Real Estate: A Viable Investment Choice
In Barbados’ current economic environment, individuals and companies are faced with the question of what to do with their excess cash.
There is a choice, even with exchange controls and limitations on available investment options. Available opportunities include: bank deposits, government bonds, corporate bonds, mutual funds, savings products provided by insurance companies, a limited pool of equities and of course, real estate. All of these options have their own inherent risk and return payoffs.
Sovereign debt has traditionally been used as the benchmark for risk-free investment. However, against the backdrop of poor economic performance globally, there has been a recent history of rating downgrades, debt restructurings/exchanges and haircuts on principal - for several sovereign instruments globally and in the region. This has left investors facing the prospect of write-downs in the value of their bonds. In the case of Barbados, rating agencies like Moody’s, have downgraded Barbados’ local and foreign currency ratings - effectively changing Barbados’ sovereign debt from Investment Grade to Speculative. As a result, investors may consider other options but the reality is, they are limited. See chart below:
Real estate in Barbados provides a useful long-term alternative. There is value inherent in the underlying asset - cash flows can be generated from rental income and the eventual net proceeds from the resale of the property. There are four broad categories of real estate to consider: undeveloped land, commercial retail buildings, commercial office buildings and residential properties. Each of these categories has its strengths and weaknesses. See below:
The general consensus is that it’s a buyer’s market. It is not uncommon to find vendors who are willing to discount their price significantly from list. The expectation is that as the market recovers, rental rates will stabilize and prices will start to hold. Investors can do well, if they maintain discipline and offer prices that provide them with a strong annual cash/rental return.
However, there are several factors to be considered when determining if an investment in real estate is right for you. Among them are:
- Liquidity – Investments in real estate tie up large sums of cash. If liquidity is needed quickly, it may not be readily available. Equity and bonds are advantageous because there is a ready market that allows conversion for them to cash more easily. Also bear in mind that depending on the property, real estate transactions may take months or years to achieve a successful sale at a fair price. Otherwise, heavy discounts may need to be applied to achieve a quick sale.
- Timing – If an investor is looking at holding real estate for the short term, it may not be the best option, given the current depressed nature of the market. Since it seems to still be a buyer’s market, investments need to be held for the medium to long-term, for appreciation. Investors who have cash and can afford to be patient, could benefit greatly.
- Rate of return - The rate of return on real estate properties is dependent on the price paid for the property, its incremental cash flows and the proceeds that are ultimately realized from its resale. The ability to achieve suitable returns is heavily influenced by rental rates, occupancy and its eventual sale price. This will depend on location, type, visibility, condition etc. The old adage still holds true; it’s all about location.
Is it right for me? Like any other investment, the decision of whether or not to invest in real estate requires careful consideration of all of the relevant risk factors. It should be discussed thoroughly with your advisors. Though real estate is not without risk, it provides a viable, long- term investment option to an astute investor in the current economic climate. Given the right combination of cash flows, price and location, it can hold its value, provide a hedge against inflation and give good, long-term returns in real terms.