Real estate is a dynamic sector that has proven to provide a hedge against inflation both locally and internationally. The sector comprises different themes such as residential, commercial office, retail, mixed-use developments, land, hospitality, and Real Estate Investment Trusts (REITs).
As an investment asset class, real estate has toppled other investment asset classes in terms of returns and risk involved, and as a result, more individuals and institutional investors are shifting their focus on investments to real estate, which continues to outperform other traditional investment asset classes. The improving infrastructural developments, growing population, growing middle class with improved tastes and preferences, and entry of multinational firms have also continued to shape industry standards, hence encouraging investment in the Real Estate asset class.
However, real estate investing can be daunting because:
i) it is capital-intensive,
ii) it exists in a very dynamic market, and
iii) it requires a great deal of expertise for a successful investment venture.
Despite these, it is possible to reap substantially from real estate, and the following are the key factors to consider when investing in it;
- Market Research – This helps an investor gauge the uptake, demand, and general performance of the different real estate themes and potential of the intended real estate investment. It can also help the developer see what competitors are doing, identify market gaps, and structure products that can fill the particular gap in the market.,
- Returns – An investor needs to analyze the average return on the real estate theme of interest, which constitutes of rental yield, which is the return realized from rental income, and price appreciation, which is the return on investment capital in a real estate investment theme. The higher the rental yield and price appreciation, the more suitable the theme for investment.,
- Traditional or Alternative Real Estate Investments- Traditionally, most investors only know of brick-and-mortar construction, which tends to be capital intensive, time-consuming, and heavily reliant on bank funding, whose acquisition process is hectic. However, other alternative ways have emerged, such as Real Estate Investment Trusts (REITs), which allow investors to invest in private equity, and structured products where a private firm customizes each as per the needs of the investors. This offers aspiring real estate investors an opportunity to tap into investment in the sector without having the intense involvement that the Real Estate development financing requires, thereby enabling the completion of units,
- Investment Purpose, Horizon, and Exit Strategy – Before investing in real estate, you must determine your goals, such as buying or developing for self-use. Investors should also determine whether they need short-term or long-term returns to recoup funds committed to real estate investments. The returns could be periodic, for instance, on a monthly basis as in rental income or in full once a project is completed for a project built from the ground up and then sold. Investors also need to be aware of the various exit options that exist in Real Estate. Some of the common exit options are; i) where a developer develops a property lease for a particular period of time and then exits through the sale of the whole development, ii) a developer could develop the premise and exit immediately through full-sale, and, iii) lastly a developer could partially exit through the sale of a particular percentage and then lease of the rest of the development,
- Geographic Location – To identify the best location for Real Estate investment, an investor needs to evaluate the potential performance of an area based on ease of accessibility and the availability of quality infrastructure provided by road networks, electricity supply, and sewer line connections. Additionally, the investor needs to assess the existence of social amenities (such as shopping centres, schools, and hospitals), the county government’s zoning regulations, and the location’s investment returns. Notably, areas with relaxed zoning regulations, high-quality infrastructure, and social amenities are likely to be characterized by high investment returns on Real Estate property,
- Capital Requirement – Unlike financial investments such as shares, real estate is largely a capital-intensive investment platform due to the larger cost input, which goes into building materials and professional fees. An investor should also consider the available investment budget in their real estate property investment decisions, including having a financial plan for development from commencement up to completion,
- Business Legalities and Obligations in Different Real Estate Investments Partnerships – An investor needs to be aware of legalities and obligations in different Real Estate investment partnerships, for example;
- Off-plan developments refer to scenarios where the property is purchased before being completed. Off-plan developments have been driven by high prices for Real Estate developments and the longevity of time taken to deliver units to clients. The process of purchase is in 3 stages, which commences where three documents being signed; i) the letter of offer, ii) the reservation form, and iii) the sale agreement, where a decision is made regarding the delivery of land parcels and land packages to the buyer at an agreed price.
- Joint Ventures (JVs) are business arrangements where two or more parties pool resources together. Ideally, joint ventures involve the combination of the developer’s financing capacity and development expertise with the landowner’s contribution to the land. On the other hand, an outright buy involves the payment of the full negotiated price of the property at the onset; this precedes the transfer of the property title to the buyer.
- Liquidity Requirements – This is how quickly an investment can be converted into cash. Investors who would prefer trading off liquidity for return may be inclined to invest in Real Estate, Private equity and structured debt. At the same time, investors who prefer liquidity should consider treasury bills, bank placements and equities.
In a nutshell, it is advisable for real estate investor to diversify their portfolio to mitigate risks and increase their returns. Real estate provides steady cash flow, substantial appreciation, and competitive risk-adjusted returns, making it a sound investment. Whether an investor opts for traditional investments such as physical property or alternative investments such as structured products, they must be well informed before engaging in the sector. One can either subscribe to a periodic Real Estate performance analysis report or choose to carry out the analysis personally. Whichever the case, real estate research and financial performance analysis offers the platform for an investor to identify the existing investment opportunities in the various real estate themes, allocate funds to the best opportunities, and maximize returns from the invested funds.
