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:
- 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 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 mean housing units will be greatly de-valued.
- 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.
- 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.
- 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.
- Taxes, Capital Gains Tax, Stamp duty, Land rents, land rates, betterment levy, subsidies and other incentives.
- Land laws, Security of tenure on investment on land, and the lengths one can go to utilize the land.
- Political temperatures– Self-explanatory really.
- 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.
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.