Real estate investment analysis – main factors to take into account

Real estate investment analysis – main factors to take into account

Let's start by trying to systematize the analysis of a given time, typology and place for making a real estate investment decision.

Usually an investment in real estate has a component that concerns the income obtainable between the purchase and the eventual sale, and on the other, the appreciation of the asset in time.

Appreciation

The valuation of an area in time is a consequence of a number of factors, not always easy to predict.

Above all, they are a set of factors that have an impact on the supply of demand in a given area over a foreseeable investment horizon.

Thus, we have the macro factors at the national level that affect the entire market across the board, and may have more impact in certain areas, compared to others. Among them:

1)  Economic growth of the country

2)  Attractiveness of the country for foreign investment

3) Attractiveness of the country for immigrants

4) Fiscal and legislative framework of real estate and rental market

5) Demographic evolution

6) Evolution of the cost of money

7) Costs and the construction industry

Regional factors:

1. Urban development policies (urban growth, mobility – communication routes, etc.)
2. Strategic projects (airports, roads, industries, business centers, universities, etc.)

Local Factors:

1. Projects promoted by municipalities
2. Changes to the PDM (Municipal Director Plan)
3. Creation of development poles
4. Social problems (closure of industries, crime, etc.)
5. Local taxation and subsidies

Of course, on top of national, regional and local factors, we have international events and global trends that can condition markets in the short-to-medium or long term.

In the case of events that affect the short-medium term, we have situations such as wars, pandemics or economic cycles, which can create interesting opportunities for market entries or exits.

In the long term, we have migratory movements, trends (such as remote work, the preference for outdoor spaces and balconies, or co-living) and demographic changes, particularly those of the age pyramid.

Yield

The profitability of a given asset involves analyzing the factors that affect the evolution of its "cash flow" over time, namely that it does not have interruptions (such as breaks in occupancy) and can grow (that is, allow an update resulting from a sustained demand).

These factors, namely those that affect supply and demand, overlap, to a large extent, with the same factors that lead to a valuation of the property.

A very important factor for any investor is to have, not only a stable or growing macroeconomic framework, but also a favorable legislative and fiscal framework, which allows him to withdraw his gains and update his rents without restrictions beyond the supply and market demand. The risk of fiscal or economic uncertainty, usually linked to political instability or sudden policy changes, is what any investor fears and analyzes before making investment decisions.

We will, in a next article, begin to analyze in more detail the mechanisms of supply and demand that have made the real estate market in Portugal move, before descending to the regional and local level to see how best to take advantage of the market moment in 2023.