Real Estate is a dynamic sector that has proven to provide a hedge against inflation both locally and internationally. The sector comprises of different themes such as residential, commercial office, retail, mixed-use developments, land, hospitality, and Real Estate Investment Trusts. 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.
However, real estate investing can be daunting, due to the fact that:
- it is capital intensive
- it exists in a very dynamic market
- it requires a great deal of expertise for 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;
This helps an investor to 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 to see what competitors are doing, identify market gaps and structured products that can fill the particular gap in the market
An investor needs to analyse the average return on the real estate theme of interest, which constitutes of rental yield which is 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 relying on bank funding whose process of acquiring is hectic. However, other alternative ways have emerged such as Real Estate Investment Trusts (REITs) which allows investors to, 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 completion of units.
Investment Purpose, Horizon, and Exit Strategy
Before you invest in real estate, it is essential to determine your goals such as either buying or developing for self-use. An investor should also determine whether they need short-term or long-term returns, for them to recoup funds committed to real estate investments. The returns could be periodically, for instance on a monthly basis as in rental income, or in full once a project is completed for a project built from ground up and then sold.
In order 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 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), zoning regulations applied by the county government and the investment returns for the location. 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.
Notably, compared to financial investments asset such as shares, real estate is largely a capital-intensive investment platform due to larger costs 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
An investor needs to be aware of legalities and obligations in different Real Estate investment partnerships, for example;
Off plan developments that 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, that commences where three documents being signed the; i) the letter of offer, ii) the reservation form, and iii) the sale agreement where a decision is made regarding delivery of land parcel and land package to the buyer at an agreed price.
This is how quickly an investment can be converted into cash. For investors who would prefer trading off liquidity for return, they may be inclined to invest in Real Estate, Private equity, and structured debt. While investors who prefer liquidity should consider treasury bills bank placements and equities.
In a nutshell, it is advisable for a 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 investment such as physical property or alternative investments such as structured products, they need to be well informed before engaging in the sector.