Five ways to recession-proof real estate
The real estate sector of the UAE has done well historically. A robust industry, it has always exhibited growth. While the rate of growth has fallen at times, it has not been in negative territory. Even so, when times are bad globally, with recession and inflation staring at the world, the Russia-Ukraine conflict creating its own issues, purchasing power falling, and investors deciding to play safe, it makes sense to come out with a plan to beat the odds. Real estate stakeholders can take several steps to keep themselves going. Here’s a look at some of them.
1. Maintain liquidity
In times of uncertainty, the one thing that will come to the rescue of anyone is ample reserves of cash. When the going is good, keeping stacks of cash is counter-productive — it is best to find optimal investment avenues rather than sit on a pile of money. But — and this is key — when a recession is looming, cash is both king and queen. Additionally, lines of credit should be actively pursued. Banks tend to freeze lending when recessionary and inflationary pressures build up. At such times, when a great buying opportunity emerges, one should not end up with cashflow shortfalls.
2. Get rid of debt
High leverage and less liquidity — this is a bad situation in the best of times, but when the macro indicators globally are not too good, they become a toxic combination. Several companies’ valuations get wiped out during a recession because they are highly leveraged. Limiting leverage to 30% to 40% is greatly advised, especially in the event of a probable recession.
3. Go for refinancing
When a recession is looming on the horizon, taking a good, hard look at the debt a company has accrued is essential. Refinancing debt is a good option to not only stay afloat but also pursue good opportunities. Refinancing the existing debt with a non-recourse one makes for a sound strategy, as does extending the tenure of a loan and ensuring that balloon payments are at least seven to 10 years away.
4. Keep away from speculative projects
Desisting from speculative projects until global trends improve is essential if one intends to stay safe. Deferring capital-intensive undertakings makes sense, especially if their prospects are driven by speculations. Not falling for the lure of easy profits may be difficult, but it might simply save a company/individual from going bankrupt! Companies can lose even fully performing assets during a recessionary period, simply because banks freeze lending and refinancing maturing debt becomes impossible.
5. Go for recession-proof investments
Urban centres are undergoing a major transformation. What was once considered a staple for the real estate industry — huge malls, office space with small cubicles, industrial buildings with low ceilings — is no longer in great demand. As there is an overall shift away from such construction, focussing on recession-proof assets — such as medical care facilities, educational institutions, mid-level residential projects, and no-frills economy projects — makes better sense, especially when the overall global sentiment is down. Moreover, rental flats are always a sound bet, as people prefer to rent a home rather than buy it during an economic downturn.
These are just some of the steps that can be taken to weather a recessionary storm. In the end, a company has to find its own way, and what works for one may not work for another.