These Markets Will Collapse And Not Recover
The global shutdown in response to the coronavirus pandemic is going to have big effects on real estate markets worldwide. However, the situation we’re about to see play out will not be the same as what we witnessed in the wake of the 2008/2009 global real estate crash when some countries—Spain, Ireland, and Costa Rica, for example—saw property prices fall by as much as 70% and more. Those bona-fide collapses were thanks to bubble pricing and over-lending. Markets with less leverage at work—Panama was the best example—saw far lesser drops in values and quicker recoveries.
What’s going to happen this time?
"Survivalist" Markets Will See Relative Booms
Every property market worldwide will be affected by the pandemic crisis but not all negatively. The “survivalist” market—for properties in places where you could live comfortably off grid and self-sufficiently—will become more sought-after than ever and therefore more valuable. Land in Cayo, Belize, is at the top of this list.
Brand-Name Markets Will Recover Quickest
Thinking long term, the world’s brand-name markets will be least impacted. Long term, a Paris rental property will always find a renter, though even this top-tier rental market will take a short-term hit.
Before the quarantine, prices in Paris were soaring, thanks largely to Brexit pushing big numbers of financial industry workers from the City of London to the City of Light. Few listings have been withdrawn during the extended lockdown of everything in this city including its real estate industry, but very few new properties have come onto the market. When Paris reopens, however, there will be a surge of new listings, creating a short-term softening and a buyer’s market window.
Another European market that had been booming pre-pandemic is Lisbon. Here the demand was driven by Chinese buying property to qualify for Portugal’s Golden Visa program. Values surpassed pre-2008 levels, and investors were finding Lisbon expensive. As in Paris, the COVID-19 Effect should give you an opportunity to buy at a better price once things start moving again. However, as in Paris, the window for deals may not be long for better properties.
The best example of a city with brand-name resiliency in the Americas is Panama City. It’s the regional headquarters to hundreds of multinationals and a genuine business and financial hub with deep and diversified pools of both buyers and renters from around the world. In addition, Panama’s economy is backstopped by the Panama Canal, which accounts for about 40% of Panama’s GDP. If you’re in the market for an investment with a short-term horizon, start here.
Vacation Rental Markets Will Collapse
Hardest hit will be second-home and vacation-home markets. These will collapse in the immediate term. At the top of this list are markets like Cancún and Playa del Carmen, Mexico, where zero tourist traffic will kill rental returns and lead to depreciating values of up to 50%. However, these well-established and relatively accessible markets will come back before farther-flung, less developed locations like Akumal and Tulum.
High-density cities, likewise, will see collapses in their rental markets, as well, as demand across the board—residential, tourist, and commercial—will diminish. Think Rio de Janeiro.
Vacation and second-home markets in general will rebound slowly. Interest will pick up as air travel returns, but it will take 5 to 10 years for meaningful recoveries in some cases. On the other hand, as these markets will be hardest hit, they’re the places to shop for crisis-level bargains. Just be prepared to invest for the long term, and, very important, buy in a place where you’d enjoy owning and want to spend time. Don’t buy for cash flow or appreciation alone (or maybe at all).
Livable Low-Density Cities Will Enjoy New Demand
The world’s most livable cities with modest to small populations will recover quickly and see booms as people look for options for reinvention and starting over in locations that offer good and affordable quality of life and relative safety from a new pandemic. The possibility of another COVID-19 crisis will be on all our minds for a long time, and small cities and rural areas offering the possibility for appealing yet physically distanced living will enjoy growing demand. Medellín, Colombia, and Cuenca, Ecuador, are good examples.
A Supercharged U.S. Dollar Will Create Specific Bargains
One of the biggest opportunities created by the current crisis will result from supercharged U.S. dollar buying power. Brazil, Colombia, and Mexico (in the case of Mexican peso-priced properties; in some localized markets in this country, real estate trades in U.S. dollars) are all as much as 30% cheaper right now in U.S. dollar terms than they were two months ago, before accounting for any local price reductions.
Is Now The Time To Jump?
In some cases, this is the time to act. Panama City’s property market remains open for business, for example, and motivated sellers are emerging. This could also be a good time to be shopping in Medellín, Colombia. However, in most cases, this is a chance to take stock and be ready to move when the time is right.
Here are seven things to keep in mind as you size up current and developing opportunities:
- Don’t try to time the bottom. Nobody can and waiting for a further fall in local values or an additional boost in your U.S. dollar buying power could mean missing out.
- Weigh the risk of buying without visiting (which you likely can’t do right now) against the risk of losing a deal. If you’re a novice global property buyer, I recommend waiting until you can travel to see what you’re buying with your own eyes.
- If you’re an experienced global property investor looking to take advantage of the current situation to expand and diversify your portfolio, you can make use of video walk-throughs and virtual tours, increasingly available globally. If one isn’t offered for a property you’re interested in, ask the agent to create one for you.
- If you find something you’re interested in but aren’t comfortable pulling the trigger, you can ask for a long reserve time pending a site inspection. Offer the agent a refundable down payment to reserve the property until you’re able to travel to see it. Not all sellers will agree to this, but it’s a reasonable request in the current climate.
- Go for premium properties in premium locations. This is always important, but it’s especially so now. Like brand-name cities, premium properties in sought-after areas are the least affected in hard times and the first to recover. Lower quality, less well situated, more common bargain properties will remain bargains during good times.
- Buy luxury where you can. Exchange rates are heavily in the dollar-holder’s favor right now, creating serious bargains. Meantime, over coming weeks and months, prices are going to tumble in some very appealing parts of the world in local currency terms, making prices even cheaper in dollar terms, creating a chance to buy a luxury property you might otherwise never be able to afford. A high-end property will be the first in line out of any downturn and a pleasure to own in any market cycle.
- Be wary of pre-construction deals in the near term. Deal only with solid developers with proven track records in their markets.