Real estate investments in Ghana offer many tempting investment opportunities. And many players are keen to take advantage.
For starters, you’ll find many individual developers buying parcels of land to sell later. Then you’ll see more individuals building homes and shops and renting or selling these units. Some other commercial developers take a different approach by going into larger-scale developments.
Based on their strengths, expertise, and appetite for risk, everyone approaches real estate investment in Ghana differently. And while there’s no wrong move, one right step you can take is to diversify your real estate investments.
Some will question the logic of diversifying if it’s still the same asset class in the same country. Fair point. But real estate is big enough to have many sub-classes to help you diversify your investments. When you diversify your real estate investment, you spread the risk around these diversified portfolios and limit the losses you could suffer in uncertain times.
Read on to learn how to diversify your real estate investment in Ghana.
Why you need to diversify your real estate investments in Ghana
As a real estate advisory company in Ghana, I’ve laughed at some ideas you can’t diversify in real estate. People may arrive at that conclusion from different viewpoints, but that’s not always true. Here’s why you should diversify your risks in real estate investment.
Putting all your eggs in one basket has never been the most brilliant investment decision. And the same principle holds for real estate investment in Ghana.
Different submarkets will have unique demand and supply factors shaping their activities. Studying the market and knowing how each of these submarkets operates becomes crucial. That’ll give you more direction on building your real estate portfolio around various real estate options in Ghana.
Here are a few points to help you diversify your real estate investment in Ghana.
Look at the various types of real estate investments
Real estate comes in different classes. And these individual classes sometimes operate under separate economic ecosystems.
It’s possible what affects one class may not affect the other. And that’s one point to consider as you look at diversifying your investment in real estate in Ghana. Among the many real estate sub-asset classes, we have residential, commercial, recreational, and industrial.
In many cases, factors that affect one sub-class may not affect the others. Or at least not to the same extent.
So, for example, what influences the value of residential real estate may differ from what influences industrial real estate prices. Similarly, factors that affect recreational real estate may not impact the residential space.
The recent COVID-19 pandemic, lockdowns, and travel restrictions hit hotels, guest houses, and event centers the hardest.
You’d have seen red were all your real estate investments in Ghana were in a chain of hotels and event centers.
Similarly, if all you had were several university student hostels, you’d have faced massive challenges when schools closed down due to the pandemic. Conversely, a diversified real estate portfolio comprising residential or industrial properties would still have brought in some rent in those challenging times.
When you appreciate these truths and diversify your investment in Ghanaian real estate, you can save yourself some hits when one sector struggles.
Diversify by investing in different cities
You can also diversify your real estate investment in Ghana by investing in different cities. You could focus on Accra as the hub of economic activity and a thriving real estate space. But there are drawbacks to that investment decision.
Or at least there’s an inherent risk in that, and your returns better be high enough to compensate for that risk.
Cities are always teeming with young people. And the pressure on infrastructure, high unemployment, and the likelihood of violence is always present in most cities. Then also, there are natural disasters like flooding and local economic ebbs and flows. If all your real estate investment is locked up in a city, a mix of these challenges can hurt you.
For example, putting all your real estate eggs in Takoradi because it is a thriving city driven by the oil and gas industry is risky. That’s especially so if you intend to build luxury homes and grade-A office spaces for companies and their workers. If the oil and gas activities die down, the real estate directly servicing that industry will suffer. And if all your investment is tied up there, you’ll suffer significant dips in rents and property values.
Diversify by submarkets
Real estate submarkets are clusters of similar uses in the same area. For example, grade-A office spaces in Accra Central or luxury residential apartments in Cantonments form a submarket.
It’s tempting to go 100% on a thriving sub-market (currently, luxury real estate in Accra is king). But diversifying some of those investments into other submarkets helps. You can construct a diversified real estate portfolio by building in a different neighborhood, say a second-class residential area like a Dansoman or Achimota.
Or even shifting from high-end, multi-family residential real estate to middle-income single-family homes. You’ll find many submarkets in the real estate space in Accra. And you can always look to diversify your real estate investments in a few to the amount of risk you expose yourself to.
Diversify by your projected income
Most real estate investments come down to enjoying periodic rents or balloon capital gains upon selling.
At a minimum, you can diversify your real estate portfolio into these two types to minimize the risks you’ll expose yourself to had you gone strictly with one asset class. Okay, real estate investment trusts are also popular in other jurisdictions, but we’ll talk about them in another article.
But how many rental properties should you hold in your real estate portfolio?
What about properties you invest in, hoping to enjoy capital gains when the values appreciate and you sell them? The answers will depend on many factors. But mixing things up with these two principal classes is a brilliant way to diversify your real estate investment. Should one asset subclass suffer, you know the other may not.
This option is more common in residential real estate. However, with a creative sale and lease back option, you can enjoy similar options with commercial and industrial properties. Well worth exploring.
Diversify by different financing options
At the heart of most real estate investments is financing. All the promising real estate investments you’ve always dreamed of will only succeed when you have the funds to pull them off.
But looking at the amount of capital you need to finance many real estate deals and the relative illiquidity, financing is another risk. And one way to diversify that risk is to get different financing options. Even if you can finance any deal out of pocket, it doesn’t hurt to limit your exposure to risk by seeking some equity partners.
Yes, bringing a partner on board comes with other risks too. And you’ll need to do your homework. And you’ll also share the profits that come through. That’s something worth a deep second thought.
Also, if you intend to borrow to help you finance the deals, you can’t overlook the inherent risks there too. For one, you’ll suffer hits to your cash flow. And paying back the principal and interest makes it a more expensive option.
You can default, putting you in danger of losing your collateral – sometimes the investment property itself. Or at least take some hits to your credit score.
You can still diversify your real estate investments in Ghana
As any prudent investor knows, diversifying your investments never grows old. Thankfully, the real estate industry in Ghana is big enough to allow you to diversify your investments based on many factors. And that will limit your exposure to the volatilities in the Ghanaian real estate space.
Yes, it’s still the same asset class at the end of the day, and a severe collapse may not spare any sub-asset. But diversifying is better than leaving it all in one type of real estate.
And for everyday folks and savvy investors who want to invest in the Ghanaian real estate space, these options will help you diversify your investment.
