4a. Real Estate

Question 1

Are real estate markets efficient?

Answer 1

No, because there is no good system for complete information exchange among buyers and sellers (tenants and lessors)

• Also, real estate returns can depend on how well the property is managed, and significantly influenced by negotiation and promotion.
• R.E markets are generally illiquid, and are regional or local. This makes market research very important

Question 2

What does negotiation refer to in context of R.E?

Answer 2

Negotiation between the buyer and seller determines the final transaction price. It is affected in an inefficient market: buyers and sellers have differing ideas about the value and price of a property

Question 3

What does promotion refer to in the context of R.E?

Answer 3

Disseminating information about a property to the buyer segment of the market.
Due to the inefficiency of the R.E market, promotion through advertising, publicity, sales etc is a necessary part of selling the property.

Question 4

What are the five steps for evaluating a property?

Answer 4

1. Conformance with financial and non-financial objectives
2. Analyse important features of the property: physical property, property rights, time horizon, geographic area
3. Collect data on Demand and Supply, benefits of property and property transfer process
4. Estimate the value of the property based on current and future financial data
5. Synthesise results and interpret

Question 5

How does demand affect the investment analysis of a potential property?

Answer 5

• who is the population segment who will rent?
• evaluate future/present prospects for this segment and stability and growth
• allows the investor to better understand how changes in this segment will affect the investment

Question 6

How does supply affect the investment analysis of a potential property?

Answer 6

• competition in the business environment
• evaluate stability of other apartment complexes
• present/future prospects of competitors; how it will affect this investment

Question 7

Should the investor accept the income statement supplied by the current owner?

Answer 7

• owner will ‘put their best foot forward’ in trying to sell
• investor should perform own analysis
• should ‘play with the numbers’: best and worse scenarios
• investor will better comprehend the present/future financial outcomes of the investment, and reduce the zealousness of the owner’s statements