Investing in real estate provides many benefits, most notably:
Real estate is tangible, which itself provides security and stability to investors over the long-term;
It is accessible and not an abstract asset class, its value and potential is easy to imagine and grasp;
Depending on underlying market drivers, real estate prices can show considerable appreciation while also providing a predictable stream of cashflows in the form of rent;
It offers a hedge against inflationary factors while it can help diversify the portfolio;
Real estate is often a fiscally appealing asset class to invest in;
It can be often financed with a mortgage or a mortgage can be taken on a property as banks will often recognize properties as adequate collateral.
While also downsides and risk of this asset class can be summarized it is needless to say that it can provide tremendous opportunities and value to investors.
What drives the prices of properties?
Property prices depend both on macroeconomic factors as well as local and specific factors. In general one should view a building and its value in relation to what can currently be constructed in the market and at what cost. If for example macroeconomic developments lead to construction expenses to go up, this in turn pushes existing buildings up in value. Additionally, there will be a huge demand for well or centrally located properties as often no new constructions are possible in these areas. Lastly there can be specific demand for buildings due to the architecture and style in which it was built.
More specifically if we look at some macroeconomic factors:
Inflationary effects: Property prices are strongly related to the price level of the materials, commodities and labour expenses in the construction. Even more generally we can say properties provide a hedge against inflationary effects. The reason for this is simple, existing houses will become more appealing if the expenses for the construction of new houses go up;
Interest rate: A high interest rate makes it more expensive to borrow money. Considering purely mortgages and the mortgage rate this will imply people will be able to get a relatively lower mortgage while interest expenses go up and therefore will be able to or willing to offer less for a property;
Demographics: It is needless to say that an increase in the population leads to a higher demand for housing. This can change suddenly due to the influx of students, expats or other migrants or over a long time span due to slow changes in the population size;
Regulatory reasons: A change in regulations can have a sudden and strong impact on property prices but also with long-term implications, we will go into this into separate articles;
Economic conditions: In a well performing economy people have more purchasing power, as housing is one of the basic areas people spends money on this means that this will in general lead to an increase in property prices.
Additionally local and specific factors play a role:
Location: Even within a city there can be huge differences in real estate prices due to considerations like general safety, accommodations and centrality of the location;
Construction quality: Think for example about the (heat) isolation, type of materials used in the construction and necessity for periodic maintenance;
Architecture and style: In general people are willing to pay more for buildings that are aesthetically appealing;
(Other) Specific characteristics: (Other) specific aspects can have a big impact on the price of a property. Think for example on the outside view, shape of the building, internal design and parking possibilities.
Optimal property selection
One component in the investment in properties that is often overlooked are doesn’t get the necessary attention is that of optimal property selection, while for example in the context of stocks this is a basic concept. Even within a building, while certain aspects might be similar or the same, there will be a huge variation in many specific characteristics as mentioned in the previous section. A developer or real estate agent will offer apartments at different prices to reflect the specific characteristics of the apartment, but in any case it is an expression of own beliefs and valuations and there is no absolute correct price. Therefore a lot of value is to be gained in the optimal selection of properties, especially when the valuation is significantly off based on objective metrics. Conversely, a sub-optimal choice can cause some headaches later on.
We excel in optimal property selection and this is already an area in which we provide a lot of value for our clients.