Posted on: 2016-06-20T09:35:54
Investment risks may give us jitters but they apply to all asset classes. As they say a butterfly fluttering its wings in China may set off a tornado elsewhere, sinking many a carefully-laid profit plan. Some risks are controllable to a lesser or larger degree but some are usually beyond the control of investors.
For example, when buying a property you can mitigate developer issues, legal problems and agreement trouble to a large extent through due diligence. But not all risks can be foreseen and even if it can be, prevented. This is true not just in property investments but in all asset classes. It is therefore important for investors to know some of the perils one may not have control over.
Government, at various levels, can be a real wild card as their policies have a big impact on property investments. For example, a road project that would have greatly enhanced connectivity and boosted growth in a locality may be shelved or stalled when there is a change of power. A new project may be taken up and authorities may acquire land and want to demolish other property in an area. Owners may only get rates below the market rate and are forced to sell if they had intended it to hold it for the long term; worse, even these payments end up being stuck for years on end due to delays or litigations.
Policy changes may also play truant with investments. Adding extra layers of clearances in approval process or any ambiguities in a new procedure may lead to projects getting stuck with the local authorities. New objections may be raised on approvals already given, setting back the clock on completion and hand-over. Buyers and builders do not much recourse in these cases.
Events that impact the larger economy – nationally and globally – are another category of risk over which investors have no control. The global financial crisis sapped liquidity and changed central bank policies and economic growth trajectory globally for many years. The slowdown in China has affected commodity-centric economies around the world. In an inter-connected world, where money flows freely to pockets of opportunities and leaves quickly, sentiments shift suddenly.
There are also wars and acts of terrorism that de-stabilize growth plans. Civil wars and political unrest also create ripples that may take a while to settle. Currency fluctuations, global tax low changes such as FATCA and changes for BEPS also impact the performance of various assets.
While some events such as policy shifts may unfold slowly, most events are sudden but lead to large structural shifts that are long lasting. The collapse of the twin tower in the US in 20011 is one example of a black swan event that was hard to foresee and whose impact lingers for many years.
Similar to man-made disasters, nature may also wreck havoc on carefully laid investment plans. The tsunami that hit Chennai dented buyer’s appetite for coastal properties for a few years. Cyclones such as Katrina that hit New Orleans, USA may shift property buyer interest from one area to another as their priorities change after the calamity.
While floods or likelihood of water shortage can be somewhat assessed, many others are not so easy to predict. For instance, many regions may be categorised as seismic zones with a risk of earthquake occurring; but no quakes may have happened for even a century. And just when we become complacent, nature may show who is in control. Insurance policies can help with a few situations to reduce loss but the financial damage in most catastrophes is to be borne by the buyers.
So, property buyers must be aware of the worst case situations by understanding the many risks that are beyond one’s sphere of control.