Macroeconomics And Real Estate Industry

Macroeconomics is a driving force for investment industry; it looks at economy as a whole entity. Broad examinations on economy wide expressions such as changes in unemployment, rate of growth, national income, gross domestic product, inflation and price levels.

Fiscal and monetary policies are tools that governments use to derive macroeconomic objectives such as: lower inflation, stimulate economical growth, currency exchange rate controls and reduction of the unemployment rate. It is important to note that application of one policy to stimulate the economical growth may have negative effects on the other side like rising inflation, so the balance for sustainable growth must be reached.

Judgements about the status of economy can be made looking at business performance indicators that clearly presents health of the business within economy. Different professionals may consider some or derivations of these indicators as a point to determine economy level:

1.     Monetary Profits - during buoyant economic times all industry sectors are motivated to increment production levels to accommodate aggregative demand. Scarcities in supply maybe faced temporary due to increased demand, therefore rising prices of production costs and sales of goods will increase sales margins. In construction/real estate industry: building procurement contracts are preset at a fixed price therefore price increase will be benevolent only to the developer which has direct control over asset sales during aggregate demand period.

2.   Share Prices and Dividends - during peak times share prices and dividends tend to rise due to growing company performance levels. Expensive access to capital may push down share prices further leaving no dividend payments between investors. Real estate industry is correlated to stock market and can be judged from the health and trading activity of real estate securities and traction of the real estate related indexes. For UK market it is benevolent to tract FTSE indexes and their derivatives as they cover retail, office, commercial, industrial sectors and performance comparison to gilds and all stock indexes over selected time.

3.    Cash Flow is tend to increase during economical boom time due to increased sales, accessible finance and increased demand. During recession companies may face difficulties turning assets into cash delaying payments for all parties involved in a business, so they must have an access to credit facility. Cash flow circulation will be determined by the strength of rent covenants and government economic stimulus plans.

4.   Running Costs; All costs in relation to running the business are tending to rise with economic progress where an opposite reaction will be on recession times. Economic rent is a payment for use of land or building space within defined geographic area. Rents tend to rise as they are derived from mortgage interest payment, land rent, maintenance and repairs fees. Mortgage interest will rise during economic peak times as a monetary control tool to diminish inflation levels, therefore every business depending on lending have to increase a service rates to compensate the difference. In short interest- is a payment for ability to have this investment under control of lending institution.   

5.    Bankruptcy Levels will be low on economic boom times, but will increase in recession due to lack of accessible finance, competition, decreased demand levels. As economy becomes buoyant new service companies will be created to meet demand and immigration increments, but with demand slowdown cuts with product, service or space consumption are inevitable. 

Real estate industry is one of the slowest investment entities to react to economical fluctuations due to long time lines to construct the assets for current demand, high transactional costs, and illiquidity of the assets. The bright side for this industry is that a many sophisticated investors use it for capital hedging, growth and cash flow purposes.