Not Time To Buy Assets Yet

The Federal Reserve on Wednesday warned that the economic recovery could be threatened by Covid-19 pandemic. The re-imposition  of restrictive measures to prevent a further rise in the number of infections in several states in the US was the main reason. Therefore the Fed is likely to keep interest rates near zero while continuing to purchase certain assets. Meanwhile in Congress, the Republicans and Democrats are still poles apart in coming up with the next rescue package.

One thing is clear though. Whenever the Covid-19 pandemic worsens, the Federal Reserve and Congress including President Trump would come in with measures to ease the negative effects it makes on the economy. That’s the reason why the stock market goes in a different direction from the economy. The same is true in many other countries.

Entrepreneurs eyeing the purchase of assets at fire sale prices should take into account this situation. Right now, there may not be a massive sale of assets at fire sale prices largely because many governments have mandated a moratorium on loan repayments and eviction. Thus owners of numerous assets need only pay the interest on their outstanding loan without fear of seizure of their assets by the financial institutions.

However the principal sum outstanding is not reduced by any amount with this moratorium. Its the same amount as when the Covid-19 pandemic started to affect the economy. Sooner or later, the outstanding amount would have to be repaid.

What entrepreneurs should do is to wait until the Covid-19 situation improves to a point when no more stimulus could be expected from the Fed, Congress or President Trump or any other governments. When that happens, the moratorium on the repayment of loans would be lifted. This has to happen sooner or later as it cannot go on forever.

Once the moratorium on the repayment of loans is lifted, many companies caught flatfooted by Covid-19 would have little cash available to meet their dues. Financial institutions too would have few options. One option would be for them to stretch the loan period for the outstanding amount. However this option would only be viable if the company could survive as a going concern. Many companies may have businesses which are no longer viable. Therefore the financial institutions may have little choice but to seize whatever assets had been put up for the loans. Similarly many of these companies may file for bankruptcy. Therefore there would be a situation where a large number of sellers is faced with relatively few buyers for the distressed assets.

The neatest and at times could be the best deal you could obtain would be to purchase the distressed asset lock stock and barrel at a bargain. Among the front of the queue would be food and beverage outlets especially restaurants. Retail outlets too would feature in this fire sale as evident by the closure of high end fashion wear like Brook Brothers.  Companies in the energy industry had been badly affected by the plunge in the oil price affected by the lack of demand due to Covid-19. The cruise industry and airlines too had been adversely affected as travel worldwide slowed to a trickle.

One area entrepreneurs could be tempted to purchase at fire sale prices could be commercial and office properties. There had been much debate about the situation facing landlords of such properties. For office properties, companies have had employees worked from home with little or no negative impact on productivity. Thus they could be tempted to institutionalize the practice since smaller spaces meant lower rental.  If this happens on a significant enough scale, it could send office rental rates down and vacancies up considerably. Similarly commercial properties like retail space could be affected by the shift to online purchases to a significant degree. This would translate into lower demand for commercial properties leading to lower rental rates and higher vacancies.

Having said that, entrepreneurs intending to purchase the property for their own use should take this opportunity to demand lower prices. Those with intention to become a landlord should do their sums and factor in reduced demand to go with the depressed prices. If the expected yield works out fine, they should consider proceeding.