The extent of capital growth that is favorable depends on the investor involved and the investment objectives. Investment objectives vary among investors, depending on their level of risk tolerance. But, ultimately, in the long run, a property investment will yield both growth and capital growth, provided the investor holds it long enough.
A typical strategy for investors seeking capital growth is to allocate the different investments in a portfolio so that it is diversified. They can further diversify their real estate investments by expected growth rates into long term and short term. Diversification helps to reduce risk in a portfolio by spreading the investments between different asset classes such as apartments and raw land.
The asset allocation would be determined by various factors such as the investor’s objective, risk tolerance, and investment horizon. For example, investors in their twenties would likely opt for more high risk longer term properties in their portfolio since they have a long time horizon. On the other hand, investors who are close to retirement might opt for ready homes and apartments in their portfolio to create growth with less risk.
The investment objectives and the risk factors would also determine the equity allocation between moderate capital growth investments and high capital growth investments. Each portfolio is different, and each investor’s definition of risk is subjective.
The Different Types of Real Estate Investments
Duplexes, bungalows, or flats that are ready, not off-plan. They are typically a few years old and offered in a secondary market by a previous owner, usually not the developer. This choice of investment is found more among homeowners who are investing in homes they want to live in themselves.
High income commercial assets include office complexes, hospital buildings, purpose-built school properties, mini stadia, malls, among others. High-yield rental income properties in the commercial space are great for generating quick returns on investment and over time, can also show significant capital growth. However, they are usually more capital intensive to invest in especially because they are known to be profitable. But, not all commercial properties might be profitable if the location is not viable for business or the purpose is not well suited to the location. For example, a petrol station in a place with low vehicular traffic will not produce high or stable returns.
Off-Plan Properties – Apartments
Homes and apartments in pre-planned projects that have good capital growth prospects typically do not pay rental yields quickly. Rents are payments from tenants to rent the portion of the property they have paid for, for a certain period. It could be annual, monthly, weekly, daily or even hourly. Rents are paid before the commencement of the rental period. Rents are paid on ready-to-use properties, and therefore, cannot be earned on off-plan projects which will be in a state of construction for several months or years. As a result, off-plan properties tend to do well for long-term high-risk investors.
Off-Plan Properties – Serviced Plots of Land
Development Companies sell plots in proposed private estates which they propose to develop with functional infrastructure that make for good quality of life and stimulate capital growth. Like off-plan homes, they are best for long term investments as it can take upwards of 10years for infrastructural developments to come up on these projects and for there to be significant capital growth.
Investors who like the idea of investing in the real estate industry but don’t want to own real estate per se can invest in land banking where the property is used as a hedge for a financial investment of a specific sum with the development company for a fixed term at a pre-agreed ROI figure. The projects can include malls, hostels, apartment complexes, hotels, office buildings, and warehouses. Land banking offers to buy back the property at the price it is projected to be selling for at the expiry date of the investment tenure. It shares similarities with crowdfunding as investors funds are pooled to develop the project and capital gains are assured to the investors.
Real World Example
Let’s say a Lagos investor wants an aggressive capital growth strategy and is willing to take on more risk to achieve higher returns. An individual investing in this portfolio might have a time horizon of 20 years or more.
Below are different property types and the percentage of the portfolio’s total amount invested that would be allocated to each type.
40% Titled Land in Emerging Locations
For a 20year timeline, titled lands in secure developing estates in locations from Ajah outwards Eleko or Ibeju-Lekki are great. With government approved titles like excisions, gazette, C of O and Governor’s consent, the lands are low-risk and can be developed or resold at a profit. As major government projects are planned for the axis, capital growth is assured. Such offers are available here, here and here
10% Off-Plan Homes
Off-plan home offers are usually discounted, thereby allowing improved margins as against ready homes that are fully finished. They also offer guarantee of rental income in future along with significant capital growth. Investing in this or this advanced project provides a balance to this portfolio and stagers the flow of income positively.
20% Commercial Properties
Commercial property investment opportunities though capital intensive, can serve to ensure a good deal of income in the portfolio and probably be the best performing element of the portfolio if they are rented by large stable corporate tenants. This Porthacourt offer is a good example of potentially high-yield commercial property to invest in.
10% Ready Homes
Ready homes offer limited capital growth and are useful in this portfolio for the immediate earning potential. They offer rental income almost immediately despite the fact that they have very low capital growth through property price appreciation. However, they can help shore up the returns in a portfolio during economic dips by adding a steady income stream like this offer here is able to.
Using the above portfolio as an example, capital growth can be achieved with lands, homes, or commercial properties. Also, the percentages that were allocated to each property group could be changed to each investor’s needs and risk tolerance. For example, an investor that’s close to retirement might opt for a higher percentage in commercial properties or ready homes and a smaller or no allocation in the raw land in emerging locations group.