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The Features of Property As an Investment – Part 2

The Features of Property As an Investment – Part 2 is one of the best articles about Property Investment. There are numerous posts on the internet that examine Property Investment, The Features of Property As an Investment – Part 2 one of which we suggest for you. Hopefully the articles that people present below can be of use, increase knowledge and be a alternative for you.

For investors to understand property, getting the basics is important. The following is additional features of property as an investment.

1) Lengthy transaction time

The transaction time required to complete a property sale is relatively lengthy. In order to balance the interests of both buyers and sellers, the property transaction process involves several stages from the payment of the deposit to the signing of the sales contract and the completion of the sale. At each stage, certain legal requirements must be fulfilled and this takes time to accomplish, with the result that the traction of an average second-hand private apartment, for example, could require up to twelve weeks before it is completed.

2) Property as an illiquid asset

Property is illiquid, that is, it cannot be converted into cash at short notice. This is a consequence of the length of time needed to complete a transaction. Illiquidity exposes property investment to the risk of market shifts over time, a two-edged sword that can enhance the value of the property as well as diminishing it.

3) Property Management

Property requires management. Because it is a physical asset, neglect and obsolescence can afflict the property. Hence, it is important to manage, maintain and where necessary, renew its physical fabric to retard the onset of obsolescence and enhance its value.

4) Supply inelasticity

Property is generally supply inelastic in the short run. This means that the stock of real estate cannot be readily increased at short notice, since it takes a considerable period to build any type of property. A single two-storey detached house could take, for example, up to one year to complete. A large mixed use commercial property could take, perhaps, four years or more to complete.

5) Imperfection data and information

Looking at real estate in the aggregate, the property market is characterised by data imperfections. Unlike stock and bond markets, where trading takes place in a fixed geographic location, properties are transacted when and where buyers and sellers (or landlords and tenants) agree on a price (or rent) and enter into legally binding contracts, wherever they might be. This lack of a central trading place implies that data on transactions is not disseminated instantaneously or equally to market participants at low cost, as it would be in the case of stocks and shares.

6) Effect of market leaders

The property market is also imperfect in terms of supplier power. In economic terms, it is oligopolistic, that is, there are several large property developers who behave as market leaders, setting benchmarks that others tend to follow. The result is that property prices may not reflect the true supply-demand equation at any one point in time. Prices tend to move quickly upwards but are “sticky” downwards. This, in large part, accounts for the booms and busts of the famous real estate cycle.

7) Government intervention

Land is one of the primary resources of any country. As such the use, development, management and ownership of land and built up properties is often affected by government legislation and policies implemented to ensure their optimal use. While government legislation and policies are inevitable, the degree and extent of intervention depend very much on the type of government and the political climate of the country.

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