Why Real Estate is so Attractive in Some Developing Countries?

Introduction

Real estate is one of the fundamental needs of any business. Mainly, it has three dimensions: commercial, residential, and agricultural. It is a scarce resource as you cannot manufacture more of it. It will continue to get scarcer with the increase in population. This is the main reason why it is so attractive from investment point of view. The second reason is the development and up-gradation of land from a lower to a higher status e.g. from rural or agricultural to urban residential or commercial.

Although real estate is a viable investment proposition throughout the world, it is significantly more lucrative in some developing countries due to a host of factors. I will discuss some of these factors in this blog post. We will also see whether it will continue to remain so or it will change and what opportunities and challenges it offers from an investor’s standpoint.

Why Real Estate is so Attractive?

As already highlighted, real estate caters to an absolute business need and it will continue to be relevant. It deserves the capital and attention that it merits. However, the real question is how and why it manages to attract much more focus and money than is essentially required to sustain it in a desirable manner. Some of these reasons are explained here:

The most important reason is that, so far, the real estate sector is unregulated or, at best, semi-regulated. Rules which should govern land acquisition, change in the status of land, land utilization and many other processes within the sector are either non-existent or can be easily bent with the collusion of authorities.
When it comes to investment, people in the developing countries are obsessed with real estate and gold. These are considered to be safe bets and also ought to give good returns. However, this is more of a perception rather than being evidence-based.
Suburban lands are generally owned by people from lower strata. They either have a scant idea about the real worth of their holdings or can be browbeaten into parting with their lands at much less than what should actually be paid to them.
While expanding the existing urban centres, when the status of these lands is upgraded from “rural” or “agricultural” to “residential” or “commercial”, their prices shoot through the roof.
Contrary to the existing international norms, the change in the land status and other processes are not duly taxed because of absence of relevant rules, corrupt practices, or weak enforcement capacity of the tax department. The simple and logical principle that businesses earning more money should pay more taxes is not or cannot be properly implemented.
The environment so created gives rise to a perception that real estate is very profitable. The black money, which is in huge supply, is also channeled into this sector to make a quick buck. This promotes excessive speculation. The prices of properties are jacked up further and become out of reach for the middle class.
As blood flows freely to all parts of a healthy body, money should also flow unhindered and evenly to all sectors of the economy. Unfortunately, the real estate sector sucks more money than is necessary to sustain it. This happens at the cost of curtailing money supply to manufacturing and other business sectors which are real engines of growth. This causes huge distortions and creates a severe imbalance of money supply which is not good for an already weak economy.
Strong and vibrant communities that can educate people about this lopsidedness in the economy and can pressurize the relevant quarters for initiating and implementing required reforms are non-existent.
Overall, it’s a lose-lose deal for all. It benefits only a small minority of speculators and punters who are already privileged.
The formal sectors of the economy suffer from a cash crunch despite being properly regulated and paying a full range of taxes. Creativity and entrepreneurship are discouraged because, in one sector, people are making loads of money effortlessly and in others, there is minimum incentive despite abiding by all the regulations, paying taxes, taking risks, and adding a lot of value.
The end user in the real estate sector also suffers as the prices are already very high. Resultantly, the average rental yields in residential and commercial real estate are not enough even to beat inflation.
Isn’t it interesting that investment in raw real estate is more rewarding than in finished real estate products? Logically, it should be other way round.
Isn’t it also strange that big real estate developers can avoid the hassle of listing their businesses on the stock exchange and can still raise a lot of capital very easily?

Make Hay While The Sun Shines?

Is it correct to argue that despite excessive speculation, the real estate sector offers a good opportunity to make some quick money without any effort? Why not make hay while the sun shines?

In my opinion, this is not a valid argument from an investment point of view. There are multiple reasons for it.

Due to excessive cash flow into real estate, the sector is in a state of a bubble. The best strategy in such situations is to stay away as no one knows when and how this bubble is going to deflate or burst. What if one is “all in” when this bubble bursts?

Inevitably, sooner or later, due to pressure from the international donor institutions and the internal dynamics, this situation is going to change. It is better to start working on developing expertise of investing in sectors that are financially more evolved, stable, and well-regulated.

Thankfully, better opportunities are abundantly available elsewhere which can be found with some research.

If one must invest in real estate, finished products should be considered. This segment of the market is relatively more stable with predictable price fluctuations and rental yields.

Conclusion

Real estate will continue to remain relevant and viable as an investment option. However, market dynamics affect its profitability for serious investors. There is a need to make a prior assessment by translating opinions into tangible numbers. If the numbers make sense, by all means, real estate can be considered as an investment option in comparison with other available options.

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My other articles you may find useful are:

How to Make a Personal Financial Plan – Basic Considerations

Personal Finance – A Suggested Checklist

Investment vs Speculation

A Brief History of Money

Why I Started a Blog on Personal Finance

Anatomy of Financial Risk

Debt, Equity, and Real Estate: An Overview

Retirement Planning

How to Compare Equity and Real Estate as Investment Options

How Stock Market Works and How to Work in Stock Market?