Why Are Rents Rising? Investment Strategies in a Prolonged Recession

October 26, 2011

With the spread of the ‘Occupy Wall Street’ movement around the world, Eurozone crisis, and various other obvious signs, it doesn’t look like the economy is going to improve any time soon.

A large number of people are, however, sitting on money in the bank, earning around 1% per annum interest. But surely there are better ways to make your money work for you?

Well let’s look at a few things we can be quite certain about –

  1. In general, people will have less money to spend.
  2. They are actively looking for ways to budget.
  3. Poorer and Middle-income people have been hit harder than the richest 1%
  4. Mortgages are increasingly difficult to obtain.
  5. Rental demand is therefor increasing.

And the rather obvious,

  1. People, no matter their economic circumstances, need a place to live.

So bearing this in mind, how does this extrapolate out to people’s actions?

Rich People – Not all the top 1% have been unaffected by the recession. Those unaffected can pick up a bargain – either buying or renting.  Those who have moved down a league, or simply moved, have often found themselves as accidental landlords, not wanting to sell their property for a low price, so adding to the supply of luxury rental property (pushing rents marginally down for real estate few can afford).

The Middle Class – The middle classes have been squeezed, not only by a sharply rising cost of living, but by rising unemployment, crumbling home equity, redundancies and foreclosures.  If we see inflation continuing to increase, then this will hurt the middle more as their disposable income shrinks.

So what are they doing to tighten their belts? Certainly one way to save money, and an increasing trend is to rent their larger house and ‘downsize’ or to simply move downmarket in terms of accommodation. This is putting upward pressure already on rent at the lower end of the market and is likely to be a welcome to all lower end landlords.

Poor People – The poor will always be with us. They make up the bulk of the budget private rental market and their choices on accommodation are becoming increasingly limited as the middle classes encroach on their traditional rental market, pushing rents up and improving the quality of the tenants available to landlords.

The end result? In a continuing recessionary environment, with rampant inflation, high unemployment, and an awful economy, a responsible ‘lower end’ landlord who keeps his accommodation in good condition will not only find increasing competition for his offering, the increased demand at the lower end will increase his rents and improve the quality of his tenant.

With increasing numbers of refugees (certainly in New York State), Section 8 (government assistance) applicants, and middle class people moving downmarket, the poorer parts of good neighbourhoods are seeing unprecedented demand for good quality budget accommodation. 

In other words, well managed, good quality cash-flow oriented investments are an excellent and secure source of income in a recession. 

Geography of course is also relevant here –

In Buffalo, New York, its possible to buy a 4 bedroom ‘rental’ detached villa,  in an ‘up and coming’ area (read – gentrifying working class area where the middle classes on a budget are encroaching) for $30,000 with a rent of $700 a month – a 28% yield. The equivalent in East London London would be a 2 bedroom flat costing £300,000, renting for £300 a week –only 5% yield !

This would mean that it would take 20 years to make your money back in London, but in Buffalo you’d make it back in less than 5 years.

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.

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