Property values are driven by basic supply and demand. When 'facilitated demand' is high (willing buyers that can access finance), and supply limited, then property values rise, and the opposite is true when demand is weak and there is an oversupply of properties. With this in mind, property investments are driven on the one hand by global macro-economic and socio-economic trends such as population growth and rising incomes, whilst on the other hand local and regional factors play a key role in property values. For example, in 2012, property values across the UK continue to fall or stagnate, except in London where demand is still high and where wealthy buyers can still afford to buy homes, either as first residences or as investments. The dynamics of financial markets also play a part in defining property values, as availability of credit is key to turning demand into actual transactions, and where credit is not available property prices are likely to remain depressed. Furthermore, the general state of an economy, either locally or nationally, will also impact property investments. If unemployment rises, then rental defaults will increase, and if wages fall, so too will rental yields as tenants push for reductions.
Investors in property should consider that the value of their assets, and the income produced by them is dependent of a number of supply / demand variables, on a local, national and international basis, and therefore perhaps the lowest risk form of property investing is to acquire properties well below market value, add further value through improvements where possible, and dispose of the property quickly in order to free up capital to repeat the cycle. This removes reliance on some of the aforementioned factors as the Investor does not require capital growth, only a buyer prepared to pay market value and able to secure the funds to do so.
Investment Characteristics
Property as an asset class is generally used by Financial Advisors as a risk-management and diversification tool, due primarily to the asset class sharing a low-correlation with equity markets although some correlations do exist. It is difficult to define the portfolio planning characteristics of real estate in general terms due to the wide variety of sub-sectors which all derive growth and income from different market-sectors and investment returns are driven by different factors to the next sub-sector.
Broadly speaking however, all property sub-sectors do share a number of characteristics that make the asset class appealing to Investors seeking capital security, income and growth.
Intrinsic value - property investment assets retain a capital value throughout the useful lifetime of the asset. Provided there are buyers, and Investor is unlikely to ever lose all of their investment.
Low correlation - Property investments generate income from rentals rather than money market performance, and capital growth is driven by demand. However, every sub-sector shares at least some correlation with the general economy.
Income - Property investments derive income from rentals as people or organisations are prepared to pay to use the asset, or in the case of natural resource properties, from the sale of the commodities produced, replacing income during times of depressed interest rates.
Capital growth - Again, capital growth is driven by facilitated demand. In the case of distressed assets, Investor may be able to capture inherent value based on their purchase discount.
