As you consider when and where to invest in real estate, our top 7 tips are invaluable.
Real estate remains one of the most profitable ventures one can engage in. As an investor, buying real property is usually a sure way of making a healthy profit. As real estate is capital intensive, you want to make sure that you get maximum return on investment. While real estate is a relatively risk-free investment, there are several factors you must take into consideration when making a real estate investment:
- Supply and demand
- Economic environment
- Interest rates
- Government policies
- Societal and demographic factors
- Technology Environment
- Purchase conditions
Supply and Demand
Real estate markets can be classified as either a seller or a buyer market. A seller market has less properties being listed for sale. When supply is low, the demand for the limited properties goes up and the prices of the properties increase as well. Sellers receive several offers for their property and may sell beyond their original asking prices. While this may not apply to the whole country, you may have several areas being sellers’ market while others will be a buyers’ market.
When the demand for properties for sale is low relative to the supply, then this is a sellers’ market. People looking for properties for sale are choosers amongst several competing options. Prices are usually low.
In Kenya, property prices have been rising steadily. This has made it difficult for most people to purchase their ideal real estate properties. First time buyers are the most affected.
The returns you would make in real estate are correlated to the existing and anticipated performance of the economy. If the economy is perfrming well, the returns from the sale of properties is high as well. When the economy is performing poorly, selling returns less profit while it’s the right time to buy property. Buying property when the economy is trending downward increases the chance of making higher returns when the economy returns on an eventual upward trajectory. The economy usually has 4 phases:
- Recovery: This is when the economic factors are starting to improve. This is an ideal time to purchase property as prices have not started rising and are most likely low. This is the wrong time to see as you will be unable to enjoy future price rises.
- Expansion: This phase is characterized by expansion in the economy leading to increase in demand. Jobs in the economy start to rise and prices of property increase. Rental prices increase as well with increased employment levels. You could still find undervalued property that you may sell later for a profit. Depending on when you bought a property, you can still sell and make a good return and have enough money to buy another property before prices increase further.
- Peak: This stage has the economy performing optimally. This phase has property prices increasing and rental occupancy at an all-time high. This is the best time to sell unless you anticipate continued rise in prices. This stage is the highest the economy can get. At times, most people anticipate that a slump will come soon and start disposing property. Having more property in the market drives demand down due to oversupply and prices start going down. You can sell a property if you feel there is no chance of prices rising higher. As recessions may affect different real estate market segments differently, review how the market you are in is performing. Low end housing usually rides recessions.
- Slump/recession: Once the economy reaches the peak, an eventual decline starts. There is unemployment in the market and people are unable to afford rents leading to vacancies. Sales of property drops. This is the best time to buy property while it’s the least favorable time to sell.
When one depends on either a bank loan or a mortgage to buy a house, the interest rate will have a big bearing of the real estate market. When one incurs high interest rates to buy a rental property, the return on income goes down and the appeal for property investment goes down. Higher interest rate usually makes most property un-achievable for most of middle income earners. High interest rates lead to a spiral of rise in construction materials which reduces the amount of construction. When interest rates are low, the real estate market flourishes as there will be higher liquidity. When interest rates are low, financing is less expensive, and purchases of property goes up.
Government is one of the key drivers of real estate transactions. All land is government owned and the government is also responsible for handling transfer processes and setting up policies governing sale and purchase of properties.
The government can offer incentives to accelerate real estate industry. For instance, the government can provide credit that allows more people to afford property and thus drive prices upwards. The government can also be a direct investor in real estate. The Konza city is an example of the Kenyan government directly impacting real estate growth. We have witnessed government issuing title deeds for land which assists in the title deed holders being able to sell the property.
Through infrastructural development like roads, sewer, electricity connections, the government can make a hitherto underdeveloped area a prime area for real estate growth. Changes in taxation can either enhance to decrease investor appetite. If for instance the government raises the capital gains tax, less people would be willing to sell property while fewer people will afford the resultant property prices. If the government allows higher mortgage relief, this may lead to an increased uptake.
Societal Influences and Demographics
The way societies evolve, this affects real estate as well. When people increasingly have fewer children, there is less demand for large houses while there will be higher demand for 2 or three bedroomed houses. As more millennials take longer to step out of their parent’s houses, there is lesser rental pressure in the market as more people continue to live under the same roof. There has been an increase in people’s preference to rent rather than buy. Millennials are very mobile, and they do not feel the pressure to settle down in one location. When demand for rentals increase, rental incomes go up while selling prices for residential properties go down. Selling prices for rental properties increase due to increased demand.
Demographics within a population have a significant effect on real estate prices. For instance, baby boomers preferred bigger houses while millennials prefer smaller houses. Millennials also want different factors like shopping malls, nightlife and schools for their children which is different than the silent generation that just want a safe and quiet neighborhood. Millennials are more tech savvy and rely on the internet when searching for property.
Technology has changed real estate for the better. You can view profiles of agents and have photos of potential properties for sale without doing a physical visit. With the government rolling out online property search, this will further enhance property transactions.
We have rolled out a map-based search feature that allows you to search for property on a map. This provides you an ability to compare prices with properties within a similar range to arrive at a better value for your money. Before making any purchase, consider how you can leverage technology to make a more informed decision.
While the all the terms above are beyond your control, you have a chance to determine the terms within which you can either sell or buy property. We have seen innovative products like 105% financing which eases the usual 10% deposit that lenders usually ask.
There are several properties that you can purchase through installments that eases the pressure for purchasers who only need to raise a deposit. There are many properties being sold off plan and you make payment as construction progresses. There are also rent to own schemes being offered. With these flexibilities, buyers and sellers can negotiate and see what works best to ensure sale and purchase of properties continue irrespective of the other factors mentioned above.
When buying and selling property in Kenya, proper planning, research and patience are your best friends. Patience helps so that you don’t end with a poorly made investment decision. Start off with realistic expectations. Keep your projected income at a reasonable level. Also, seek property within your price range. We remain open to supporting you throughout the process and you can always contact us for a free consultation.
If you feel there is a factor we have missed, let us know in the comments below.