Key factors in real estate investment

The property market in many cities across the world is facing unprecedented challenges. Prices have risen so high that most of the buyers have been priced out of the market. The sellers have somehow anchored themselves to these irrational prices.

The end result is that prices do not seem to be coming down. There are almost no transactions in the market at the given prices.

Globally, millennials are getting into the habit of buying houses. With increased incomes and other favourable factors such as low mortgage rates, older millennials are ready to retire from the renting life, which is seeing increased demand for homes, in various markets.

With such a trend, it would be obvious that there is need to build more houses to cater for the demand, but there are certain considerations that need to be put to meet the demand while at the same time maintaining profitability for the investor.

Zeroing in on the Kenyan market, the demand for urban housing was estimated at around 80,000 units a year in 2010, with demand projected to increase to nearly 300,000 units a year by 2050. The supply in Nairobi was at 15,000 units in 2013, which was catered for only 18 percent of the demand.

How can investors take advantage of the projections for the long-term?

Already the government has embarked on providing housing through the Affordable housing programme which targets low income earners in major urban nodes as only two percent of formally constructed houses are targeted to the lower income segments, which account for the largest share of demand.

Home ownership in urban areas is affected by the high prices and as such Nairobi is largely rental driven market.

As an investor, it is advisable to get into the rental market while accessing trends of what is in demand and the projection of how neighbourhoods will develop. Obviously affordability is what most people want but also emerging trends such as work-home proximity are what new homeowners consider.

We are familiar with a housing bubble where market prices reach unsustainable levels and as supply increases, demand naturally declines. It may be temporary but could last several years.

You can identify a housing bubble by the number of unsold houses as well as discrepancies between the capital vs the rental value of houses in an area.

As an investor, it would not be wise to get into an already saturated market.

The current interest rate cap debate will also have a significant effect on the real estate market in terms of mortgages. If scrapped as recommended by President Uhuru Kenyatta in the Finance Bill 2019, banks will be at liberty to adjust their rates as per market forces. This could have a negative or positive impact depending on how the economy performs.

The annual inflation rate in Kenya declined to 3.83 percent in September 2019, from 5 percent in the previous month. World Bank Kenya Economic Update project s Kenya inflation rate will trend around 6 percent in 2020.

Other factors come into play as continued subdued private sector investment could drag down growth in the near-term, leading to less jobs and less income which will reduce demand in real estate sector.

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