Real estate represents a significant portion of most people’s wealth, and this is especially true for many homeowners in Kenya. According to researches, 40% of Kenyan families own their own primary residence. The size and scale of the real estate market make it an attractive and lucrative sector for many investors.
This article will look at some of the main factors that affect the real estate market and the variety of investments available.
Factors That Influence Real Estate:
1. Demographics
Demographics are the data that describes the composition of a population. Such as age, race, gender, income, migration patterns and population growth.
These statistics are an often overlooked but significant factor that affects how the real estate market is priced. And what types of properties are in demand. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades.
There are numerous ways a demographic shift can affect the real estate market, but for an investor, some key questions to ask might be:
- How would this affect the demand for second homes in popular vacation areas as more people start to retire?
- How would this affect the demand for larger homes if incomes are smaller and the children have all moved out?
These and other questions can help investors narrow down the type and location of potentially desirable real estate investments long before the trend has started.
2. Interest Rates
Interest rates also have a major impact on the real estate markets. If you’re considering buying a home with a mortgage it is beneficial to research interest rates using a mortgage calculator.
Changes in interest rates can greatly influence a person’s ability to purchase a residential property. That is because the lower interest rates go, the lower the cost to obtain a mortgage to buy a home will be. This creates a higher demand for real estate, which again pushes prices up.
It’s important to note that as interest rates rise, the cost to obtain a mortgage increases, thus lowering demand and prices of real estate. However, when looking at the impact of interest rates on an equity investment such as a real estate investment trust (REIT), rather than on residential real estate. The relationship can be thought of as similar to a bond’s relationship with interest rates.
When interest rates decline, the value of a bond goes up because its coupon rate becomes more desirable. And when interest rates increase, the value of bonds decrease. Similarly, when the interest rate decreases in the market, REITs’ high yields become more attractive and their value goes up. When interest rates increase, the yield on an REIT becomes less attractive and it pushes their value down.
Related: How to get the best mortgage interest rate
3. The Economy
Another key factor that affects the value of real estate is the overall health of the economy. This is generally measured by economic indicators such as the GDP, employment data, manufacturing activity, the prices of goods, etc. Broadly speaking, when the economy is sluggish, so is real estate.
However, the cyclicality of the economy can have varying effects on different types of real estate. For example, if an REIT has a larger percentage of its investments in hotels, they would typically be more affected by an economic downturn than an REIT that had invested in office buildings.
Hotels are a form of property that is very sensitive to economic activity due to the type of lease structure inherent in the business. Renting a hotel room can be thought of as a form of short-term lease that can be easily avoided by hotel customers should the economy be doing poorly.
On the other hand, office tenants generally have longer-term leases that can’t be changed in the middle of an economic downturn. Thus, although you should be aware of the part of the cycle the economy is in. You should also be informed of the real estate property’s sensitivity to the economic cycle.
4. Government Policies/Subsidies
The legislation is also another factor that can have a sizable impact on property demand and prices. Tax credits, deductions and subsidies are some of the ways the government can temporarily boost demand for real estate for as long as they are in place. Being aware of current government incentives can help you determine changes in supply and demand and identify potentially false trends.
What’s the Best Investment?
The size and scale of the real estate market make it an attractive and lucrative market for many investors. Investors can invest directly in physical real estate or choose to invest indirectly through managed funds. Investing directly in real estate involves purchasing the residential or commercial property to use as an income-producing property or for resale at a future time.
Indirect ways to invest in the real estate market include investing in real estate investment trusts (REITs), real estate exchange-traded funds (ETFs), commingled real estate funds (CREFs) and infrastructure funds.
Due to the higher liquidity available in the market, the lower transaction costs and lower capital requirements, average investors prefer to indirectly invest in real estate.
Related: Beginners’ Guide To Real Estate Investing
The Bottom Line
The factors mentioned above play a significant role in moving the real estate market. But there are also more complex parts that come in to play. And although some of these factors suggest a clear-cut relationship between the factor and the market, in practice, the results can be very different.
However, understanding the key factors that drive the real estate market is essential to performing a comprehensive evaluation of a potential investment.
