Written by Albert J. Haddad
How to Navigate lower cap rates as an investor and borrow smartly
I’m always finding people who are curious about the current climate of the market. They will ask me what I see and how it will affect investments.
Usually I give my opinion, but I want to take a minute to break down the current market and how it is affecting consumers and investors alike.
Within a four month period the tone of the Federal Reserve switched from a hawkish tone to that of a dove.
What does all of this mean and how does that affect our market and consumer experience? What does it mean that we are in a dove-type market and how can someone guard against taking a major hit if the market shifts in a more hawkish direction?
Understanding the Terms—
A hawk primarily is focused on interest rates. Generally, they believe that keeping interest rates on the higher end will help to keep the inflation rate in check.
On the opposite side of a hawk is a dove, someone who is more concerned with monetary policies that focus on low interest rates, believing that it increases employment and generally discounting the inflation rate.
Recent developments in the United States, specifically the announcement that interest rates did not show the need for additional hikes in 2019, signal a dove market. While announcements like this can signal more investment opportunities, it portends issues on a global scale that lead to the volatility of the global markets.
Global Issues at Play—
Take for instance the boom economy China has been experiencing. In China, they have over the last couple of decades become one of the world’s largest economies. In 2017 their Gross Domestic Product grew 6.8% over the previous year.
Much of this growth comes as a result of their own government spending, which has led to a debt-to-GDP ratio of 260%, leading to a 6.6% growth reported in 2018, their slowest pace since 1990. China has been forced to find a way to emigrate their lower class citizens into a middle class position, which makes their continued growth seem almost unsustainable.
According to The Wall Street Journal, “Softening wage growth and rising household debts are causing Chinese consumers to tighten their purse strings.“ With a volatile global economy, it makes sense that the U.S. is attempting to find a more stabilized approach.
Dealing with a Dove Market—
Given the above, the U.S. economy currently finds itself in a dove market—lower cap rates that are leading to more investment opportunities—that are arguably a better position for sellers than buyers.
But can a dove market be navigated by a buyer for their own benefit? The answer is, “yes.”
The real question is: how?
The best advice for buyers in a dove market is to find a way to borrow money cheaper. By doing so, you’ll in effect create a delta between your debt and the risk of the rates increasing that will hedge you against the risk of losing valuation on your properties by a hike in interest rates.
This is best done by borrowing against undervalued assets that will give you the borrowing power to create the delta needed to protect your investment.
A dove market can create a sense of security for consumers. However, it can also become a trap for investors who do not invest wisely. The fourth quarter of 2018 proved this when people were hit hard by the rising interest rates.
If you have any questions on how the current dove market affects you as a consumer, please call the Alpha-Rex team to discuss and answer questions on any property or portfolio needs you have.