Real Estate Investor Magazine South Africa April 2015 | Page 19

because a specific area may be in
a completely different phase of
the cycle for a number of reasons.
Similarly, each country will have
its own clock, and each area in an
offshore destination will have its
own cycle.
Even in the same area, different
sectors of the property market,
such as residential, office, retail
and industrial, may be in different
stages of the cycle.
The good news is that this
means smart property investors
can diversify their portfolios to
minimise their risk of all their
investment properties being in
the same cycle. Buying properties
in different areas, cities or even
countries will help investors spread
their risk.

“One of the
fundamental basics
of economics is that
markets move
in cycles.”
“Timing” the market
The property cycle can be an
important investment tool for
buyers, sellers, investors and
developers in the property market.
For example, the optimal time
for buyers to enter the market is
when the property cycle is near its
lowest point. The best time to sell is
when the property cycle is nearing
its peak. Professional investors take
advantage of the opportunities of
the recovery phase. Developers
should ideally enter the market
when the property cycle is in the
early recovery or upturn phase, to
have them completed by the boom
phase of the cycle.
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However, as property investment
is a long-term strategy, the real value
of understanding the property cycle
lies not in “timing” the market, but
rather knowing how much time to
spend in the market to realise the
best returns.
Smart investors know that
excellent investment properties
can be found regardless of where
we are in the property cycle, and
that no matter at whichever point
in the cycle you buy, the cycle will
complete itself and begin again.
While buying at the bottom of
the cycle is ideal, it is certainly not
necessary to miss a good property
opportunity at the top of the
cycle. Even if you buy an average
performing property during the
cycle, it should deliver good returns,
provided you hold the property for
at least one full cycle.
As such, your investment horizon
should be no less than the duration
of a mini-cycle - at least seven
years. But if you really want to see
great returns, keep your investment
property for at least a macro-cycle
of around 20 years.
Investing counter-cyclically
Furthermore, rather than “timing”
the market, smart investors use the
property cycle to invest countercyclically.
Acting counter-cyclically is an
acquired investor skill. It is much
easier to buy at the top of the market
cycle when property price inflation
is buoyant and credit is both cheap
and easy. Buying when the market
is down – property values are
falling, credit lending criteria are
tight, and interest rates are high
– requires great confidence and
careful planning. While investing
when the market is depressed
and filled with negative news is
counter-intuitive in the extreme,
it is precisely what distinguishes

the most successful investors from
the rest – the ability to buy when
everyone else is fearful, and to resist
joining the buying frenzy when the
market is at its peak.

Improved investment decisionmaking
Understanding the property cycle
allows property investors to plan
ahead and be prepared for the
inevitable up and downs. Those who
appreciate the cycles will know that
capital appreciation will fluctuate
with the cycles. Yet, despite the
short-term fluctuations in the rate
of growth, property values rise
steadily over the long term.
Similarly, property investors who
finance a property at the lowest
point in the interest rate cycle can
expect that the interest rates will
rise – by an average of 6% per cycle
- and make provision for it in their
planning. Rental demand will also
rise and fall, as will average rental
increases, as they move through
their own cycles. Be prepared for
this and factor it into your planning.
Understanding
this
one
fundamental of the markets and
using it to ensure you can withstand
the downturns, prevent desperate
selling just before the next upswing,
or resist the temptation of boomtime buying, will give you a real
edge in the property investment
game.
April 2015 SA Real Estate Investor

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