The Weird Psychology Of Why You Do So Many Deals In December
Every December, professionals across various sectors of real estate race around, stressed, trying to get those last few contracts signed before the calendar turns over. The fourth quarter, and especially December, almost always sees a surge of deals closed. But why?
The reason behind it lies in the warped logic where economics and psychology meet. And it may be causing you to make bad investments.
The year-end deal surge in real estate is no myth: Over the past five years in Europe, 18% of deals by volume and 16% by count have happened in December, according to Real Capital Analytics. That is more than double the next highest month, which is June.
There is no real rational reason why real estate investment deals should be concentrated in one month — deals should be driven by unique factors relating to buyers and sellers and real estate fundamentals rather than being in any way seasonal.
But pressure on buyers in particular leads to a stampede to get deals done before the clock strikes midnight on 31 December.
“People’s budgets tend to run to a December year-end,” Income Analytics Chief Executive Matthew Richardson said. “You start off the year with a defined strategy, and you wait to invest in the best possible deal. You are optimistic. But as the year comes to a close, you look at the deals and they are what they are, and you just have to place clients’ money.”
“Clients say they want the best possible return, but they also want to get the money away, especially in a world where they are getting 0% on it in the bank or in bonds,” Richardson said. “So you have a kind of moral hazard. If you don’t spend the money, you know you are going to be having some tetchy conversations with the client.”
The head of real estate or the chief investment officer of institutional investors like pension funds are probably facing pressure from their investment committee to invest because they need to make a return to pay out their liabilities.
“Investors say they want one thing, a particular level of risk and reward,” Richardson said. “But the investor world splits in two between those who want to stick to the strategy and those who want to invest. So there is a temptation to buy things that are maybe a bit riskier than you said you wanted to buy.”
Some of the deal spike likely comes from solid deals that had been dragging out from earlier in the year but had extra pressure applied to finalise before the budget closes. But in some cases, it becomes not about getting the best deal but a deal of any kind.
For sellers of real estate, there is a clear message to take from all this: wait until the final quarter to sell your assets if you want the best price, as there will be a lot more capital chasing deals.
Data is not yet available for how this December is going, and 2020 is a unique year. But Richardson said there are factors that suggest the phenomenon will occur again this year.
“You’ve got the vaccine coming along, so people will be keen to invest now to catch any bargains that might be out there,” he said.