Real estate investment risks and how to handle them

 

Crystal Rivers mixed-use development located in Athi River, Machakos County. [File, Standard]

Real estate investment is seen as one of the most lucrative investment options in Kenya. Be it building wealth, having a secondary source of revenue, securing your future, or even just growing your investment portfolio, the real estate sector is one of the investment vehicles that can help you get there.

In the investment world, risk and return are positively correlated as most people tend to be risk-averse, thus, the higher the risk the higher the return. Investors should always be aware of the various risks involved with an asset class before pumping their capital.

Sarah Wahogo, the chief executive of Safaricom Investment Co-operative, explains some of the risks associated with real estate investing and how to navigate them:

1. Location risk

In any lucrative real estate investment, the location of the property is key. Real estate investors run the risk of choosing a location that may not be suitable for living in or making a return on investment.  The location of a property will determine whether your investment will serve you in the long-term.

For instance, if you are looking to invest in a house to start your AirBnB business, choosing a house in a prime location that is close to social amenities such as shopping malls and restaurants would be ideal.

On the other hand, as an investor seeking to have a retirement home, quiet and serene environments would best serve you.

Before investing in a property, conduct thorough research about its location to ascertain whether it suits your needs.

2. Market fluctuations

It is a popular assumption that the real estate market always appreciates and promises great returns. However, some factors such as the economy, supply vs demand, inflation rates, currency devaluation, and changes in GDP growth and interest rates, can impact the pricing of different properties.

Economic fluctuations can lead to reduced or increased demand for real estate properties, potentially affecting the pricing of properties.

For instance, if you invest in an off-plan property, just as the value of the property can increase, it can also decrease in value. If the value increases, good for you, but if the value decreases, then you will have run the risk of having paid more than those buying afterwards.

Sarah Wahogo Safaricom Investment Cooperative CEO.

To manage such a risk, as an investor, you ought to diversify your portfolio across different asset classes and regions to avoid exposure. Additionally, always ensure you seek legal and professional advice from experts who understand the economic landscape, and who can advise you on what to do in case prices plummet. To further manage risk, do thorough research by conducting due diligence and constantly monitoring the investment trends in the sector.

3. Regulatory risk

Regulatory amendments may affect prospects for the sale of a property increasing the risk of buyers paying more.

For instance, changes in land rates, payment of stamp duty or any other tax obligations may affect the pricing of a property.

Time to time, relevant tax rules, or the application of rules may change. Political instability can affect property rights and the rule of law, leading to disruptions in property ownership, tenure systems, and land rights. Investors may find themselves facing legal and regulatory challenges that affect their ownership and investment security.

Amendments to tax rules may result in investors being faced with new and different investment conditions, including an increase in the price of properties.

To manage this, consult professionals who understand the different regulatory requirements in real estate and how they affect your purchasing power.

4. Time risk

When investing in real estate, time is always a risk factor. If you are investing in an off-plan project and there is a delay in the completion of the project, any increase in interest rates may in turn lead to an increase in property price, or the delay may lead to depreciation in value of the home in case you plan to sell it or rent it out.

Furthermore, a delay in the completion time of a real estate project may delay your plans of moving in at a particular time. The time risk can be addressed by investing with a developer that has a reputation for delivering on time.

Also, ensure that you conduct thorough research on the probability of growth over time therefore leading to an appreciation of property prices in the area in case you ever need to sell or rent out the property.

Some risks can be eliminated but most can only be managed. To manage risks in the real estate sector, whether as a developer or an investor, conduct your due diligence and conduct a thorough market analysis that will help you counter the different challenges along the way.