Location, location, location - does this age-old mantra apply to real estate in Accra?
- published in the Business and Financial Times -
by Scot Murray
If you’re on the hunt for a prime property in Accra, real estate’s most beloved catch phrase may be steering you in the wrong direction. It’s important that you take the time to consider your decision-making criteria in the context of this particular market before you begin your search. Let’s get to the facts.
Location is of course very important when you’re purchasing raw land. The land’s proximity to town, access to paved roads, nearby water and electricity connections among many other aspects all contribute to its current value and potential future value. But buying land can also (and often does) come with complications. You have to protect your land with a wall and a caretaker. You may end up facing frivolous litigation.
Paperwork can be a burden and land tends to be an illiquid asset. Thus, if you don’t have the stomach to withstand unknowns and possible risk of losing your money, buying land may not be an advisable investment for you.
Purchasing a house or apartment tends to be less risky and the cash flows at completion are often quite predictable. Most shrewd property investors therefore accept the wisdom that a finished product that can generate a predictably high yield is preferable to the hit or miss nature of land.
But when you buy a house or apartment, be careful how much weight you place on the value of location. When you buy a physical asset, remember that your money is not just going into the ground. It is being split between the ground and the structure that is on the ground. While the value of land will certainly increase with time (and in the best locations even more so), the value of physical structures will decrease (and rapidly) if the building is not built well or maintained.
In efficient markets where sales prices are transparent, price is directly correlated to the relative long-term value of the home based on its quality and the underlying value of the land beneath it. Therefore, one can argue that location (as a proxy for future land value appreciation) is the most important factor to consider since it is the sole driver of any increase in value – hence, the adage: location, location, location.
But this is where the Ghana context forces us to have a second think. If an inefficient real estate market is not forcing price to properly reflect quality, such as in Accra, then your focus should not be limited to the theoretical future appreciation of an apartment based on its location alone. You must take on the more challenging question of whether the apartment is of a quality that will maintain its value over time. If not, then no matter the location and its eventual value appreciation, you risk not being able to recoup even the price you paid for it.
For this reason, Accra needs a different mantra: Quality, quality, location.
If over two thirds of your investment is going into a building, then two thirds of your thinking should be on what kind of building you’re buying. Once you’ve chosen the right one, let location and time do the rest of the work and you’ll find out just how lucrative property investing can be.
Scot Murray is the Managing Director of Denya Developers. He and Ernest Hanson, the Managing Director of Beaufort Properties, will be writing a bi-weekly column on the property market in Accra. You can contact them at +233268315111 or email@example.com
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