It goes without saying that any homeowner’s primary goal is to generate as much income from their investment as is possible. However, they must price their properties appropriately and in line with the local market lest they get stuck with an empty property. Now, flipping houses isn’t as easy as it may come off initially, as Real Estate falls prey to what we call the ‘hedonic pricing model’ of valuation. This works on the premise that factors affecting a marketable good can be determined by both internal characteristics and external factors in its immediate environment. Same as one can assume the price of a car will reflect the characteristics of the car such as styling, luxury, utility, fuel economy, and so on. And seeing as the property market essentially cannot survive in an isolated state, it may be very easy to go wrong if both these factors are not put into consideration at the point of investment.
Of importance to note is that performance of the housing sector is intertwined with that of the broader economy through real, financial and fiscal circuits. In Kenya, Real Estate contributed about 8.5 percent in GDP growth this year (2018), a total of which stands at USD75 Billion at the present (2018).
We always say ‘if you’re thinking of investing in Real Estate to earn passive income, you need to accept the reality that there are factors you can change and others you will have totally no control over’.
These inelastic factors, speaking from a landlord, or home investor’s perspective would include:
1. Forces of supply and demand: Demand refers to what quantity of a product or service is desired by consumers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. How is this relevant to Real Estate? Well, if we are to go by figures and use the deficit declared by the Kenya Property Developers Association of 200,000 housing units in urban areas (predicted to go up to 300,000 by 2020), of which about 50,000 are supplied every year, we see the imbalance in supply and demand. Estimates are at an over 2 million collective units across board (low-income to luxury). No one person can solve this shortfall in even a year’s time. An oversupply, in the same way, would means housing units will be greatly de-valued.
2. Interest rates and Inflation: Impact mortgage values landlords have to consider if they are not fully financing their property ICO. Higher rates mean buyers borrowing from financial institutions will borrow less due to the higher premiums. This would cause a disconnect in property asking prices and offers buyers put forward. Direct influence on market pricing causes a proportional shift in rental rates.
Kenya had 275 mortgage accounts in 2006, which steadily grew to 24,458 in 2015.
However, the Central Bank of Kenya (CBK) said, in a 2017 report that the number of active mortgage accounts fell by 373 or 1.5 per cent to 24,085 at the end of December that year – a significant reversal from where it stood in the previous period when the number of loan accounts grew at a compounded annual rate of 12.9 per cent between 2006 and 2015. Interest rate cap as well as tightening of credit standards for such loans played a role in this.
3. Economic growth: Real Estate not existing in a vacuum means it is susceptible, if not one of the most vulnerable sectors, to general shifts in the economy. Recessions, recoveries, and plateauing all have a direct bearing on the cost of Real Estate as it affects wages and disposable income of the population. To put this into perspective, higher incomes would mean people are willing to pay more for “luxury and vanity” while lower incomes mean they would focus more on the bare minimums.
4. Zoning restrictions: These impact tax rates directly, thus somewhat dictating what nature of Real Estate to put the land under, and how much return one gets for their investment.
5. Taxes, Capital Gains Tax, Stamp duty, Land rents, land rates, betterment levy, subsidies and other incentives.
6. Land laws, Security of tenure on investment on land, and the lengths one can go to utilize the land.
7. Political temperatures – Self-explanatory really.
8. Housing policies: The provision of infrastructure, the regulation of land and housing development, the organization of the construction and materials industry, and the involvement of the public sector in housing production all have direct impact referring to the assembly of housing and its responsiveness to shifts in demand.
But alternative policies also are important—for example, those that relate to the physical and legal security of renters and owners, and the ability to use housing as collateral for long-term financing.
These policies influence the desirability of, and demand for, real estate and housing as an asset and, therefore, the amount of housing that investors want to build. In turn, these policies have an effect on the amount and affordability of housing offered to fulfill the requirements of ultimate customers of housing services. Investment selections additionally influence the value, availability, quality and production of informal housing, which accommodates much of the urban population in many developing countries.
Enabling & Non Enabling Policies.
“Enabling” countries are seen to be more positive because their policies encourage housing demand through acceptable housing finance, property rights and subsidies. Such countries facilitate housing offer by providing infrastructure, pertinent regulation and a competitive housing development industry. Prices of houses at lower income levels among non-enablers are typically the equivalent of two annual incomes on top of other enablers.
Home possession rates among enablers are typically fifteen to twenty-five share points higher. Crowding, as measured by floor space per person, is significantly less among enablers. The percentage of population moving annually is higher among enablers—an issue that facilitates upgrading housing conditions and enhancing job mobility.
Other Factors
Thankfully, there are some factors within your control that will help you realize as much out of your property in the long run, whether it is for sale or rental purposes. These are discussed as below:
Location
Perhaps one of the most emphasised factors of pricing in Real Estate. Rightly so, because it is better to buy the worst house in a good neighbourhood at a higher price than the best in a bad one at a more “pocket-friendly” price. Ultimately, it will cost more to own. And besides, in as much as we all want to have a beautiful view of the beach or mountainside, that view won’t be of much use if you’re late to work every morning. Different demographic groups will be looking for certain desirable traits to do with geographical location, access to urban areas, major roads and transport arteries.
For instance; Proximity to schools – populations with children of school-going age, Nearness to employment areas – working populations, much of the productive-age buyers/renters, Proximity to social, shopping and recreational areas – more youthful population, Calmness, serenity, quiet areas – relatively populations advanced in age.
Market
Governed by forces of supply and demand, which have a ripple effect on comparable properties in the market. Interest rates prevalent and the state of the economy.
Condition
State of repair and maintenance and quality of workmanship. Upgrades in place especially relating to re-modelling of kitchens and bathrooms as these are considered potential “deal breakers” in Real Estate transactions. Market rents, fair-pricing, and market rates ascertained by inspection reports (termite damage), and appraisals done.
Neighbourhood
State of houses, security, frequency of sales, reputation. The Real Estate market relies heavily on comparable sales for market values. The more active a market, the more accurate pricing is. However, a very high turnover is cause for alarm.
Features
Is your property new or old? Also alludes to the amount of time a property has been on the market. Longer equals lower rates due to perception, or incorrect market). Lower sale prices will impact the rents tenants are willing to pay for similar properties to let in the area.
Finishes
Getting value for money. Can impact both negatively or positively – highly customised improvements may not be of great value to another person. Sentimental value is not considered. It is important to remain objective in regard to this factor as many investors may expect too much for their improvements when the actual market does not pay too much consideration to the “brand names, and logos” as they may have initially assumed. It is therefore imperative that they find consultants to advise them prior to investing heavily on some finishes and fixtures.
Size
A more spacious home comes with a higher price tag than one that just barely meets the essentials on occupancy ratios. This is primarily because it costs more [per square foot] to construct. Additionally, roomier houses allow tenants/buyers higher utility of spaces. These extra use-cases therefore contribute to the value of the property. They range from things as simple as space to comfortably keep pets to installing appliances and additional features such as washers/dryers, bathrooms or even partitioning into other rooms. Single family homes also tend to attract higher rents than apartments due to additional extras accorded relating to privacy and compound spaces, and the fact that shared or high-density properties generally share costs like service charges and land rates.
Demographics
These are the quantifiable characteristics of a given population. A population under study can be characterised based on factors such as age, race and sex. It may as well cover entire societies or groups further defined by criteria such as education, nationality, religion, and ethnicity. This is a treasure trove of valuable Real Estate market data as insights on prevalent distribution rates improves knowledge on what kind of units would be in demand. This not only informs the investor on what to build, but further study into population growth rates can foreshadow what a population’s future needs may be. The age of buyers in a given geographical location and their nature, whether home or overseas buyers and renters directly impact the prices e.g. Gigiri, Nanyuki, Kitengela
Urbanization
Changing gentrification (the restoration of run-down urban areas by the middle class (resulting in the displacement of low-income residents) trends cause some regions to undergo price explosions. Again, this would require pro activeness on the part of the developer, as well as assistance by analysts to take advantage of rising trends in foresight of expected market demands. E.g. Kiambu (Thindigua, Ruaka), Riruta Satellite
Written by
KARAMA OGOVA | Regional Sales Manager | GNA Real Estate