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Property has notable features that distinguish it from other types of investments, such as stocks and bonds. Generally, these features of property make investment in real estate risky. But, by the same token, they also enhance the potential returns that can be achieved by investing in property. The following is some of the features of property as an investment.
1) Property as a unique asset
Property is heterogeneous or unique. This means no two parcels of real estate are identical. Even an adjoining pair of semi-detached houses or two neighboring flats will differ in some detail like the facing of the bedroom, and the type of finishes and improvements the respective owner used.
2) Property as an immobile asset
Property is immobile, and cannot be moved to another location. Consequently, it is at the mercy of its physical environment. The addition of infrastructure, like a station, in the vicinity of a property will affect its value. Thus, apart from the usual economic and social factors that influence the value of any investment, there is an unique spatial dimension to the analysis of property. Immobility and heterogeneity of real estate also lead to the delineation of sub-markets, often defined by sector. Examples of the sector are residential, retail, commercial and industrial.
3) Property as an indivisible asset
Property is indivisible in the sense that it cannot be broken into tradeable constituent parts like individual shares of a company. There is an exception to his. The exception is the securitization of real estate markets in some parts of the western world is transforming big “lumpy” real estate into bond-like or share-like instruments with rather exotic names like (REIT (Real Estate Investment Trusts), PINCs (Property Income Certificates) and CMO (Collateralised Mortgage Obligations). However, at this moment, most capital markets have not developed to such a degree of sophistication as to be able to offer such instruments.
4) Property as a durable asset
Property is relative more durable than most other goods. A building may deteriorate but generally as a slow rate. The normal physical life span of a building is generally taken to be some 60 years, though its economic and functional life may be shorter. Land, on the other hand, is definitely durable. Its value appreciates over time and normally at a rate faster than the rate of depreciation in value of any improvements on the land. The net result is that while the quality and physical condition of the building may have deteriorated over time, the total value of the land plus improvements on the site will at least be maintained, or more often than not be increased.
5) Capital Commitment
It requires a high level of capital commitment to invest in real estate, with the result that some kind of financing is invariably used. Hence, changes in credit conditions and regulations governing financial intermediaries like banks, insurance companies could have significant repercussions on the property market.
6) High transaction cost of real estate.
The cost of a transaction in property is high. Because of the complexity of a property transaction, several parties are usually involved: estate ages, valuers, building surveyors, government departments, financiers and lawyers, acting for either the buyer or the vendor. This implies that the parties bear additional costs such as legal fees, valuation charges, stamp duty and mortgage processing fees.
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