LOCATION, LOCATION, LOCATION!
How the location of real estate determines the value
Haven’t we all asked ourselves once in our lifetime: Where should I move? Even though the city may be certain due to our job, we still need to decide on a desired neighbourhood, which will contribute to our happiness. These considerations also play a fundamental role with real estate investments. The real estate location determines whether or not a property is high yielding. The three well-known factors are: location, location and again location. We will give you an insight into what’s really important when it comes to real estate locations.
On the hunt for a new home, a look on the map and a stroll through the neighbourhood is generally enough in order to determine whether or not we want to stay in our new home. Investors and real estate experts generally rely on objective criteria. The location has a great impact on the value appreciation of a property and on the economic success for homeowners and real estate investors. The purpose of the property must therefore correspond to the location.
The future use of a real estate object is the starting point when selecting and assessing a prospective property. The location requirements for a retail store differ greatly from residential or social properties.
An established procedure for the valuation of the real estate location is based on spatial information such as the analysis of the macro and micro location of the property.
The macro location relates to the country, the city and the general supply and demand on the real estate market. Factors such as the infrastructure, socio-demographic data, political situation and the basic economic situation are used for the macro location assessment.
The following factors are specifically evaluated:
- Connection to the rail and road network
- Railroads and airports
- Buying power
- Sustainable economic power of the region
- As well as factors relating to leisure time and the environment
These factors are expandable and relate to a specific project and its requirements. The proximity to a motorway is particularly important for a logistics property, whereas the proximity to a retail store is more significant for a residential area.
In Germany the micro location of a neighbourhood is divided into A, B, C and D classes. Prof. Dr. Just of IREBS Real Estate Academy explains in the following interview the classification of the residential real estate market.
The assessment of the micro location generally focuses on the direct vicinity of a property. This generally includes a community, a district or a street.
In case the micro location assessment also includes a regional airport, the analysis will also include the distance to the airport as a criterion.
The following factors may be included in the micro location assessment:
- Resident structure of the neighbourhood
- Distance to
- Shopping facilities/ town centre
- Restaurants and bars
- Public transportation
- Structure of the development in the immediate neighbourhood
- Qualified rent levels and vacancy rate
- Environmental factors: wind, flood, direct sunlight, noise, pollution
As with the macro location, a general statement cannot be provided about the quality of the micro location. It depends on the requirements of the real estate project.
The property includes the plot required for the project.
In addition to the size and the quality of the property, the legal aspects must also be evaluated.
The following factors are to be assessed:
- Ownership, land register and building encumbrances
- Rights of way or other easements
- Current constructions or expenses for removal or clearing
- Construction law:
- Development plan
- Liability of the construction law
- Preservation orders
- Requirements relating to the specific construction
- Parking spaces
- Past debts
- Development (water, electricity, telephone)
The price is possibly one of the most significant property related factors. The adequacy of the price usually results from the overall assessment of the macro and micro location as well as the property itself.
Do only hard facts (such as the economic power and the infrastructure) influence the location assessment?
Based on the list above, a subjective assessment of the location is quite probable with many of the factors. A final location valuation is influenced by individual preferences and soft facts. Following a correct valuation process, a structured location analysis based on the mentioned factors significantly minimizes the risk of a misjudgement.
You will find a lot of useful information on Germany’s most important real estate locations from our City Guides for Properties