“When it comes to investing in real estate, only three things matter: Location, location and location!”
If we’ve heard it once, we’ve heard it a thousand times! It’s supposedly the number one rule in real estate – but is it really true? Not according to Prof. Carles Vergara of IESE’s Department of Financial Management. In his view, the time has come to put this tired mantra to rest.
“The global financial downturn taught us numerous lessons, including the importance of avoiding a laser focus on location when making real estate investments,” says Prof. Vergara.
“Location will always be important in property operations, but investors also need to consider the timing of the business cycle as well as marketability, which entails different aspects that affect the assets’ valuation and profitability.”
As the title of his newly released book suggests – Timing, Marketability, and Location: The New Real Estate Paradigm – Prof. Vergara advocates a three-pronged approach when it comes to making smart real estate investments.
1. Timing real-estate cycles
Over the span of years, the real estate market follows a cycle of recovery, expansion, hyper supply and recession. To stay ahead of the curve, investors should acquire a sound understanding of how the economy works on micro and macro levels in order to spot opportunities, maximize profit and hedge risk, regardless of the real estate cycle.
As Prof. Vergara observes, “Think back on the global financial crisis: investments made at the peak of the real estate bubble were disastrous, even for properties with excellent locations. On the contrary, investments made at the bottom of the cycle generated solid returns, even for properties with not-so-great locations.”
The upshot: perfectly timing the market might be too much to ask for, but investors will definitely make better investment decisions when armed with information.
Marketability is also critical but it’s easy to confuse it with value. Value considers tangible features like property type – residential, hotel, retail, office and industrial properties – size, features and configuration.
Marketability, on the other hand, is more a question of the property’s potential different uses, as well as its assets, quality standards, design, technology and sustainability standards.
The saying “You’re only worth as much as someone is willing to play” underscores the vital interplay between value and marketability.
Real estate properties are illiquid so most investors buy and hold them for the long term in the hopes that they will appreciate to their target goal. Property values in less-than-desirable areas fluctuate more than those in better locations, posing a greater risk for investors if they are forced to prematurely divest.
Whether the investment is an apartment in Nairobi or a retail space in New York, Prof. Vergara suggests utilizing different valuation methods that take into account the impact timing, marketability and location on assets.
The “International Real Estate” program is designed for real estate professionals, developers, financial institutions, investors, consulting firms, civil servants and firms that require property assets for their distribution, retail, utilities and hotel operations. The next edition will be held on March 4-6, 2020 in Barcelona.
Written by business communicator and editor Suzanne Hogseth