While factors like demographics and social ideology may appear insignificant in real estate, they are major determiners of the business.
By ALEXANDER OPICHO
Every young Kenyan dreams to own a real estate investment. This is a leaf borrowed from the history of successive investment in Kenya which is the reason the real estate in urban Kenya represents a significant portion of most people’s wealth. Statistics affirm this situation; over sixty percent of invested capital in Kenya is in the real estate.
This is so because of good size and scale of the real estate market, two variables that make real estate market an attractive and lucrative sector for many investors. However, these conditions may not last long owing to poor state of occupancy and other forces of in-efficient market. Hence the timely need on the hand of the investors to think globally in an effort to remain relevant in the industry.
Factors to consider when investing internationally
The most important factor to consider is human demographics. The age, race, gender, income, migration patterns and population growth are important aspects to bear in mind when making a real estate investment decision. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades.
There is a positive relationship between sales in the real estate and the interest rates of the host economy. For example, if you’re considering buying a home with a mortgage, it is advisable to research about interest rates. Changes in interest rates can greatly influence individual ability to purchase a residential property. This is because the lower the interest rates go, the lower the cost to obtain a mortgage to buy a home will be, which creates a higher demand for real estate, which again pushes the prices up.
The health of the economy
Another key factor that affects the value of real estate of the host country is the overall health of the economy. This is generally measured by economic indicators such as the GDP, employment data, manufacturing activity and the prevailing retail prices index. Presence of the Chinese in the host economy and so forth. However, the general premise is that the whip-sawed economy will obviously produce the iffy financial conditions for the real estate industry.
Non-universal effects
However, in a contradistinction to the above view, one American real estate economist recently observed that the; cyclicality of the economy can have non- universal effects on different types of real estates. He gave example of hotels and office tenancy by averring that, hotels are a form of property that is very sensitive to economic activity due to the type of lease structure inherent in the business. He exemplified that, renting a hotel room can be thought of as a form of short-term lease that can be easily avoided by hotel customers should the economy be doing poorly. On the other hand, office tenants generally have longer-term leases that can’t be changed in the middle of an economic downturn. Thus, although you should be aware of the part of the cycle the economy is in, you should also be cognizant of the real estate property’s sensitivity to the economic cycle.
Social ideology is a factor
Social ideology in form of prevailing legislation, cultural dynamics, national philosophies and constitutional structure of the host country is yet another factor that can have a sizable impact on property demand and prices. For example, the prevailing tax credits, deductions and subsidies are some of the ways the government can temporarily boost demand for real estate for as long as they are in place. Being aware of current government incentives can help you determine changes in supply and demand and identify potentially false trends.
The size and scale of the real estate market is the primary condition for investors to succeed on the market. The size of the market also predetermines how the investors can invest in the host market for the real estate. By basing on the market, the investor can invest directly in physical real estate or choose to invest indirectly through managed funds. Investing directly in real estate involves purchasing the residential or commercial property to use as an income-producing property or for resale at a future time.
Indirect ways to invest in the real estate market include investing in real estate investment trusts, real estate exchange traded funds, commingled real estate funds and infrastructure funds. If at all the real estate market in the host economy enjoys the higher liquidity, lower transaction costs and lower capital requirements, then it is advisable for the investor to indirectly invest in real estate. Above all, the investor must have a clear exit strategy in case of the crunch time.
Alexander Opicho is an essayist and freelance writer based in Lodwar, Kenya. Email: opichoalexander@gmail.com
