By Angelos Georgiou
I’m sure the phrase ‘Cash Is King’ has been around for quite some time, probably since the time financial institutions gave you a satisfactory interest on your savings.
I remember a few years back, being in the United States talking to a banker about savings in financial institutions and asking him about the interest.
He smiled (somewhat ironically) and said, “when you’re at the bottom you can only go up!” That was during the same time when Cyprus was offering a 4-6% interest rate on savings (they called it the “escalator concept” at the time).
This article isn’t about interest rates on savings but rather on the options (specifically property) one has to invest money instead of saving it (under the pillow, in the garden, in a bank).
Other investment options include bonds (low risk, supposedly) and stocks (high risk).
Low-risk investments will equal to an expected low return and high-risk investments will equal to an expected high return.
This all depends on the risk appetite of the investor. There are other options such as buying an expensive car, going to Las Vegas for a few months or investing in poker games, but irrelevant to this article and not recommended for investment purposes.
Back to today’s market. What is one’s money worth if saved rather than spent or invested wisely? Interest rates are currently at low levels which probably mean we are being driven to invest it, or at least, that’s what they expect us to do.
If we assume an inflation rate of 2% per year with a savings interest rate below 1% per year, your money will be worth 1% less every year.
Governments usually drive interest rates down to start moving money in the market. This may also drive investors to borrow for investment purposes as interest rates are low.
One would probably save money if offered a high interest rate on savings when compared to returns on other investment alternatives. The point being, they’re not currently offering this, therefore some options are, as above, based on each one’s risk appetite.
I prefer diversification in a portfolio; spend a little here, invest a little there, save a little elsewhere, get a little mix of it to minimise your risk.
The basic objective of a portfolio is to reduce risk by investing in various types of assets over a range of industries, although most of us can’t do all of the above but rather choose an option that best suits us.
We are now within a market where it seems that rents are at high levels and prices of properties are gradually increasing with loan underwriting having stringent requirements. Both rents and prices seem to be on the increase, while supply is also increasing in the market; that’s Cyprus for you!
So, what are our property investment considerations? Well, if you don’t want to save your money and your alternative option is property investment, then one should now probably expect a lower return on investment for the same amount of risk. Is it really considered low though?
If, for example, we assume that a 5% return on a 1-bedroom apartment was considered a logical one at the time when one could receive a 2% interest rate on savings, what would a return on a similar property investment be considered logical today, when interest rates are close to zero?
See the correlation? See the comparison? See the difference? I’m sure those so-called “property consultants” have already explained it to you when they convinced you to buy that apartment with a current return of 8% stating “we can sell it later for more”!
I’m sure they analysed and explained that your return may decrease in the near future and/or you may lose on your capital.
Well, let’s hope that strategy is going to work, otherwise, you may be running the risk of losing capital and returns, along with other problems in the case of a mortgage.
Most of us expect a steady return on investment while all other things being equal. Well, other things are never equal! The fact is, we need to evaluate all our options and the market in general.
Our return expectations need to change based on the market trends, updates and market drivers. One may even consider the possibility of accepting to buy a property at a slightly higher price, simply because it has a higher risk doing anything else with the available cash.
This would decrease the return on investment but, as we all know, a lower return would mean a lower risk; still above your alternative option of savings today.
It is also important to consider the cash flow concept. In general, when you invest in a property in which the rent received is higher than the expenses you pay to own the property, then your cash flow is considered a positive one.
So, you need to really believe and be consulted properly by a professional real estate agent/broker/property consultant, as to the property investment and its return and/or possible capital appreciation.
Having a positive cash flow will not negatively affect you if there is no appreciation of the property; capital appreciation will, though, provide you with more options later and obviously, we are all hoping for capital appreciation on our investments.
In other words, return expectations can change based on other factors and drivers of the market. You may then evaluate as to the type of property investment (residential, commercial, industrial, etc.).
Again, one should evaluate the trends, the market drivers and analyse them, change expectations based on possible market changes; all depending on the type of investor and risk appetite to allocate funds appropriately.
One may choose a return property (e.g. an apartment to rent) or simply a property which is expected to have capital appreciation (e.g. a plot of land which may not offer a monthly return).
What may have been considered a low investment return percentage a few years ago may be considered a satisfactory percentage return today, considering comparisons of other market factors, investment options and the current savings option.
Cash is still an important factor to be able to invest, although the traditional concept and meaning of the term seem to have changed from its original definition, at least for savings purposes with the current interest rates.
Angelos Georgiou, FRICS, FCIArb, is Managing Director of KTESION Real Estate & Asset Advisory. He is a Chartered Valuation Surveyor, Fellow of the Royal Institution of Chartered Surveyors (RICS) and Fellow of the Chartered Institute of Arbitrators (CIArb). Tel: 22-752092