AI Real Estate L1 Flashcards
direct investment physical buildings
houses, offices, shopping malls, specialities
indirect investment physical buildings
mutual funds, real estate investment trust (REIT’s)
direct finance
primary mortgages (annuity or reverse mortgages)
indirect finance
secondary mortgages (covered bonds, CMBS and RMBS)
Investment decision is depending on
valuation: characteristics, location
market analysis: future developments
finance: loan to value ratio
Methods for valuation
- Income (investment) capitalization approach
- Sales comparison
- Cost approach
- Using accounting measurements
- Residual approach
Income (investment) approach
- estimate future CF
Price = (rent-expenses)/discount rate= cap rate - > practical problems:
1. insufficient market information on rents and discount rates
2. forecasting over more then 10 years becomes a tedious task
Sales comparison
the underlying premise here is that the market value of real estate is related to the price of comparable, competitive properties
- revealed preferences approach
–> positive feedback leads to bubbles
cost approach
tries to quantify the replacement cost of a real estate
Other valuation methods
Accounting measures
- similar to the investment method, but we look at EBITDA instead of the rent. We come up with a sustainable profit
–> applicable to hotels, restaurants and casino’s (there are no near permanent rents)
Residual approach:
(The residual income approach is the measurement of the net income that an investment earns above the threshold established by the minimum rate of return assigned to the investment. )
- Value of the land is based on its usage
- What is the highest and best use of a site?
- What are the development costs?
- Surplus of 2-3 is the value of the site with it’s current usage.
Homogeneous and liquid market
sales comparison
heterogeneous moderately liquid market
Income capitalization
unique illiquid
cost based approach
Income capitalization
PV is derived:
- future net cash flow generation
- takes the total return perspective necessary for successful investment
is a valuation method that appraisers and real estate investors use to estimate the value of income-producing real estate. It is based on the expectation of future benefits.
- financing decisions are normally excluded from analysis
Asset holding period
depends on investment strategy
BREAKING DOWN Capitalization Rate
Cap rate is the most popular measure through which real estate investments are assessed for their profitability and return potential. The cap rate simply represents the yield of a property over a one year time horizon assuming the property is purchased on cash and not on loan. The capitalization rate indicates the property’s intrinsic, natural, and un-leveraged rate of return
BREAKING DOWN Capitalization Rate
Cap rate is the most popular measure through which real estate investments are assessed for their profitability and return potential. The cap rate simply represents the yield of a property over a one year time horizon assuming the property is purchased on cash and not on loan. The capitalization rate indicates the property’s intrinsic, natural, and un-leveraged rate of return
Revealed preferences approach
states that consumer behavior, if their income and the item’s price are held constant, is the best indicator of their preferences.
The theory states that given a consumer’s budget, they will select the same bundle of goods (the “preferred” bundle) as long as that bundle remains affordable. It is only if the preferential bundle becomes unaffordable that they will switch to a less expensive, less desirable bundle of goods.
Asset holding period:
Core investment strategy
Goal: focus on income
Market: Class A and Multi tenant
Holding Period: Up to 10 years
Asset holding period:
Value add investment strategy
Goal: Value creation with some income
Market: Class A and B with high vacancy low rents with repositioning options
Holding period: around 7 years
Asset holding period:
Opportunistic investment strategy
Goal: Value creation
Market: New development
Holding period: up to 5 years
How can rental inflows be sketched?
Will we face vacant rates?
Site analysis, demand analysis, supply analysis, cost estimate, finance structure, rate of return analysis
Site analysis
net usable land area, utility availability, soil condition
Demand analysis
population projections, employment numbers, income projections
How much maintenance costs are required?
- sum up all potential categories and come up with the expected costs
e. g.: property tax, insurance, maintenance
What do operating expenses not include?
debt service and Capex
Capex
Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.
(property marketing costs, capital reserves for future large repair projects, leasing commissions or tenant improvements allowances).
How to reason a sale price?
Exit yield approach: discounting the CFs after the expected sale of the property (normally with a higher discount rate)
Value development approach: keep the discounted CFs constant or growing; decrease with additional investments to keep the property upmarket
Lot building approach: estimate the discounted CF of a new usage at highest and best use.
