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Market Downturns Profit The Savvy

By +Eric Jafari

I am frequently surprised that historians are not better investors. History does have a tendency of repeating itself - especially when it comes to money.  During previous market downturns such as the Wall Street Crash in 1929, the Japanese asset bubble in 1980, and the credit crisis in 2008, there is one repeating pattern: wealth has always accrued in the pockets of those that are disciplined enough to embrace the Warren Buffett principle that profit is generated by the purchase price, not the sell. 

Is it as simple as blindly placing your capital into anything, and as the cliché goes, "a rising tide lifts all boats" when the market eventually recovers? Unfortunately not.

Two drivers are influencing current market conditions: first, is flight to safety: investors are flocking to perceived safe havens, such as residential/commercial properties in London. This means that London opportunities are currently not being sold on a historically discounted basis.

Secondly, lack of liquidity: developers/borrowers are unable to obtain debt at high loan to values.

Natural market forces within specific asset classes and sectors continue to increase demand and yet supply remains unchanged. The lack of liquidity is a common trend among all and thus those with the liquidity are able to capture market share. Outside of London (in certain regions) and in many cases within non-prime London, there are shortages in supply for student housing, serviced apartments and residences and yet, due to the lack of debt, developers are unable to deliver the required additional supply.

This phenomenon forces developers to identify alternative methods of obtaining finance to accommodate the supply gap. Consequently, investors who take the time to identify asset classes and markets housing the largest supply gaps are able to financially benefit. They can either self-develop within these markets (which requires development experience), partner with or lend to cash-starved developers on favourable terms previously unavailable during the property boom. During the boom, developers and borrowers used to call the shots. The tables have now turned.

21 August 2012

Tags

Wall Street Crash,Japanese Asset Bubble,Credit Crisis,Flight to Safety,Developer Financing