At some point interest rates will rise.Too many are over-leveraged and many are on variable interest rates. Sadly as I have seen this cycle several times, people will lose their houses and have to down scale. Even inflation is starting to creep up. Inflation takes a bite out of everyone’s paycheck and leaves less for mortgages.
Unemployment is low, but median income has not increased. The gap between the wealthiest and the less fortunate in society continues to widen. The middle class is hurting. The population in this segment is being squeezed out—either elevating to the upper class or moving closer to the poverty line. Logic says the majority of this segment will experience a trend in the direction of affordable housing. Demand for affordable housing is predicted to increase under these conditions. More so, those already in the lower ring of society, it makes it even harder to get out of the cycle of poverty.
So why do have the title…Investing in Affordable Housing for the Long Term? Honestly, it is not glamour but at some point there will be a nasty recession. Affordable LHA/working tenant properties have to be one of the safer property investments, at least in my opinion. My colleagues own 50 LHA/working tenant properties in Manchester. While those who bought city centre wonderful flats lost their underwear, my JV colleagues continued to grind out profits. However LHA properties are not for the faint of heart or those who do not know how to manage. The key is management. Knowing how to work with the councils. How to make sure you get paid as a landlord. It is very nice to go buy one of these properties….but the massive difference is managing it.
When buying affordable properties….you are buying way below replacement value. The properties we are in the process of buying were in the 60-80k range. Today they can be purchased 40-50k depending on condition. New construction is going up in major cities across the country. The caveat is that the constuction taking place is not for entry-level homes and apartments. The bulk of what is being built is catered to grade B+/A properities with luxury finishes and amenities. These properties are over valued and as I have seen several times already in my career investors get wiped out by purchasing these trophy properties. Our basic LHA properties are approx 100 years old and will be around another 100 years. Not sexy…not wonderful…However in strong demand and needed in today’s society.
The Property Markets are cyclical. Real estate is local, but it’s also cyclical. Economic indicators suggest we are closer to the top of a cycle than the bottom of one. If there is ultimately a downturn (and at some point there inevitably will be), affordable housing demand should remain strong. Predicting the future is a fool’s errand, but in a downturn, it is logical to assume that the asset class most likely to experience strain is the one most exposed to price fluctuation. These areas tend to be metropolitan cities with luxury properties. Just look at what is happening in London at the moment….
Thoughts
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