11- Property investments

Question 1

What are 3 advantages of direct property investment?

Answer 1

-Low correlation with securities
-Lower volatility
-Regarded as a hedge against inflation (real asset)

Question 2

What are 3 disadvantages of direct property investment?

Answer 2

-Illiquidity
-Cyclical fluctuations
-Possible void periods

Question 3

What are the 3 main characteristics of Real estate investment trusts (REITs)?

Answer 3

-If they distribute 90% profits there’s no capital gains or corporation tax
-10% max single shareholder
-Income distributed as property income

Question 4

What is an Investment Property Database (IPD) index swap?

Answer 4

Swapping LIBOR plus a margin in exchange for returns on a property index

Question 5

What are the 3 main Property Valuation Methods?

Answer 5

-Cost approach
-Sales comparison approach (hedonic pricing)
-Income approach

Question 6

What is the Cost approach?

Answer 6

Cost of buying the land and building the property

Question 7

What is the Sales comparison approach?

Answer 7

Value based on similar properties that have recently sold

Question 8

What is the formula used for the Income approach?

Answer 8

Property value = Net operating income/Capitalisation rate

Question 9

What is the formula for Net operating income?

Answer 9

Net operating income = Gross potential income - Expenses