Here is seven aspects to property investment that I have found to be helpful over the years:
Look at the big AND small picture
Property should be viewed from both a macro and micro perspective, taking into account the big picture and micro activity within the suburb or immediate geographical area. For example, the general demand and future (improved) rights within a property zone over the next 5 years.
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When a request is made for a property valuation, the applicant and others tend to ask me as soon as I have completed an inspection of the site, “So, what do you think the property is worth?”
It makes me think of a patient asking a medical doctor whether a tumour is malignant before a biopsy is carried out. In both instances it is recommended to carry out tests and analyse certain facts before stating, what may appear to others to be a quick and easy conclusion.
Some of the factors to consider are, inter alia, the attributes of the subject property vis-a-vis that of recently concluded sales of comparable type properties within the same and/or immediate area:
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A professional property valuer is a person that has an accumulated knowledge of the building industry, understanding financial investment criteria and economical markets. A professional property valuer can gather, analyse and deduce reliable information for rational interpretation. The key function of a valuer is to explain and present complex assumptions and derivatives in an understandable matter. The data statistics should be transparent and all assumptions needs to comply with logic and motivational reasoning i.e. “apply your mind” as a wise architect once informed me.
No value is predeterminable, only as the concluded assumptions and market related information are applied does the bottom-line or final valuation appear. A professional property valuer cannot form a personal opinion separate from the data and therefore can only express the opinion as derived from the market. The result is a valuation that is only as credible as the data and assumptions on which it is based.
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The market value of any property, in simple terms, is whatever someone is willing to pay for that property and other similar properties. Land is fixed in supply (we only have one earth), therefore value is determined by supply and demand. The price of land is a function of how the land is utilized in terms of its most profitable use given the location and (economic) preferences of consumers and the society.
The productivity of land can be optimized with the greater demand and the more intensive application of capital. The available land stock at a specific point in time is fixed in price, but will gradually relax or become more elastic as the period extends and the same or lesser demand remain. A typical full circle property cycle for South Africa is every 20 years, therefore property investments and risk analysis should be based on a minimum time frame of between 10 to 15 years. The price of land is in correlation to the earnings in excess over and above the opportunity cost required, though capital growth can be factored as long as realistic assumptions are termed.
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If you think that a property is easy to sell and any tom, dick and harry can do it – think again.
Home owners are subject to increasing compliance requirements. Municipal laws require home owners to apply for certain certificates before they sell their property. Here is a few important ones to remember:
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The world of finance in general and real estate in specific has become increasingly volatile over the past number of years. Events previously considered infrequent and negligible has become more significant if not more frequent. With the increasingly complexity of the world, neo-classic economic theory is being critiqued for its inadequacy of explaining real world events. Events are not, as the theory suggests, insignificant even if they are assumed infrequent.
For example, the 2008 U.S. subprime crisis serves as the latest reminder of an imperfect financial system. What made this crisis even more significant than a financial dip in the U.S. is the effect it had on other economies. Globalisation and the interconnectedness of economies make what happens in one country important and of concern to another.
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