If you’re familiar with financial market trading, you’ve probably heard the term “short selling”. This is an investment vehicle that allows you to profit in a depreciating market, while it diametrically opposes the core tenant of buying low and selling high.
When you short sell, you effectively borrow the asset in question from a broker with the express intention of selling it on. When the prices associated with this asset fall, you buy it back and return it to your broker, retaining any profit that has been made in the process.
Short selling Australia or in similar markets remains synonymous with stocks and currency, with CFDs enabling investors to trade these assets without assuming ownership of an underlying financial instrument. In some cases, it may even be applied loosely to real estate and investment property, but is this really a viable way of making money?
Short-selling Real Estate – How Does it Work?
The concept of short-selling real estate is a viable one, particularly from a theoretical perspective.
It typically deals with properties that are in a pre-foreclosure state (with a notice of foreclosure having been previously delivered by a bank). The property can be sold once the bank has issued its approval, while the deal is dependent on the associated mortgage company agreeing to a purchase price that is short of the total debts secured against the house.
A popular option is to invest in ETFs that are short on real estate and investment properties. These funds are designed to deliver inverse returns to a pool of selected investments, and they work in a similar way to shorting individual securities like stocks.
The difference is that they typically include a basket of both residential and commercial properties, with individual funds destined to produce a daily performance that moves in the opposite direction to a particular index. The theory here is that the value of inverse real estate ETFs will increase as the property market declines in value, enabling you to profit despite continued depreciation.
With this type of investment, assets can be borrowed or secured through margin lending, with investors able to profit incrementally as their value soars. When this trend is reversed, the assets can be returned as with standard stocks or currencies.
Is this a Viable Option for Australian Investors?
Investors may also be able to short sell shares in a chosen property developer, but regardless of this the process of short selling real estate follows a similar and well-trodden path.
The question that remains is whether this type of investment is a viable option for Australians? This is hard to quantify at present, but there’s little doubt that Australian home prices are continuing to slide across the majority of mainland state capitals.
In fact, year-on-year prices have fallen by between 2.2% and 3.5% in Sydney, Melbourne and Perth, with the median value across all state capitals declining by 2.7% overall. The current level of national decline is estimated at 3.1%, creating a potential opportunity for short-sellers to profit from the near-term depreciation of the market.
With the decline in property values expected to continue indefinitely against the backdrop of tighter lending standards and weak wage growth, investors may continue to profit by short selling real estate in Australia. However, this is an extremely time-sensitive endeavour, and one that should be attempted by experienced and knowledgeable investors.