Soft markets present investors with one of the most idyllic market conditions – an opportunity to reap massive profits from a disengaged market where demand is depressed because of a multitude of sellers chasing after very few buyers.
Also referred to as the buyers market, or a depressed market, a soft market is a down-trend in the market cycle characterized by a scarcity of buyers in the market followed by a glut or oversupply of particular types of properties.
It can occur in different market segments and in particular areas (locations) in the market. These market conditions adversely affect demand leading to a massive drop in prices. Soft Markets create an opportunity for massive investor profits to those savvy enough to realize the trend and how best it can be leveraged.
Soft Markets: Understanding Market Cycles
Cycles are normal and, without exception, all markets go through both cyclic and non-cyclic patterns which collectively form a trend or a path against which their growth or decline can be measured. In an open market, cycles are determined by demand and supply trends which are in turn determined by perceptions of the market and occurrences both within and extraneous to the market.
One of the cycles in the market is a downcycle; a sustained period of low demand and trading activity within the market. Downcycles, which occasion soft markets, are rarely ever universal (affecting the entire market), but instead, occur within “pockets” of the market.
Their impact on different property segments and categories are not necessarily even across the market, so some segments and categories of properties tend to experience the downtrend more profoundly than others. A downtrend is characterized by three key indicators:
- Depressed demand (few buyers)
- An influx of sellers creating a glut in supply with vastly more property offers than buyers in the market are willing/able to absorb, and;
- Falling prices.
This cycle is also referred to as a soft market, or a buyers’ market – buyers’ market because they become the dominant determinant of price in the market. It follows naturally that with depressed demand, prices will fall as sellers become antsy to dispose of their holdings with very few takers in the market.
For as long as soft markets persist, investors can profit massively out this cycle by negotiating steep discounts out of sellers desperate to close on their property offers. The conditions give buyers the “ascendency” in the market, allowing them to snap up investment properties at solid bargains that will eventually fizzle away once there is an equilibrium between demand and supply and the downcycle comes to an end.
Soft Markets Create Massive Investor Profits
In Kenya, soft markets are most common during the end/beginning of the year when the incidence of sellers making sell decisions is at its peak – usually to finance some other acquisition or to meet the financial burden of some pressing needs. However, it is the period immediately before, during and after the cycle of political contest in this country that the conditions of soft markets reverberate through the industry. The election cycle slows down the market through the uncertainty it creates by scaring away buyers from the market.
With diminished demand, motivated sellers looking to cash out quick become more readily susceptible to terms and offers as determined by the few buyers braving the market. Indeed, to see just how much of an effect the prolonged election cycle of 2017, peek into the Q3 Hass Property Land Price Index of 2017 which details clearly how profoundly the prolonged electioneering period stunted the growth of prices of land in Nairobi and its environs. Land prices, which were hitherto considered immune to political risk, took a beating as sales stagnated across the market.
Pockets of downtrend cycles also occur for particular property types because of exceptional events in the market which are perceived negatively by the sellers. For example, the introduction of dumpsites in close proximity to residential areas, the influx of undesirable elements in a particular residential neighbourhood, especially upmarket areas; land rezoning into commercial use in a hitherto residential area may cause a flurry of quick exits by sellers. It is important to note that the only significant beneficiaries in such scenarios are those who get in immediately at the onset of the scramble to exit. Rezoning from residential to commercial use invariably causes prices to sky-rocket in the long run and so it is important to invest early right at the onset of the exit by residential property owners.
Just as any corporate organization entering the market would perform a SWOT analysis covering both macro and micro factors that would affect their business, any real estate bargain-hunter would/should be inclined to assess the market to determine whether or not the deals (opportunities) they find in the market are premium quality offers.
So how do you identify a soft market and leverage the best deals around?
#1. Build Market Intelligence
You must be in touch with the market. You can’t see something unless you know that it is there. There is absolutely no way to know if a deal is good if you are unfamiliar with the market. You have to know the prevailing market conditions and prices for the type of property in the specific location in which an offer has been made, that way you can compare it with the offers you’re looking at in order to make the determination that you have a bargain.
#2. Find the Seller’s Motivations
It’s just as important to know the sellers’ motivations as it is to know the market. The seller’s motivations will provide insight into circumstances necessitating the sale and therefore the seller’s willingness to enter into a bargain through negotiations over terms and price favorable to a buyer. If you are looking for a good deal, knowing that the seller is highly motivated to enter into a deal will give you an edge in the negotiation allowing you to push for the very best terms and price.
#3. Research, Seek Professional Help
To this end, you can either consult with a property valuer, your realtor, or even a property investor who is more knowledgeable than you are. You can visit online realtor platforms and websites to get comparative information and do research on property price growth trends. A bargain is only a bargain if you create equity on the acquisition at the time of acquisition. Any gains made during your ownership of the property are incidental to the acquisition and cannot be part of the bargain. Additionally, if the acquisition is not in a growing market, the long-term returns may also be diminished.
#4. Hone Your Negotiation Skills
The reason it’s called a Buyers’ Market is that buyers rule! So, drive that bargain and drive it as hard as you possibly can for the maximum advantage. It’s not enough to assume that you know well enough about the market and the sellers desire to strike a bargain. Push for the price and terms that best suit you, within reason given the opportunity and circumstances. Leave nothing on the table!
#5. Have an Exit Plan Going in
Just because you can buy it doesn’t necessarily mean you should. And just because you got a bargain doesn’t mean you should hold onto it perpetually. The savvy investor will tell you that they determine when to get out at the time they get in. An exit strategy gives you an idea of when to offload the property and will be determined by the sort of returns you are considering when entering into the acquisition. Even a good bargain has a shelf-life – don’t ruin a good thing by overstaying unnecessarily.
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2020 ADDENDUM: This postscript was added during the Covid 19 pandemic in 2020.
The Covid 19 pandemic has greatly eroded market activity in 2020 and it is likely that the real estate market will remain soft to mid-2022 as Kenya gears up into full-scale political mode with the launch of a referendum (BBI) agenda and the political push to amending the constitution. Not all market segments have been affected but across the market, there is an endemic lethargy.
What’s your outlook for 2021? We would love to hear from you in the comments section.