Real Estate

The characteristics of property as an investment – Part 2

For investors to understand property, it is important to get the basics down. The following are additional features of investment property.

1) Long transaction time

The transaction time required to complete the sale of a property is relatively long. To balance the interests of buyers and sellers, the property transaction process involves several stages from the payment of the deposit to the signing of the sales contract and the completion of the sale. At each stage, certain legal requirements must be met and this takes time to comply with, with the result that the traction of an average second-hand private apartment, for example, could require up to twelve weeks before it is completed.

2) Property as an illiquid asset

The property is illiquid, that is, it cannot be converted into cash in the short term. This is a consequence of the time required to complete a transaction. Lack of liquidity exposes real estate investment to the risk of changes in the market over time, a two-edged sword that can increase property value as well as decrease it.

3) Property Management

Property requires management. Because it is a physical asset, neglect and obsolescence can affect the property. Hence the importance of managing, maintaining and, where appropriate, renewing its physical fabric to delay the appearance of obsolescence and increase its value.

4) Inelastic supply

The property is generally inelastic in the short run. This means that the stock of real estate cannot be easily increased in the short term, as it takes a considerable period to build any type of property. A single two-story single-family home could take, for example, up to a year to complete. A large mixed-use commercial property could take perhaps four years or more to complete.

5) Imperfect data and information

Looking at real estate as a whole, the real estate market is characterized by data imperfections. Unlike the stock and bond markets, where trading takes place in a fixed geographic location, property is traded when and where buyers and sellers (or landlords and renters) agree on a price (or rent) and enter into contracts. legally binding, wherever they are. . This lack of a central trading venue means that transaction data is not instantly or fairly disseminated to market participants at low cost, as it would be for stocks and shares.

6) Effect of market leaders

The real estate market is also imperfect in terms of the power of providers. In economic terms, it is oligopolistic, that is, there are several large promoters that behave as market leaders, setting benchmarks that others tend to follow. The result is that property prices may not reflect the true equation of supply and demand at any given time. Prices tend to move quickly to the upside, but are “sticky” to the downside. This, in large part, explains the booms and busts of the famous real estate cycle.

7) Government intervention

Land is one of the main resources of any country. As such, the use, development, management and ownership of land and built properties are often affected by legislation and government policies put in place to ensure their optimal use. While legislation and government policies are unavoidable, the degree and extent of intervention depends largely on the type of government and the political climate in the country.

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