Real estate has long been touted as a good investment on the basis of property having excellent value, but to capitalise in a dynamic marketplace, one has to understand where value lies.
When broadly defined, Steve Thomas, secure estate specialist for Lew Geffen Sotheby’s International Realty in Constantiaberg, says real estate is the value of the land plus the improvements upon it, the resources beneath it – and the rights above it, without which the former has a basic, unenhanced intrinsic value with minimal benefit or yield.
“In determining value, many attribute a lot of weight to the rand per m² ratio. But while this is certainly one factor, it’s far more significant to those who view real estate from a purely investment perspective.”
Thomas says a homeowner gains enhanced value over time while utilising the property as a place to live – the primary function – while the investor seeks only enhanced value or highest financial return over time as the primary function of the property. What factors must one take into consideration when determining the true value of real estate?
“Certain elements are fairly standard and easier to ascribe a value, for instance the number of bedrooms and bathrooms, the size of the plot and the age and condition of the home, but one cannot disregard contributory value which can significantly influence the equation.
“This refers to the contribution made by particular features to the overall value of the whole property and is often discussed in relation to renovations or improvements.”
He says one cannot ignore the external influences like proximity to a good school and amenities and cautions to guard against over-capitalisation. Thomas says real estate which has been “improved” can provide not only enhanced value, but also “yield” from, among other things, rental income.
All of these factors are often the reasons behind considerable price variations of two similar houses. But one can break it down even further by evaluating factors such as the quality of build and finishes, special features, location, views, lifestyle and more.
While it is impossible to look into the future and make 100% accurate predictions, Thomas says there are a number of steps one can take to determine “good value” and minimise risk.
- Check (proposed) development plans in the area
- Check actual selling prices in the area over the last 18 months to two years
- Check the title deed (restrictions)
- Visit the area at different times of day: Talk to a reputable agent about current trends
- Talk to locals.
“Remember fluctuations are inevitable as real estate always has and always will work in cycles of boom times and correction periods,” says Thomas.