Regardless of the global economic slowdown in the last decade, real estate is one of the largest sectors of economic activity across the world, holding a key role in investor portfolios as an asset class. The significance of the real estate industry can be highlighted from the fact that it constitutes around 15% of the GDP of the two biggest economies in the world, USA, and China.
Fortunately, the credit squeeze which has adversely affected the real estate market over the last decade might soon be over. As the year comes to an end, experts are of the view that the coming year will usher in a thriving residential and non-residential property market, rich with opportunities for both buyers and sellers.
However, the revival of the sector is expected to be challenged by an increase in the cost of acquisition due to rising interest rates. Simply put, the cost of acquisition includes all the costs incurred for purchasing a real estate property. In the US, for example, housing interest rates were nearly 0.5% higher as of September 2017 as compared to a year ago and more rate hikes are expected in the near future.
The good news is that despite the increase in interest rates, mortgage applications from home buyers increased by 4% vis-à-vis the same period last year, which would suggest that the residential real estate market is beginning to witness a revival that is likely to sustain. Significantly, the expected rise in interest rates will ensure that buyers who can genuinely afford the rising cost of acquisition will apply for loans, reducing the risk of defaults in the future. In other words, a repeat of the sub-prime crisis that send the economies of most developed countries on a downward spiral is unlikely.
Another challenge confronting the residential real estate sector is the fact that supply is presently unable to keep pace with rising demand due to shortage of land and skilled labour. The supply demand mismatch, combined with rising cost of construction, is likely to push up prices in the short term. However, builders remain confident in their ability to increase the supply of new homes in the long run. Given that background, it would be fair to assume that the supply-demand mismatch is unlikely to persist for long.
The scope for increasing the supply of houses in the bigger cities is usually limited since the housing market is usually already saturated and new construction is usually subject to regulatory restrictions from local authorities. As a result, a vibrant housing market in medium-sized cities is likely to emerge in the coming years.
Many investments in the sector are also brought in by foreign buyers, particularly from China, where an inorganically fluctuating yuan, unstable financial assets, and competitive markets have pushed wealthy consumers to hunt for opportunities that offer a better return on investment. However, the continuation of this trend could be adversely impacted in the event of protectionist measures by the Chinese government to prevent the outflow of foreign exchange.
In 2016, Chinese investments in real estate assets increased by 56 percent, touching USD 28.2 billion. The Asian giant also became the largest cross-border real estate investor, taking over the US. As China is primarily an export-oriented economy, it is necessary for the government there to maintain a competitive exchange rate against the USD.
The advent of the internet has ushered in another major development in the property business. Most prospective buyers now first look up for information and property options online before approaching the agent. A study conducted by a marketing research firm recently indicated the internet impacts buying decisions of more than half of home buyers in India. In 2018, property agents will be expected to maintain portfolios on social media networks and allocate funds for online marketing.
Similarly, the forthcoming year will also see an increase in platforms for real estate auctions. Contrary to popular belief, auctions are no longer indications of distressed sales or bank-forfeited properties. When a property is put up for bids, all parties in the transaction are treated in a fair and equitable manner. The terms and conditions remain the same for everyone. It offers benefits for the seller in both slow and strong economies with quick and guaranteed sale without much expenditure on advertising. Also, both the buyer and the seller know when exactly the transaction will occur, giving them sufficient time for planning and documentation process.
In recent times, auction platforms have integrated with the internet to make way for online auctions. Though nothing can replace the assurance of physical inspection, innovations in virtual reality hold a lot of promise for cautious buyers. Admittedly, the sector has been slow in adapting to new technologies, but young entrepreneurs are exploring real estate marketing opportunities in the non-traditional medium. Many property developers and agents have already started building their brands on Instagram and other social media networks to engage with the millennials, who have already emerged as a key target group.
In conclusion, the real estate sector is poised to be impacted by easy access to information online. There will be transparency in negotiations and social media branding will become indispensable for companies. What remains to be seen is that how many companies are willing to adopt these changes in the coming months. After all, isn’t it the early bird that catches the worm?
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