Investing in a recession

There could be emerging opportunities for investors in the current market, but to take advantage of them you need to be reviewing your existing portfolio now.

The Share Market crashed in October 1987, but the economy didn’t reach rock-bottom until 1991-1992. It is clearly way too early to call the end of this COVID recession. In reality, the recession is only just getting started. The consequences of which will be with us for years to come.

My view is that this recession will hit low-income households much harder. Companies will keep their high-skill employees knowing that the recession is temporary. Unskilled and low-skilled labour won’t be so lucky. Wage subsidies are a short-term fix for a more fundamental problem that was looming before COVID-19.

Businesses are increasingly pushing towards automation and getting rid of low-skill jobs. Administration jobs are disappearing offshore to lower cost countries or disappearing altogether. Far from protecting vulnerable workers, a minimum wage of $20 per hour actually encourages businesses to find efficiencies faster. COVID-19 has been a step change for retailers and the push to online, and it’s not coming back.

The risk to investors

This is a big risk for property investors in that retail, hospitality and tourism workers are typically renters. Rent arrears, tenants not paying their rent, and downward pressure on rents will become more common. We will see more adult children living at home, at least temporarily.

With interest rates this low, I doubt lost rent will cause financial destress to landlords, but cash flows will get hit. Prices will hold up, especially with so many first home buyers in the market spurred on by historically low interest rates. We have seen a massive surge in first home buyer activity.

The challenges and the opportunities

The challenge is going to be taking advantage of the current market to grow your portfolio especially if attractive deals come along. Similar to post-GFC, I think there will be an opportunity for multi-income properties. The sort that first home buyers don’t look at or cannot buy, and the sort that requires significant equity which will rule out most mum and dad investors.

Given the inherent risk in the property market, even though interest rates are low, there will be opportunities to find 6%-7% gross yielding properties especially outside of Auckland. But given tight credit conditions, they won’t necessarily be easy to buy.

Cash flow is going to be king and yield will be more important than ever. It might be an opportunity to review your portfolio and jettison properties that aren’t delivering strong cash flow. To keep buying, sometimes you need to sell. The good news is that there have never been so many first home buyers in the market. That said, I don’t know how long that will last.

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