Real Estate Life Cycle and the Factors affecting it

Investors have to understand the real estate life cycle, and know how to survive and take advantage of each phase. We are going to look at the four phases of the cycle and the factors that bring about the changes.

Dec 22, 2020 - 01:27

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Real Estate Life Cycle and the Factors affecting it

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In the cycle, one phase always leads to the other, and so the cycle repeats itself in a systematic way. Real estate investors need to study the market and come up with strategies for each phase in the cycle.

Recovery

It is hard to tell when the cycle is at the recovery phase as it comes after the recession. The market experiences high vacancies, the rental growth stagnates, prices are stable and there are cases of foreclosures and bankruptcy. This can be a good time to invest in properties that are below the market value and do some value additions to them and then sell or lease when it gets to the expansion phase.

Expansion

In the expansion phase, supply and demand are in balance and the phase is characterized by a growth in the economy, building and buying of new properties, improvement of the occupancy rate and a rise in prices.

Hyper Supply

They say that too much of everything is poisonous, but it all depends on how you look at it. In this phase, there’s overcrowding in the market by investors and developers, and the supply exceeds the demand. This can be brought about by a large supply or simply a downward shift in the economy.

Recession

With recession, supply exceeds demand by a huge margin resulting in a high vacancy rate. Prices reduce and many people sell their properties. Tenants reduce rent and owners may opt for concessions. For investors who have been saving money, they can buy property at discounts and invest.

Factors Affecting the Real Estate Life Cycle

There are many factors that affect the life cycle of real estate. Listed below, are just the main ones.

State of the Economy

The state of the economy can bring about any of the life phases. Poor economy may lead to a recession and improvement in the economy can boost the sector or even harm it, especially with the case of hyper supply.

Population

High population, especially of the working class, significantly affects the cycle. The more the working-class population, the rise in demand for housing and commercial spaces. Rural to urban migration also affects the cycle.

Interest Rates

If the interest rates are low, more and more people will be encouraged to get loans and buy or build. If the interest rates are not favourable, most people will shy away from the real estate venture.

Government Policies

Government policies like tax reductions, subsidies and the recent affordable housing plans by the government of Kenya boost the real estate sector and in return, the cycle is affected.

With the Covid-19 pandemic, one can predict the phase we are in at the moment. Despite the difficulties experienced in each phase, one can still find investment options.