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
Societal and demographic factors
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
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 performing 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
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 itÃ¢â¬â¢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 parentÃ¢â¬â¢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 peopleÃ¢â¬â¢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.