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Why do real estate funds prove to be mostly crisis-proof?

Why do real estate funds prove to be mostly crisis-proof?

For those familiar with the subject, it is not surprising that almost all categories of assets recorded heavy losses in March, with the exception of real estate funds.  The question is whether prices are reacting slowly to the new situation, or whether real estate is the stonghold of stability.No one can say for sure that this is the case, but there are many good reasons to consider the second possibility.

When the stock markets began to fluctuate in the first weeks of March, property prices were also affected showing to be part of this trend.Or rather, the prices of open real estate fund units in mid-March were even lower than they would have been justified by fundamental data alone - that is, by the values of the underlying homes. From mid-March onwards, the prices of some of the largest real estate funds traded on the European stock exchanges fell, on average by about 10 percent. No one can say for sure that this is the case, but there are many good reasons to consider the second possibility.

When the stock markets began to fluctuate in the first weeks of March, property prices were also affected showing to be part of this trend.Or rather, the prices of open real estate fund units in mid-March were even lower than they would have been justified by fundamental data alone - that is, by the values of the underlying homes. From mid-March onwards, the prices of some of the largest open-ended real estate funds traded on the European stock exchanges fell, on average by about 10 percent.  But only for a short period of time.

The lowest point in the price trend was between March 14 and 22, by the end of the same month the difference between stock values and house values was only seven percentage points.

Since then, it only observes the upward trend in stock prices, resulting in a decrease in the gap.  Throughout the first quarter, real estate funds have even achieved something that almost no other class of stock has been able to do. There was a record of a price increase.  Although it is small, being only 0.3% according to the Scope rating agency statistics, it is still an increase.

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However, we are not communicating that there is a recovery, as it is very difficult at this time to create any prognosis for the future.

Several factors and variables have to be analysed, such as how long the closure of hotels, restaurants, shopping centres, industries, offices will last, because the income from the funds comes from the tenants, as does the profit for the distribution of dividends to investors.  Therefore, the decisive factor will be the financial aid from the state, from the banks and from subventions to strengthen the cash flow of companies and individuals. 

And how many companies and jobs will survive the crisis? Bearing in mind that most of the properties in the funds' portfolio are office, retail and residential properties. It is necessary for each one of us to understand the great importance of fulfilling the duty to pay rents, so that the funds can continue to show good numbers and remain active in the acquisition and arrangement of real estate for rent.

Conclusion: Real estate continues to be an excellent investment option, both institutionally, in the case of funds, or privately, in the case of individual acquisition. However, it also and above all depends on the assumption of your contractual commitments to pay your rent or your loan.  Because otherwise, we will all suffer the consequences of a collapsing economy and an unprecedented increase in unemployment.

Text: Paulo Lopes 

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