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Investments Management Ltd
Every individual wants to invest and earn high returns. Investing is risky and in many cases, individuals get lower than expected returns or even earn losses altogether. This has been true in Kenya particularly in the last few years where the combination of high interest rates, heavy government borrowing both locally and internationally and corruption among other micro economic factors have resulted in lower returns for investors.
The asset classes most affected have been fixed income and equities; both of which are earning lower returns than their five-year averages. Real Estate on the other hand has remained bullish posting returns of more than 20% in general and up to 30% per annum on selected markets. We thus compare the performance of real estate to the other asset classes, explore the reasons why real estate outperforms the other asset classes and give tips to investors on ways of sharply investing in real estate to guarantee high returns.
Comparison of Real Estate Performance with other asset classes
|
Asset Classes |
Average Five Year Return |
2015 Asset Class Return |
Variance |
|
Listed Equities |
10.0% |
(10.6%) |
(20.6%) |
|
Fixed Income (91-day T-bill) |
9.6% |
(3.5%) |
(13.1%) |
|
In 2015 listed equities earned-10.6% mainly affected by poor performance in the financial services sector, which was affected by the high interest rates environment that led to an increase in non-performing loans. This led to a decline in the prices of banking stocks. The 91-day T-bill’s performance is also lower than its five-year average posting -3.5%, 136% lower than its five-year average of 9.6%. Real Estate still earning high returns of on average 25% p. a |
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Why Real Estate is outperforming other asset classes
Despite operating in the same investment climate as fixed income and equities, real estate as an asset class outperforms the other asset classes due to several factors including:
-
High demand and low supply – real estate especially residential theme is a necessity and hence a must have. In addition to this there is a huge deficit in the market with only 50,000 houses being supplied annually against a demand of 200,000 houses p.a and in total 2 million houses. This makes it an investors market resulting in high prices and rents and hence high returns. Other factors also boosting the demand for real estate include devolution and demographic trends such as the youth bulge and urbanisation
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Regular yield – in the form of rent that increases the returns for real estate investments
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Maintains capital and appreciates in value, mostly higher than at the rate of inflation – unlike the other asset classes whose main source of gain is the yield and an investment in them can lead to loss of capital, real estate maintains the capital and increases in value hence recording higher returns than the other asset classes
How to sharply invest in real estate to guarantee high returns
An investment in real estate can be made in two ways. That is the brick and mortar way where the investor engages in development or buys developed property or innovative methods that do not encompass development such as through purchase of real estate backed notes, listed real estate in the form of REITs or just listed property.
For brick and mortar investments the investor needs to ensure that the future development will have uptake, high returns in terms of both rents and yields and will be delivered in time at the requisite quality and within the budgeted amount. This can be achieved through the following functions:
Market Research: The investor/developer should conduct research to be able to identify market gaps in terms of services, amenities or products and develop products that fill this gaps hence guaranteeing high uptake and returns of both rent and capital appreciation
Fundraising: Every successful developer must have a fundraising strategy. The developer should be able to raise the requisite amount on time and at the lowest possible cost to increase the returns of the project. Structuring should also be done to lower the financing costs
Client Focus Different developments will target different caliber of clients. A developer should hence identify the target client and develop products that will best suit them to guarantee uptake of the products. Choice of location should be client oriented considering the amenities infrastructural facilities available in the location.
Project Management and Quality Delivery: Real estate development requires close monitoring to ensure that the proper processes are followed and the desired quality is achieved. It is thus important to acquire experienced expertise to handle the project and ensure quality is delivered and timelines are met
Marketing and Distribution Strategy: Intensive marketing and distribution is crucial in exiting a development especially. The marketing should by targeted towards a specific niche with potential to purchase or rent the product
For alternative investments in real estate through channels such as real estate backed notes and REITs an investor should keenly evaluate the investment opportunity by analyzing the return potential of the underlying asset in terms of capital appreciation, rental yields, occupancy, uptake, selling prices as well as rental rates.
Real estate remains the best performing asset class due to its resilience to macro-economic factors and non-correlation with the markets and while it is not entirely risk free prudent investment in the sector after careful evaluation of the opportunity and proper project management will result in high return to investors. In Cytonn for instance, our development affiliate Cytonn Real Estate has all the above-mentioned functions and this has translated to high returns to our investors. Our Ruaka Development The Alma (http://www.the-alma.com/) achieved 55% returns for early investors and Amara Ridge in Karen is 100% sold out 6 months before completion (http://amararidge.com/).
For more on sharp high yielding real estate solutions, please visit