January 5 2022
Real Estate properties are an asset class that could potentially (while real estate does tend to appreciate, there are no guarantees) provide, to individuals, a high return of investment.
One way of securing a good return is by using the property to collect rent as a landlord. The other primary way that landlords earn money is through appreciation. If your property appreciates in value (we will be looking at how, further on), you may be able to sell at a profit or equally important, to borrow against the equity to make your next investment.
In real estate, property appreciation refers to the change of value of a property over time. There are several factors affecting the margin and time frame of property appreciation, the most important of which are discussed below.
Property Improvements through property’s features, amenities, and upgrades influence its value. By features we refer to characteristics or fittings that set the property apart and by amenities facilities to provide comfort and convenience to occupiers.
For Commercial Real Estate (CRE) this would refer to a few conveniences such as the energy efficiency of the building, the presence of conference facilities, reliable and fast internet connection facilities to enable remoting working across different jurisdictions. Access and ease of parking for clients as well as security and concierge services are often deciding factors in sourcing an office space and as such provides an owner a competitive advantage. Auxiliary facilities to the main function say for an office would be an outdoor/break out space as well as the provision of a cafeteria for the staff. Furthermore, the design of an architecture and the interior of the property can also play their part in price appreciation.
In residential properties the improvements would have a range across all the property rooms, such as the example of the dining room where the relationship to other rooms (Dining/family and Dining/living combination) could prove to be deciding factors in renting such a property. Other notable features would be outdoor features such as, swimming pool, barbeque area, garden, an outdoor kitchen etc. Renovating a home’s kitchen could potentially add to its value upon completion. Completing a basement construction, adding a guest bathroom, or upgrading heating/cooling infrastructure for private residences are all valid value-adding improvements.
Asset Location, location, location. If the neighbourhood surrounding your property is growing, say in residential area where a high street is being created, adding new local businesses, and opening up more jobs while also offering facilities for homeowners, local house prices tend to increase. If the community is struggling, i.e. crime rates are on the rise, businesses are closing or relocating to other more affluent districts, it usually results in depreciation of the specific property.
Infrastructure development and new road transport networks improving connectivity are also a significant factor. As these are often changes taking place across longer periods, monitoring of how the location inherent value is modified is always crucial. Potential homebuyers cite local schools, job opportunities in close vicinity, shops and entertainment choices as the most important factors.
Market conditions play an important role in property appreciation as well as the wider area of real estate market dynamic. As a rule of thumb, if properties of a similar size and condition to your own, are in high demand in your area, value will go up. On the other hand, if availability of similar homes rises in the market, value will go down.
Lending rates and current interest rates and future trends play a crucial part for real estate appreciation. By providing low borrowing cost to investors and buyers, such as current local government initiatives, will encourage more potential buyers to enter the market. Consequently, generating more demand will create property appreciation. On the other hand, higher rates will reduce the pool of buyers, stifle demand and result in property depreciation.
The overall economy (including macro indicators such as employment, population growth etc.) has an effect to a more global scale. When the economy performance is weak and consumers are under pressure, real estate tends to be less in demand. Oppositely, when the economy is strong and employment is up, you often see appreciation rates rising. What is being witnessed locally at the moment is an investment in real estate as a way of maintaining the purchasing power of capital by depositors who have not had good returns from depository products combined with increased inflationary pressure. The inflation hedging capability of real estate stems from the positive relationship between gross domestic product (GDP) growth and demand for real estate.
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