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Real Estate Industry Review

Introduction

Real estate refers to land and improvements done on it such as the erection of buildings, digging of wells, and construction of fences. Generally, the improvements have to be immovable or permanent (Case 1992).

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Countries worldwide conduct real estate businesses in different ways. The way the industry is conducted depends on various legislations and regulations that a country has adopted. Some of these differences include ease of owning land or even where to invest in certain businesses. However, there are certain similarities concerning how the business is conducted. This is in terms of legal formalities, the taxes that need to be paid, and even the documentation until the title is issued to show the legal property transfer by the parties involved (Barlow 2006).

There are numerous roles that the real estate industry does in the economy. These areas are explained below. First, the real estate industry has led to the promotion of Gross Domestic Product (GDP) in the economy (O’Sullivan 2003). This is depicted by a large number of residential houses and the real estate services offered. The value added is easily calculated on the gross rental income less the maintenance expenses incurred.

Secondly, the real estate industry has led to the development of consumer markets. For real estate to be developed, they require a lot of raw material input in terms of cement, bricks, timber, and even steel. Due to these demands, there has been the emergence of both construction and manufacturing industries to offer these commodities for use in the real estate industry.

In addition, the real estate industry acts as an employer as several people derive their income from this industry. Research has shown that the real estate sector is the second largest employer from agriculture (Han 2005). Some people are employed as masons, plumbers, or even carpenters.

Indirectly, real estate helps the nation by being the resting place of a nation’s workforce. After a long day working, one needs to rest and therefore having a good place to rest later after work makes an individual more productive the following day as he/she is refreshed and ready to tackle the day’s activities of building the nation.

Further, real estates act as a great factor in seeking finances, for instance, loans (Dain 1985). A person can easily get a loan from a bank using real estate as collateral. Banks are continuously demanding secure loans and with real estate, one can obtain a loan from a bank more easily compared to another person offering other investments as collateral. The loans acquired are either individuals or corporation loans (William 1993).

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Estates act as sources of revenue to households. This is mainly by the middle-class persons who derive partial income from them. This is the real sense in terms of diversification in sources of income, an individual is sure of getting their basic needs even if the other sources of income fail. This form of diversification acts as a psychological motivator to the investor as he/she is sure of making ends meet even when the other sources of investment fail.

Real estate acts as a buffer of inflation and vulnerability. Unlike many other forms of investment, real estate appreciates value always. The value of a piece of land, ten years ago is worth two times or more today. This ensures there is a counter effect even when there is an incidence of economic depreciation.

The government has been a major beneficiary of various taxes levied from real estate. Stamp duty is an example of this tax (Barlow 2006). The government uses tax levied on several development projects like road construction, the construction of public schools, and even hospitals. All these put together lead to economic growth.

There are other indirect ways in which the real estate industry has led to the growth of the economy. An example of this is through the increase in sales of real estimates which automatically translates to the increase in real estate prices. In so doing, the value of houses increases irrespective of whether the houses have been sold or not. This reciprocates by increasing the values of home equity loans a person can acquire and hence increasing consumer spending.

Real estates have a derived demand (Stein & Pamela 2004). This is because shelter is a basic need for man. Compared to other commodities the demand for real estate is rather inelastic. Government intervenes in several ways in the real estate market to safeguard the vast interests of both the buyers and real estate investors. The Government can intervene through ways discussed below

Rights in Land Ownership

When we talk of real estate transactions, there must be land ownership at one point or another. Therefore for this transaction to be completed amicably, the government should make it easy for both citizens and foreigners to own land.

To emphasize estate development, the government should ensure there is a land levy. This should be taxed on all idle land. In doing so, people will be under pressure to develop their pieces of land and if unable to do so, they will be pressurized to sell them thus giving them to individuals who can develop them. The ease of land ownership will be an incentive to both the real estate investors and potential buyers as few land exchange protocols will be required.

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Title Registration

Through land registration and issuance of title deed, the government will achieve protection of buyers from hoax any concealed claims. The government will ensure there will be a department of property registry where the title documents and survey records will be kept. Both the investors and potential land buyers will be advised to check in this department to verify the legality of the piece of land before engaging in any transaction. In so doing verification will be made easy and assessable by any person wishing to transact in real property.

Taxes

Generally, taxes form the greatest source of revenue to any government (Dipasquale & William 1995). Sellers of real estate nonetheless tend to raise the cost of their property so that they can maximize their profits once the taxes are deducted. This puts an unnecessary burden on the consumers of real estate. Examples of these taxes in the real estate industry include stamp duty and property rates. The effects of these taxes spill over to the buyer whereby he or she will be forced to part with more money or all in all, the seller can choose to withhold the property.

Therefore the government should impose low taxes on real estate property transactions. In many economies, governments have promoted this by ensuring capital gains be tax-exempt. Some governments have gone a step further such as the United States and stepped in to help first-time home buyers whereby they are given a tax credit of around $ 8,000 (O’Sullivan 2003). More to that the government has spent a lot of dollars in buying mortgage securities.

Financing

For any investment, finances are of paramount importance. Based on the high level of economic growth real estate generates in the economy, the government needs to step in and promote this important industry. Government can achieve this by encouraging financiers such as banks to offer low interest to investors in the real estate industry. Also, the government encourages its citizens to take mortgages by reducing the taxable amount in one’s income.

The financiers such as the banks have been given financial incentives by the government to encourage and motivate them to modify the mortgages that they give. For mortgages to be given, a proper business plan and a good management team will be required (Case 1992). The developer or investor in our case will need to divide his investment project into different development stages.

Though it is highly advisable to generate finances from one’s savings, it’s sometimes difficult to do so. There are two main ways of sourcing for finance:

  • Debt-based financing

This is where one borrows money from a creditor and repays it later with interest. This form of financing is important where the owner wants to keep his ownership rights. In this form of financing, the rate of financing does not change and the loan is more often than not deductible.

  • The equity-based financing

Unlike debt-based financing equity financing has a considerable loss on ownership and control. Two types of equity-based financing exist and these are private and public equity.

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Real Estate Brokers

This refers to a person or party that links a seller to a buyer that is he/she acts as an intermediary between these two parties. Brokers are a double edge sword, in that they can work on behalf of the buyer or the seller. A broker can act on behalf of either the buyer or the seller. When acting on behalf of the buyer, he/she helps the buyer to buy an estate at the least possible price and when acting on behalf of the seller, he helps the seller find a buyer who will pay the highest amount of money for that estate.

To avoid the emergence of unscrupulous people in the name of real estate brokers, the government should establish a department that will be solely responsible for the issuance of broker licenses. This control measure will open up accountability and create public confidence in this field of investment. More this, the government should monitor the online real estate transactions and in specific check the industry trend to detect anomalies early enough.

Information

It is said information is power. The government should ensure that the real estate investors and the buyers acquire the right information in time. This information will help them in deciding on the investment opportunities to undertake and where to invest (O’Sullivan 2003).

To foster adequate passage of information, the government should introduce real estate learning in the school curriculum. This will make students to be equipped with adequate information relating to real estate. More to this, the students will know about the various career opportunities existing in this field such as architects and even land surveyors.

In the case of the buyer, the information will enable him/her to tell the legality of the seller’s real estate before he (buyer) involves himself in the transaction.

For the sake of ensuring effective passage of information, the government should establish an independent department to cater to the varying needs of both the investors and the buyers.

Zoning

In this sector, the government should heavily step in to ensure that real estate development is carried out following stipulated laws and regulations. This will call for land division into various uses such as industrial, commercial, and even residential purposes (Dipasquale & William 1996, 1995). In addition to the above-mentioned intervention, the government plays a significant role in safeguarding the interests of both middle and low-income earners. This is by showing accountability to its citizen by checking on the real estate price index (Stein & Pamela 2004). This would easily be manipulated by greedy investors wishing to maximize profits from other people’s miseries.

The real estate industry highly depends on other sectors such as cement and brick, therefore the government should give incentives in this sector through ways like a reduction on corporate tax charged to them. By so doing, there will be a spillover effect to the real estate industry as their inputs, which are the raw materials from these sectors will be at a subsidized price and hence make the cost of estate production low. This will also result in a great reduction in the prices that the estates are sold to the final buyer (Case 1992).

Accessibility and security are of paramount importance in determining where one wants to live. To promote the real estate industry, therefore, the government should construct and maintain a good quality transport network. The government should not leave this role to the investors as this would translate to unaffordable estates. This is in terms of roads and railway lines construction. To check on security, the government should build more police stations and recruit more police personnel (Dipasquale & William 1995).

Also, the government should frequently be in check on the quality of the houses being constructed. This is because the private sector, as rational investors would do anything to maximize their profit and thus the government should step in to ensure that the set rules and standards are met by the private developer. In so doing, the economy will be growing as the workforce in the country will be in good health and no one will be hospitalized as a victim of a collapsed building.

To sum this up, the government has a big role to play in safeguarding the real estate industry. As explained above, this area can be summarized as:

  • Creation of good legal and economic environment of real estate business.
  • Passing legislation that will safeguard both the investor and buyers.
  • Introducing structures that will oversee control in the industry.
  • Ensuring there is public confidence in the industry for investment purposes.
  • Ensuring that investment finances are readily available and are affordable to the investor and buyers.

Conclusion

From the above information, it is clear that the real estate industry plays a significant role in both economic growth and development. It is therefore the role of each government to ensure that investors are highly encouraged to invest in this field. The government has also a great role to play in ensuring that it sets aside sufficient cash in its budget to carry out adequate research in this field and thus encouraging innovation of cost-effective housing facilities for its citizens

List of references

Barlow, D. (2006) Real Estate Transaction. 4th ed; New York: Aspen publishers.

Case, E. (1992) The Real Estate Cycle and the Economy: Consequences of the Massachusetts Boom of 1984-1987. Urban Studies 29(2), 171-183.

Dain, A. (1985) The Revolution in The Real Estate Finance. Washington D.C: The brooking institute.

Dipasquale D. William C W. (1995) Urban Economics and Real Estate Markets. New York: Prentice hall.

Dipasquale, D. and William C. (1996) Urban economics and real estate markets, London: Englewood Cliffs.

Han, S. S. (2005) Global City Making In Singapore: A Real Estate Perspective. A Journal in Planning Progress 64, 69-175.

O’Sullivan, A. (2003) Urban Economics, 5th edition. New York: McGraw-Hill/Irwin.

Stein J., & Pamela, L W. (2004) Commercial Real Estate financing, practicing law institute, Los Angeles: Harvard Law School.

William, L. (1993) Full Faith and Credit, New York: Randon house.

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