Opinion and Analysis
Why real estate data is vital for investors
Posted Tuesday, October 23 2012 at 17:30
Real estate markets are by nature obscure and often require professional input to understand because they are characterised by heterogeneous assets which are usually sold through privately negotiated deals. Within such none transparent markets lay immense fortune for the market savvy investor and great risk for the novice.
Any form of investing has an element of risk, and all rational investors are risk averse, so potential investors always require market information to assist in forecasting the likely outcomes of their investment plans. For real estate investments, the need is even greater due to the uniqueness of individual properties and complexity of property markets.
Kenya’s real estate market has experienced consistent growth since 2003 to the extent some investors have come to assume that positive real estate returns are guaranteed. This misguided notion is a recipe for disastrous consequences should market dynamics change and cause the good fortunes to evaporate unexpectedly.
Currently, the market is replete with sketchy un-synthesised information that is often quoted and in many occasions used for decision making without in-depth analysis. For example, the frequently referred shortfall of 150,000 housing units annually was a projection of housing need based on statistics of year 2009 population census.
So those who may use the figure as a basis for investment planning assuming it is an indication of market size are misinformed since it does not represent effective demand.
In response to the US subprime mortgage crisis of 2008 and the ensuing global financial meltdown, international real estate investors shifted focus to emerging markets in Asia, South America and Africa where there is greater market potential due to rapid urbanisation, growing demand by an increasing middle class and large reserves of untapped natural resources, but the major challenge is understanding the markets.
For the first time Kenya appeared this year in the radar of global market analysts in a report titled “The 2012 Global Real Estate Transparency Index” in which it was ranked 65 out of a sample of 97 countries. This unfavourable rating is an indication that much needs to be done as the sector progresses into more sophisticated real estate investment products like Real Estate Investment Trust( REITs).
Real estate data fall into two categories; property industry data for use in performance benchmarking; and macroeconomic data which is utilised in simulation models for forecasting the likely impact of government policy and different economic conditions on the market and property returns.
At the macroeconomic level, research and data collection target market drivers like a country’s GDP, household income, population dynamics, employment, interest rates, inflation and taxation. At the real estate industry level, critical information is on property prices, construction cost, rent levels, real estate returns, occupancy rates, level of market activity, price changes, stock of housing, sources of demand and finance.
In Kenya’s context, good property data can provide users with answers to issues of public interest like the actual size of the housing market, required units at various income levels and towns, whether a property bubble exist, by how much has inflation and high interest rates reduced the demand for property, the likely impact of political stability in the region, and the future of the market amongst other concerns.
The writer is the head of property valuation at Regent Management