AI Real Estate L1

Question 1

direct investment physical buildings

Answer 1

houses, offices, shopping malls, specialities

Question 2

indirect investment physical buildings

Answer 2

mutual funds, real estate investment trust (REIT’s)

Question 3

direct finance

Answer 3

primary mortgages (annuity or reverse mortgages)

Question 4

indirect finance

Answer 4

secondary mortgages (covered bonds, CMBS and RMBS)

Question 5

Investment decision is depending on

Answer 5

valuation: characteristics, location
market analysis: future developments
finance: loan to value ratio

Question 6

Methods for valuation

Answer 6

1. Income (investment) capitalization approach
2. Sales comparison
3. Cost approach
4. Using accounting measurements
5. Residual approach

Question 7

Income (investment) approach

Answer 7

• 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

Question 8

Sales comparison

Answer 8

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

Question 9

cost approach

Answer 9

tries to quantify the replacement cost of a real estate

Question 10

Other valuation methods

Answer 10

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. )

1. Value of the land is based on its usage
2. What is the highest and best use of a site?
3. What are the development costs?
4. Surplus of 2-3 is the value of the site with it’s current usage.

Question 11

Homogeneous and liquid market

Answer 11

sales comparison

Question 12

heterogeneous moderately liquid market

Answer 12

Income capitalization

Question 13

unique illiquid

Answer 13

cost based approach

Question 14

Income capitalization

Answer 14

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

Question 15

Asset holding period

Answer 15

depends on investment strategy

Question 16

BREAKING DOWN Capitalization Rate

Answer 16

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

Question 17

BREAKING DOWN Capitalization Rate

Answer 17

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

Question 18

Revealed preferences approach

Answer 18

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.

Question 19

Asset holding period:

Core investment strategy

Answer 19

Goal: focus on income
Market: Class A and Multi tenant
Holding Period: Up to 10 years

Question 20

Asset holding period:

Value add investment strategy

Answer 20

Goal: Value creation with some income
Market: Class A and B with high vacancy low rents with repositioning options
Holding period: around 7 years

Question 21

Asset holding period:

Opportunistic investment strategy

Answer 21

Goal: Value creation
Market: New development
Holding period: up to 5 years

Question 22

How can rental inflows be sketched?

Will we face vacant rates?

Answer 22

Site analysis, demand analysis, supply analysis, cost estimate, finance structure, rate of return analysis

Question 23

Site analysis

Answer 23

net usable land area, utility availability, soil condition

Question 24

Demand analysis

Answer 24

population projections, employment numbers, income projections

Question 25

How much maintenance costs are required?

Answer 25

• sum up all potential categories and come up with the expected costs
  e. g.: property tax, insurance, maintenance

Question 26

What do operating expenses not include?

Answer 26

debt service and Capex

Question 27

Capex

Answer 27

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).

Question 28

How to reason a sale price?

Answer 28

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.