By: Juan Sorochin
Manager, Consultancy and Research
Real estate serves as an investment vehicle that generates an income stream from the tenants paying rent. The supply and demand of real estate, especially commercial real estate, is derived from the supply and demand of goods and services.
The behaviour of the real estate market is cyclical and is linked to the performance of the economy
in general. For example, if new jobs are created in the service sector, more office space will be needed to accommodate the growing workforce and vice versa. Three main actors are involved in the real estate market: occupants or buyers are companies
or individuals that demand spaces to develop their activities. Investors are those who demand properties that generate income. And developers are those who produce buildings and lettable spaces through development and construction.
Most authors agree that the real estate cycle can be divided into four main phases:
– Recovery (from the previous cycle)
An increase in economic activity causes employment growth and, as a consequence, need for new spaces. In a scenario of low development and high vacancy, the available space is quickly absorbed by the increasing demand. The fall in vacancy causes an increase in rents, since the supply is not enough to cover the demand.
The growth in rents and more attractive rates of return catch the attention of investors and developers. The supply of real estate is “inelastic” because the stock is not immediately available to meet the demand because of the “development lag” that is basically the time it takes for a building to be built. These factors make values and rents continue to grow.
New buildings are added to the inventory but these are not completely occupied by demand. As a result, the vacancy rate begins to increase and rents begin to decrease.
More new stock that was under construction enters the market without being absorbed and the supply reaches a peak. Because of oversupply and high vacancy, rents fall and rates of return are no longer attractive to investors and developers.
Real estate developers are the actors taking the largest risk. Decisions are made years before the project is finalised and enters the market. Hence, it is of utmost importance to recognise the underlying factors that affect supply, demand and prices of real estate.
These factors are: External factors
– General Macroeconomic Variables
As previously mentioned, the behaviour of the real estate market is linked to the performance of the economy in general. The increase or reduction of indicators such as inflation, unemployment and GDP growth influence systemic risk, based on the expected rate of return.
– Specific Macroeconomic Variables
Depending on the sub-market to which the property belongs, other indicators also have an impact. For example, in retail the level of sales and fluctuations in the purchasing power of consumers are important. If the purchasing power increases, retail sales will increase, the demand for stores by retailers will increase, increasing rents and vice versa. The office sub-market is more linked to movements in the supply and demand of services; while the industrial/logistics sub-market is affected by changes in the levels of industrial activity and foreign trade.
– Location and Environment
The location of the property is one of the most important factors. Elements such as the quality
of the area and the surrounding environment, the availability of infrastructure and urban equipment, zoning and urban indicators should be considered. Accessibility is another determining aspect. For offices, this is measured in proximity to public transport. For retail, it is given in the volume of footfall of potential buyers. While for the industrial/logistics sub-market, it lies close to highways, roads, ports and railroads to move production and stock.
– Physical Attributes
The most visible characteristics of the property, such as its construction quality, state of repair, area and age, directly affect its value.
– Legal and Financial Factors
Generally, these are the most overlooked aspects. However, they are vital because they are directly linked to the stability of the income stream produced by the property. It involves the financial strength of the tenant and the legal security the contract provides to the investor. Through this article we aim to help developers to make best informed decisions regarding their real estate projects.
This article was published as part of the fifth edition of Property Finder Qatar’s Trends Report