The foundational principle of real estate investment is that it is an appreciating asset. The common belief is that real estate value always goes up. This is true, but it is not the whole truth. Like all other investment vehicles, real estate has its potential downside. It can actually diminish in value, plateau in value or lose value outright. Although this is not a common trend, an astute investor will look at the pros and cons of every investment he or she is involved in.
Looking at it another way, a piece of real estate could be compared to a piece of cloth that you bought at an expensive price but which is no longer in fashion. By virtue of the shifting trends in fashion, it is still a piece of clothing but not actually the same in value. The various properties in the market are not the same in value and their location coupled with other factors will definitely determine their long term value to an investor.
It is also easy to spot the manifestation of an area that has declined in value. When you begin to see a high incidence of ‘For Sale’ or ‘For Lease’ in an area or when the number of those exiting an area becomes an ‘exodus’ then you know that the area has declined in value. However, the path of wisdom is to recognise these signs early and exit before it is too late. It is better to cut your losses than to hold on too long and lose outright. Most of the trends we are going to discuss today are for those wise investors to spot and act on quickly.
A clear sign of a declining neighbourhood is an increase in the crime rate of an area. As people begin to flood into a particular neighbourhood they begin to shape the destiny of that area. If an area has a high percentage of the rough and tough types then it is bound to repel the decent and upwardly mobile. Several neighbourhoodshave become unsafe and crime-ridden as the economy experiences a slide. Sometimes, a neighbourhood’s vibrancy is dependent on one or few companies. When such companies have problems people lose their jobs,default on mortgages, the area begins to experience a higher incidence of unemployment and its twin sister,crime.
Government policies can affect the value of properties negatively especially when there is a total stop to infrastructural development or the pace of infrastructural development is slow. This is especially true of some government estates in Nigeria where allocation has been made but you cannot even access your plot due to poor layout and lack of basic amenities. The fact of the matter is that the persistent lack of basic infrastructures is a major cause of stagnant growth in the value of properties.
Natural disasters or the possibility of natural disasters in an area,such as flooding, is a major cause of declining value of properties in an area. Many investors do not consider environmental factors when deciding the area they want to invest in.Infact,some build without assessing the area under different environmental factors. This should not be so. A wise investor should consider the various factors that could jeopardize his or her investment and take steps to mitigate or avoid them.
This reminds me of a rule of the thumb that some renters of properties in a certain part of Lagos, Nigeria overlooked and paid dearly for. In this particular area, during the rainy seasons several houses are usually flooded and those that are not flooded experience water sipping into their flats and destroying the rugs and other things having direct contact with the floor. Most of the tenants abandon their flats at this period and many never return to the area again. Unscrupulous landlords in that area then refurbish the house against the next summer time for leasing to the next gullible tenant. But for those who know what to look for, when they see the greenish mark at a particular level round a property or its fence, they know that such a property usually experience flooding.
Another factor that practically affects the value of property in an area is uncontrolled developments and indiscriminate developments in the neighbourhood. Sometimes this could be due to the activities of traditional land owners who could sell half or a quarter of land because they need money. Also poor regulatory regimes could cause an area to develop into a ‘slum’.
It is possible to reverse some of the trends causing the value of properties in an area to decline. If the stakeholders are people of the same mind they would be able to tackle some of those factors before they get out of hand. This is the place of community action. Take for instance security. A group of people living in the same area and who are faced with the same security challenges could share the cost of providing security.
- ABIODUN DOHERTY
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