risk exposure being limited to macroeconomic factors and policy changes.
This is different from stocks, which have a wider array of risks factors. In addition to the same risks listed above, stocks and equities are sensitive to corporate governance, management competency, customs laws and supply chain risks, amongst many others.
For example, the COVID-19 outbreak has restricted border access between countries, which affects the international flight industry, and its respective airline stock counters. Fewer flights will result in lesser foreign tourist inflows, which affects hospitality stock counters as well.
Investors who invest heavily in real estate assets do not need to worry about these added worries. As long as the tenant pays their rent on time, and both parties agree to a satisfactory rental rate, the business will go on as usual.
In fact, securing a quality tenant that has plans on renting your property long-term would eliminate many of the risks that come with real estate investment.
3. Illiquidity
Normally, the inability to liquidate your assets quickly is a put-off factor for most investors. For stocks, bonds and ETFs, it is possible to quickly sell off your assets and withdraw cash in a span of just a week.
Real estate, however, would sometimes take weeks and even months in order to liquidate, as it is considered a private investment. Real estate does not trade as frequently and as openly as the free public market.
Investors may need to interact with many parties and stakeholders throughout the process as well, such as the sales agent, mortgage officer and lawyer. This further prolongs the sales and purchasing process of investing in property.
However, illiquid asset works in favour of investors during an economic downturn. This is because private investments are slower to respond to valuation shifts than public investments like stocks and bonds are.
Hence, house prices and rental rates do not fluctuate much whenever there is an economic downturn, and will only reflect in value months or even years after the initial downturn. In fact, if the catalyst for the economic slowdown is only short-term and temporary, such as a pandemic that only lasts a few months, property values might not even be affected at all.
That is also one of the main reasons why real estate is considered one of the best asset class to invest long-term, as it has the ability to weather multiple economic cycles across decades.
Regardless of the market conditions, it is still best to diversify your investment portfolio, and real estate alone is by no means should be the only investment you should hold.
However, real estate has always been a core centrepiece of most high-net-worth investors. And rightly so, due to its stability and long term prospects as an investment tool, the ability to collect rental income, and the easy leverage through mortgage loans.
What do you think? Have you considered investing in the property after witnessing the turbulent events that have transpired for the past few months?
Ohmyhome is here to help you on your investment journey by being the go-to platform for any of your property needs, from sales and purchases, rental listings and even a comprehensive view of all the newly listed properties available on the market!
Contact our agents to get further info! Call +6016-299 1366 or visit Ohmyhome today.
