Building sustainable growth through investment grade real estate
The word “Investment” within the context of buyers purchasing real estate is commonly used abstractly, without sufficient conceptual framework given to end-users, on how said returns will be achieved. This ideology asserts that every purchaser of real estate is assured of making money in any circumstance, as sort of a proverbial “All-weather” asset akin to Hedge Fund manager, Ray Dalio’s investment product.
Whilst real estate is synonymous with stability, a sound strategy to optimize a real estate portfolio is vital. As a caveat, the guidelines used in this article are viewed through a residential real estate investment lens. As such, it is also important to note that Real Estate is heterogeneous and a nuanced view would be required if these principles are applied to another sub-category within real estate.
Types of real estate investing
Before we delve into the main aspects that make up an investment-grade property it is important to understand the different strategies investors can deploy when allocating capital. This targeted approach helps in improving the efficiency of your investments as you build your real estate portfolio.
Real Estate used as a store of value where investors buy, hold and sell once the markets have appreciated to the desired level is straightforward. This sort of investing is largely passive and doesn’t require much work, just the selection of a location with a clear growth plan in the pipeline.
An example of this would be property purchases along the Lekki corridor in Lagos, Nigeria, or regeneration projects in a formerly depleted area within the London area such as Brent or Wembley.
The second real estate investment type is focused more on a cash flow and equity strategy. With this method, investors can make consistent returns on their investment via rental income similar to dividends from stock. Also, depending on the dynamics of the region the property is in, investors can remove equity from the property to purchase another one, whilst still maintaining the cash flow from the previous property.
Whilst both holding and cash flow strategies have their unique qualities, investors in the growth stage should ideally focus on cash flow investments first before entering more long-term opportunities.
How can you determine if a property is investment-grade?
Price appreciation: Price appreciation is the increase in the value of a property after a while. The main aim of any real estate investment is to make money, as such it is important to understand how this will happen, meaning the factors that play a role in increasing the value of your asset(s).
They are demand and supply, location and property market drivers (Increased desirability due to increased infrastructure improvements to the area such as road network, the building of an airport, industrial/corporate activity, such as Amazon setting up a facility in the area or Dangote’s refinery within Ibeju Lekki among others).
Liquidity: The more liquid an asset is, the better. Liquidity in this context refers to how quickly you can sell your asset. To clarify, for strictly investing purposes a 1 or 2 bedroom apartment in a good location would be sold quicker than a 4 bedroom townhouse in a similar location.
This is because there is a wider pool of buyers ranging from investors to first-time homebuyers who would quickly absorb the smaller more digestible units, compared to the 4 bedroom, which would be more ideal for a large family and more expensive.
Yield benchmarking: Yield is simply defined as the returns you make from an investment on an annual basis. Within real estate this is represented by the income from rent, for example, a property purchased for $200,000 and provides returns of $10,000 a year demonstrates a 5% annual yield on investment.
According to Global Property Guide, this is the global average, and as such investors should look to assess any potential purchase against this benchmark. Using a short let model investors would be able to achieve higher ROI’s as high as 15% to 20% however this opportunity is dynamic and requires specialist advice before proceeding.
Cash flow: A cash-flowing investment is an investment where the revenues cover all expenses – mortgage, insurance, property management, and more. The revenues also typically provide leftover money at the end of each month. These opportunities are typically found in markets with sustainable growth where the demand for real estate is balanced.
2021 residential real estate market overview
According to, Savills’ world city index (this covers global prime markets such as Dubai and London) the resilience of the global residential property markets has continued in its strong growth in the first half of 2021, with capital values rising by an average of 3.9% over the six months to June 2021, the fastest rate since December 2016.
Sustained record-low-interest rates, improved buyer confidence, increased transactions at higher price points, and economic stimulus measures have all contributed to the strong property price growth. It would be noteworthy to add that not all cities performed positively over the first half of 2021, as cities with negative capital growth relied heavily on international buyers in their prime markets.
The Lagos market has also seen strong growth within the small-size 2 and 3 bedroom family housing market, most especially along the Lekki corridor. Investors in this house type and location were among the gainers in the sector, as they were all but guaranteed income through a strong rental market driven by corporate tenants looking to live more centrally. There has also been a sharp rise in the use of the short-let model to receive above-market rents.
Amongst 6 short let operators surveyed, managing 5 units or more, they reported annual occupancy rates of at least 50% in the last 24 months. This translates to at least two and a half times above traditional rental market returns. Operators who achieved higher all included value add services in their offerings. There has also been growth in demand for secure gated communities with access control following various security incidents in 2020. We expect these trends to continue as we enter Q1 2022.