I don’t expect any significant upheavals in the markets this week. After a sobering Friday, the markets experienced their worst weekly downturn since October. On Monday, markets rebounded slightly. My colleague, Garrett Baldwin, has already warned about the possibility of continued weakness. But keep in mind that Friday’s moves are easy to explain. Numerous so-called futures contracts expired, i.e., bets on the price trend. Against this background, investors sold in part to take profits. Prices are not a yardstick for this week’s performance. Risks lurk more in the medium term. Today, I want to talk about some of the risks in real estate.
Real estate has been a very red-hot market over the last year. But the air seems to be thinning again for real estate funds. Their results depend, among other things, on how much commercial real estate is still being used and how high the enforceable rents are there.
Almost half a dozen real estate funds are currently experiencing another difficult phase. For some time, I’ve advised my German readers to avoid the market for real estate funds. The chances and risks are not in reasonable relation to each other.
Real estate funds are certainly finding fewer and fewer opportunities to generate high returns as real estate prices rise and the economy weakens. However, due to the special regulations for open-ended real estate funds, you as an investor are inhibited from reacting under challenging times. You cannot return the units to the fund companies at will. Therefore, if you want to exit, you’d have to sell on the fund markets yourself. But trading there is severely restricted. You should not rely on strong demand.
Time to Think Longer Term
Considering the risks in real estate, I always advise you to think long-term. Real estate funds also live from the fact that interest rates are still low. According to statements by the Fed, the U.S. central bank, this will continue until 2023. Nevertheless, you should think even more long-term: If interest rates rise in a few years, this will also affect the real estate market.
That’s why, in addition to investing in owner-occupied real estate, I currently recommend residential construction companies in particular. You can still sell stocks quite well when the outlook is falling. At the moment, however, there are still good opportunities there in the short term and also attractive dividends.
The lack of affordable housing is virtually driving business for some companies. They have economies of scale compared with private landlords – especially when further energy-efficiency measures have to be financed. We’ll talk more about other ways to generate income.