Real Estate an Asset Investment!

It is this quintessential desire that has made man acquire land, invest in it and construct thereupon. It is an empirical fact that the real estate forms a major part, almost 68 per cent of the asset investments in the global balance-sheets of the major world economies.

According to a report of McKinsey & Company, two-thirds of the global net worth is stored in real estate and only around 20 per cent in other fixed assets. This real estate investment reflects residential, as well as commercial use.

With land being in fixed supply, which can obviously not be increased and global population multiplying threefold in the last 60 years, it increased from 2.5 billion heads in 1950 to 7.9 billion heads today, making the real estate more dearer per head and a very sought after investment.

While there are other forms of capital investment available such as stocks, securities, savings accounts and more, what makes the real estate a desirable investment? There are multiple reasons for that.

One of the major reasons for investing in the real estate is that it provides secure investment for a longer period of time and the price keeps appreciating over years, offsetting the effects of inflation and depreciation of the currency.

This can be explained by the example of a person who had made an investment of Rs300,000 in a 500 yards plot 30 years ago in a residential-cum-commercial area of Karachi – say, Gulshan Iqbal. The value of the same would stand today at around Rs50 to Rs 65 million.

Now it’s very interesting to note that the Pakistani rupee in 1990 stood at Rs20 against one US dollar. Today, the exchange rate for the rupee against the dollar is Rs182. It is a nine-fold increase in the exchange rate, while the appreciation in the land price over 30 years comes to almost 200 times of the original investment. This appreciation in value not only offsets the inflation but guarantees a lucrative profit on sale of the same now 30 years later.

Another reason why one should invest in the real estate is that it has a low responsive behaviour to economic cycles in a country, compared to other asset classes. Yes, the real estate too experiences cycles of boom and slump but compared with other forms of asset investments such as stocks and securities, which react sharply to economic volatility, the effect on the values of the real estate remains relatively low.

A change in the policy rate or financial policy of a country or political uncertainty have high impact on stocks markets, which react sharply to everyday happenings. A stock market investor has to have complete insight into the factors playing in the market, its trends and sound financial backing to keep up with the volatility of the market. Investing in the stock market is a very professional thing and for a small investor the risk factor is strong.

‘Happenings’ have a relatively low effect on land prices. The prices/value may remain stable on political upheaval or financial policy changes but they would very rarely fall drastically. It is natural disasters and wars that have a greater impact on land prices, but thankfully most places and their real estate remain spared of such adverse events. Thus compared to the stocks, the real estate remains a safer and secure form of investment in the long-term.

Investment in the real estate is often done to earn good returns by renting the property. People with a good amount of savings prefer to buy, built up properties to put it out for rent. Now, there is always a large number of people out there who are ready to rent a property, be it a house, apartment, shop or even an office, since not everyone has got the capital to buy it. We do not have a data bank of rented property in Karachi but a look at classified sections of daily newspapers suggest that there is a good market out there for property rentals in all parts of the city, with the tariffs varying in relation to the economic status of the majority population of a particular area.

Like any other investment, the real estate too involves a proper thinking process and planning. When investing in the sector one must do due diligence and consider the property from three important aspects.

The first and foremost aspect to consider is the peace of mind. A property transaction must bring peace and feeling of security to the one investing. For this, one must give proper time to look into the legal documentation of a property and ensures that the land title is clear and without any encumbrances. The location of the property, its adjoining neighbourhood and the basic infrastructure of the area all contribute towards making it a worthwhile investment. Being a little patient and doing due diligence would ensure mental peace in the long run for the investor.

Secondly, the investor must look into the future prospects of the property, as well as the rental values. A realistic study of the area where the property is located, assessing how developed it is, what rentals are being charged by other property owners there, as well as how the other areas similar to this one have experienced an appreciation in the property prices and rentals in the near past would certainly help make a good investment decision.

And while there are many other things one may consider in making investment decisions in the real estate, a very important one is to look into the risks involved and a way-out to mitigate such risks. When investing in a totally new area or a new residential scheme one must ensure that the scheme has the basic infrastructure and the approaches to it are in place, guaranteeing that over the time, the scheme will be completed as scheduled and bear fruits.

Due diligence will help identify such risks and one will be able to think of ways to counter them or simply avoid investment in a risky scheme.

As the cities grow and sprawl in all dimensions, the real estate presents an excellent opportunity for the small investors to select, investigate, perform due diligence and invest in property that will become a favourable asset for them and their families.

The beauty of the real estate investment is that while securities and stocks may pay an interim profit, their principal amount remains the same over years, but with the real estate, the capital invested appreciates manifold with time.