The Year of Cash

More than any year in the recent economic troubles, this year ahead looks to be the most interesting yet.

The general public are now belatedly coming round to the idea that valuing real estate on a ‘future capital growth’ basis is simply not sustainable. In other words, one by one everyone has finally admitted to themselves, in Europe and the States, that it was just one big bubble.

But the bubble hasn’t fully burst yet – many places haven’t fallen at all. Super-rich enclaves in West London, and Manhatten have been relatively unaffected – why is that? Flight to quality? Rich people haven’t been affected? Well, a bit of both I’d say, but mainly because of a history of cash buyers. According to this BBC article 80% of transactions in some parts of London are cash.

Cash dominated markets are likely to remain more stable than highly geared ones for obvious reasons. They are neither likely to be under risk of foreclosure, nor at the mercy of interest rate rises, rent fluctuations, inflation and of course excessive speculation.

Markets where most people are highly geared give a totally different dynamic, and as the whole residential real estate sector slowly de-gears, it is therefor becoming a more realistically valued market, and less exposed to outside influences like interest rate fluctuations.

You can think of gearing in real estate like air in a balloon. Where gearing is falling, it is likely to have an impact on prices as they deflate to the ‘real’ market price – i.e. without the corrupting factor of bank lending in the equation.

While buying with gearing is great when you can get it, just lets be aware this year ahead that bank money is likely to be retreating from the sector for years to come, and so make your valuations assuming no bank funding and see if it still adds up as an investment then.

Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment. You can contact Alan by E-mail: alan@abbotsinchcapital.com or by phone: +44 (0) 20 7193 2079.