[Editor’s note: This is a guest post from RealtyShares. RealtyShares is a Bronze Sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. At LendIt, Nav Athwal, Founder and CEO will be speaking on the panel: The Capital Markets Approach for Real Estate.]
The current state of the stock market is troubling to say the least. With crude oil prices dropping below $27 a barrel, its lowest level in more than a decade, stocks have taken a hit on a global scale. Energy stocks have been dealt a particularly severe blow, leaving the future of many oil companies uncertain and raising questions about economic growth worldwide.
The continued turmoil in China is only adding to investors’ worries. When Chinese officials shut down trading in the first week of January it triggered a massive selloff on Wall Street, resulting in the worst four-day start in history for the U.S. stock market. The country’s economic forecast fell just short of expectations, with the gross domestic product (GDP) increasing by just 6.9% over the last year. That represents the slowest rate of growth China’s GDP has seen in 25 years.
The implications of the shake-ups in China have spread to the broader Asian market. According to the Wall Street Journal, Japan’s Nikkei is officially in bear market territory while stocks in Hong Kong have hit a three-year low. South Korea’s KOSPI Index is down more than 6% year-to-date.
CNN reports that a bear market now exists in several European countries, including France, Germany and the UK, while the markets in the United States, Australia and Switzerland are currently in correction mode. The impact has also extended to global stocks. MSCI’s All-Country World Index, which covers 46 developed and emerging markets worldwide, has fallen 20% since peaking in April 2015.
On Thursday, both the European and U.S. markets rebounded slightly. The Dow Jones and the S&P 500 were up at the end of the trading day, along with London’s FTSE 100 Index. Still, the question of when the market will stabilize is weighing heavily on the minds of investors and industry experts alike. While the answer is anyone’s guess at this point, there’s something of a silver lining. As more investors flee foreign markets, they’re looking to hedge their bets by sinking money into the U.S. real estate market.
According to Deloitte, China is currently the second-largest foreign investor in the US commercial real estate sector after Canada, holding an 8% share of total cross-border investments in U.S. commercial properties. Much of the investment focus has been on commercial holdings in New York, Los Angeles and San Francisco.
On the residential side, Chinese buyers are snapping up homes in cities across the country, funneling billions of dollars into the market in the process. The American Association of Realtors estimates that Chinese spending on U.S. homes topped $28 billion between April 2014 and May 2015.
The push into the U.S. real estate market by foreign investors is not surprising. With China’s economy still wobbly and the larger world economy lagging, real estate has become a safe haven for investors who want to escape the roller-coaster ride stocks have been on recently.
While the surge from foreign investors has been a boon for the U.S., real estate isn’t necessarily a foolproof way to insulate against shifts in the market. The relative lack of liquidity in real estate compared to stocks, for example, can be problematic because in during periods of market decline, valuations may be depressed.
While more illiquid investments tend to generate higher returns they often carry a higher degree of risk. If the market flounders, an investor whose portfolio is heavily concentrated in real estate may find themselves in a difficult position when attempting to liquidate those investments. In the worst case scenario, they may be forced to sell at a loss to avoid an even larger financial hit.
Concerns about market conditions aside, now is still a good time invest in real estate simply because so many of the barriers to investing in property have been removed. Once upon a time, it took hundreds of thousands of dollars and the right connections to get in on a private real estate deal. The 2012 JOBS Act made it possible for accredited investors to invest in private commercial and residential properties through crowdfunding platforms.
In October 2015, the SEC finalized Title III rules of the JOBS Act, allowing non-accredited investors to participate in real estate crowdfunding. While the updated rules are still subject to a 180-day comment period, they’re expected to take effect sometime this year, which would offer millions of investors the opportunity to add real estate to their portfolio.
Compared to buying an investment property, real estate crowdfunding packs a lot of appeal for investors, beginning with a much lower entry point RealtyShares, for example, offers investors the chance to get started with just $5,000, which is certainly more realistic for the average investor who isn’t working with a Donald Trump-sized bankroll.
Real estate crowdfunding also offers a degree of transparency that you won’t get with something like a real estate investment trust. It’s possible to get the details on a specific property whereas with a REIT you may not have access to in-depth information on the underlying investments. That makes it more difficult to gauge how well an investment fits with your goals and risk tolerance.
To be fair, a REIT does have an advantage over crowdfunded or direct real estate investments in the liquidity department. Having the ability to sell off REIT shares is something that may be particularly invaluable to investors who are worried about market decline. By the same token, a real estate investment offers investors exposure to multiple properties in the same investment. With direct ownership and crowdfunding, investor funds are concentrated in a single property which may limit diversification.
Moving into 2016, all signs point to U.S. real estate continuing to hold steady despite upheavals in the world market. The Urban Land Institute’s most recent Real Estate Consensus Forecast is predicting another strong year for commercial real estate. The residential estate market is also expected to expand, with demand for rental properties climbing steadily according to CoreLogic.
The relative stability that real estate offers, paired with the potential to generate a steady stream of cash flow makes it a solid choice for investors who are concerned about shielding their portfolio from volatility. As stocks continue to struggle, real estate investors are likely to find themselves breathing a sigh of relief in the midst of a market meltdown.
The host of this blog, LendIt, is the largest conference series dedicated to connecting the global online lending community. Our conferences bring together the leading lending platforms, investors, and service providers in our industry for unparalleled educational, networking, and business development opportunities. LendIt hosts three conferences annually: our flagship conference LendIt USA as well as LendIt Europe in London and LendIt China in Shanghai. Visit our home page to register for the next event and to subscribe to our newsletter.