Real estate is a dynamic sector that has proven to provide a hedge against inflation. The sector comprises of 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 and upper class with improved tastes and preferences, has also continued to shape industry standards and hence encouraging investment in the real estate asset class. However, real estate investing can be daunting, due to the fact that; its capital intensive, exists in a very dynamic market, and requires a great deal of expertise for successful investment venture. Despite these, it is possible to reap substantially from real estate.
Here are the factors to consider when investing in real estate.
1. Market research
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 analyze 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.
3. 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.
4. 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. Investors also need to be aware of the various exit options that exist in real estate. Some of the common exit options are:
- Where a developer develops property lease for a particular period of time and then exit through the sale of the whole development.
- A developer could develop the premise and exit immediately through full-sale.
- A developer could partially exit through the sale of a particular percentage and then lease of the rest of the development.
5. Geographic location
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 centers, schools, and hospitals), zoning regulations 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.
6. Capital requirement
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.
7. 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 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:
- The letter of offer.
- The reservation form.
- The sale agreement where a decision is made regarding delivery of land parcel and land package to the buyer at an agreed price.
- Joint Ventures (JVs) which are business arrangements where two or more parties pool resources together. Ideally, joint ventures involve the combination of the financing capacity and development expertise of the developer with the landowner contribution of land. An outright buy, on the other hand, involves the payment of the full negotiated price of the property at the onset, this precedes the transfer of the title of the property to the buyer.
8. Liquidity requirements
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. Real estate research and financial performance analysis offer 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.