Building hinges on location

The stock market depression in 2009 sent many potential investors seeking alternative investment vehicles. Bonds and Treasury bills received plenty of attention, but so did real estate.

While the increased interest in real estate is a positive thing; many investors did not and are still not thinking through their real estate investment decisions.

Real Estate properties are differentiated from most other financial or real assets by their uniqueness.

No two office buildings are alike, no two pieces of undeveloped land are alike, no two hotels are exactly alike and no two shopping cents are alike.

Each property is different because it is in a different physical location. This makes location one of the most important attributes of any piece of commercial real estate.

Location

The first thing to understand about location is that it is not an absolute. There is no such thing as a generically “good” location or a generically “bad” location. The desirability of a particular site is relevant only in terms of its intended purpose.

A property that is good for a residential dwelling is not necessarily good for an apartment, an office building, a factory, and the like.

Assessing the value of a property always requires the strategic perspective: What is the purpose intended for this property?

Only in that context are the actual physical attributes of that site relevant.

Physical attributes of a site would include the current use of the property, its location with respect to traffic patterns, relevant zoning laws, the contour of the land, the attributes and uses of adjacent or neighbouring parcels of land (an otherwise desirable piece of land for a single-family residence might be made undesirable if the adjacent property were a garbage damping site or a noisy factory), the effective marketing area or impact zone of the property and trends in adjacent neighbour and local land use.

Another factor to consider in the valuation of commercial real estate is the impact of subjective perception.

Certainly, a piece of property has an objective reality. However, that objective reality may not be as important as the subjective lens through which that property is viewed.

An objective reality might describe 50 acres of rugged land surrounding a dismal swamp located 20 miles from the nearest urban area.

Preserve

A subjective perspective might be to consider land as a nature preserve, featuring select executive home sites surrounding ecologically important wetlands that provide protection for a living environmental laboratory.

The objective reality might be a rundown building adjacent to a metropolitan central business district whose desirability is threatened by a declining neighbourhood.

The subjective perspective might be that the (refurbished) building could become a badly needed community centre (called Sarakasi) for area theatre and art fanatics that is distinguished by its accessibility and its significant architectural and historic significance.

An investment in such a property could be thought of as a beacon of successful urban renewal that could revitalise the neighbourhood.

Disregard this important consideration in your investment and it can be costly. If you have driven on Thika road from Nairobi to Thika, I am sure you have seen a very attractive building on the right-hand side in Ruiru.

The building is suitable for a five-star hotel, but it is in the wrong place. It is all in the perspective.

A lot of highly successful commercial real estate development occurs because someone is able to think “outside the box”, while keeping location, location, location in mind.

So the next time you want to acquire a plot or property, make sure you consider the location and end use of the property or plot.

The writer is an Independent Financial Consultant: [email protected]