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A systematic property market analysis
By arlene | June 17, 2008
If you have been active in an area for some time, you will have a thorough understanding of the local property market. If, however, you are a newcomer to a neighbourhood, conduct a systematic market analysis in order to gain such an appreciation.
In conducting a market analysis your immediate concern is to establish the range of rent levels for the type of property with which you are concerned. These rent levels are determined by analysing comparable properties in the neighbourhood. A second concern is to establish how rent levels can be expected to change in future. This requires an analysis of those socioeconomic characteristics and trends that affect property values and the stability of the local property market in general. This analysis should be carried out for the town, city, or region as a whole, and also for the specific neighbourhood. Factors to consider include:
- Whether the population of the town or region is growing or declining. A simple way of establishing this is to compare the population growth rate of the magisterial district with that of other similar districts. At the neighbourhood level, the strength of the market may be gauged by indicators such as traffic densities, the age and condition of buildings, long-term trends in prices and rent levels, the presence or absence of construction activity, and trends in the amount of mortgage finance approved in the neighbourhood. You are probably aware of one or more areas where it is difficult to obtain a loan — an indication that property values in the area may be declining. Many “to-let” signs in the neighbourhood are often an indication of a temporary oversupply, but they may also signify a declining neighbourhood.
- Income levels in the region. Together with population figures, income levels determine purchasing power, which is a major determinant of real estate demand. The demand for, and thus the value of, both residential and retail properties are strongly influenced by income levels. The demand for residential properties is also dependent on the availability and price of credit. When mortgage loans are easily available and interest rates are relatively low, younger people tend to purchase property, instead of renting. In the residential leasing market you may actually find that, as interest rates decrease, demand for leased accommodation declines. The availability of government subsidies for first-time home buyers has actually reduced the demand for rental flat properties in some areas.
- For all property types, popular trends and attitudes are important. The demand for houses with family rooms and the advent of office and industrial parks are examples of these.
- The nature of the economic base and employment in the area. Investigate the number and type of businesses in the area, and their growth. Who are the major employers? A region with a diversified economic base tends to be more stable than one which depends on a single employer, such as a mine or a large motorcar manufacturer. Is the majority of the population employed in the town, or do people work elsewhere?
- Major transportation routes, traffic patterns and traffic densities. Both commerce and industry are heavily reliant on transportation. At the neighbourhood level, sufficient parking space is essential for all properties.
- The boundaries and land use of the area. Boundaries are defined by transitions in land use or by physical barriers such as major roads, dams, rivers, parks, or railway lines. These barriers could curtail the growth of the neighbourhood, town, or region. Within the boundaries of the area, what are the predominant land uses?
- The supply of, and demand for, the type of property with which you are concerned. This will be reflected by current rent levels and vacancy percentages. These are the most important indicators of the strength of the local market, since they directly reflect not only supply and demand, but also the underlying socioeconomic characteristics of the neighbourhood and region. Statistics on rent levels and vacancy factors are to be found in newspapers and various property publications.
It is particularly important to understand the significance of vacancies: vacancies are a vital and normal part of the property rental industry. A rental unit can only be altered, modernized, or renovated if it is vacant. Any business must have an inventory of goods to be sold. In the property rental industry, vacant units represent the inventory that is available for renting. The absence of vacant units in a neighbourhood probably indicates a space shortage, or that rentals of units are priced too low in relation to demand. However, as is the case with other businesses, inventories are costly to hold and have to be minimized. Vacant units are traditionally minimized, but not to the detriment of the profitability of a property. If rentals are extremely low, there will probably be no vacancies, but property ownership may not be profitable. The rental of a property is often set at a level which maximizes profit to the property owner, after taking into account possible vacancies. Rental increases frequently cause a limited number of tenants to vacate leased space, yet the net income from the property after the rental increase is often higher than it was immediately before the increase. Another reason why property managers tend to accept vacancies is that, through careful selection, they hope to maintain the quality of their tenants. A substantial decrease in rent level may lead to a reduction in the quality of tenants obtained.
Invariably, changes and trends in these characteristics are more important than isolated figures. For example, an office vacancy level of 10% is seen in a different light if it is known that this level has declined from 20% over the past six months, and that the trend seems set to continue.
A checklist is a convenient guide when conducting a market analysis.
I find it convenient to record the data which I capture by plotting it directly on maps or aerial photographs. Suitable maps and photographs are available from various sources, including the local authority, the Government Printer, government institutions and private firms.
Having analysed the town and the neighbourhood, you should have a sound appreciation of rental levels in the area as well as of expected future changes. This knowledge will aid you in evaluating your client’s property.
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Topics: Land, Market, Property, Rental, Residential |
June 18th, 2008 at 1:38 am
A lot of good information here. It shows you really have to know what you are doing in real estate. There is a lot to it.
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