CAIA - 14 - Real Estate as an Investment Flashcards

1
Q

The 5 advantages of real estate are:

  1. ___ returns
  2. Hedge against ___ ___
  3. ___
  4. Steady ___ ___
  5. ___ ___advantages
A

The 5 advantages of real estate are:

  1. Absolute returns
  2. Hedge against unexpected inflation
  3. Diversification
  4. Steady cash inflows
  5. Income tax advantages
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2
Q

There are 3 disadvantages in real estate

  1. ___ of characteristics
  2. ___assets that cannot be easily ___or ___
  3. Highly ___
A

There are 3 disadvantages in real estate

  1. Heterogeneity of characteristics
  2. Lumpy assets that cannot be easily bought or sold
  3. Highly illiquid
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3
Q

Two difference between a long-term lease and a bond:

  1. A bond is not ___ ___
  2. As maturity nears, the market value of a building is driven more by ___ ___ ___.
A

Two difference between a long-term lease and a bond:

  1. A bond is not inflation linked
  2. As maturity nears, the market value of a building is driven more by local market fundamentals.
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4
Q

When a building is empty, its value can behave more like ___.

A

When a building is empty, its value can behave more like equity.

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5
Q

The ___-___asset allocation process focuses on analyzing the macro environment and risk premiums.

A

The top-down asset allocation process focuses on analyzing the macro environment and risk premiums.

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6
Q

The driving factor of the ___-___asset allocation process is the relative attractiveness of individual investment opportunities.

A

The driving factor of the bottom-up asset allocation process is the relative attractiveness of individual investment opportunities.

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7
Q

Real estate can be classified in 4 ways:

  1. ___ vs ___
  2. ___vs ___
  3. ___vs ___
  4. ___vs ___
A

Real estate can be classified in 4 ways:

  1. Equity vs Debt
  2. Domestic vs International
  3. Residential vs Commercial
  4. Private vs Public
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8
Q

___ is a residual claim on an investment.

A

Equity is a residual claim on an investment.

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9
Q

___ is a fixed claim on an investment

A

Debt is a fixed claim on an investment

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10
Q

Mortgages with considerable credit risk may behave like ___, and ownership of real estate with long-term leases may behave like ___.

A

Mortgages with considerable credit risk may behave like equity, and ownership of real estate with long-term leases may behave like debt.

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11
Q

Most international real estate investments are made in ___.

A

Most international real estate investments are made in stocks.

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12
Q

The degree of international investing usually depends on the asset allocator’s ___.

A

The degree of international investing usually depends on the asset allocator’s country.

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13
Q

Institutional investors invest primarily in ___ of ___backed by residential real estate for residential exposure.

A

Institutional investors invest primarily in pools of mortgages backed by residential real estate for residential exposure.

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14
Q

Credit risk of commercial properties depend on ___ ___, while credit risk of residential properties depends on the ___ ___.

A

Credit risk of commercial properties depend on cash flows, while credit risk of residential properties depends on the borrower’s creditworthiness.

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15
Q

The advantages of investing in private real estate are the ability to select ___ ___, direct ___of ___, and ___-___benefits.

A

The advantages of investing in private real estate are the ability to select specific properties, direct control of investments, and tax-timing benefits.

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16
Q

The advantages of public real estate investing is that it is easier to ___, greater ___, low ___ ___, improved ___ ___, and ___in ___.

A

The advantages of public real estate investing is that it is easier to access, greater liquidity, low transaction costs, improved corporate governance, and transparency in pricing.

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17
Q

In order to be a REIT, the following must be in compliance:

  1. ___% of income must be derived from real estate activities
  2. REITs are required to pay out ___% of their taxable income in the form of dividends
A

In order to be a REIT, the following must be in compliance:

  1. 75% of income must be derived from real estate activities
  2. REITs are required to pay out 90% of their taxable income in the form of dividends
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18
Q

An equity REIT has over ___% of its assets in the private real estate equity market.

A mortgage REIT has over ___% of its assets invested in real estate debt.

A

An equity REIT has over 50% of its assets in the private real estate equity market.A mortgage REIT has over 50% of its assets invested in real estate debt.

19
Q

A ___ REIT invests in both equity and debt and does not comply with either of the 50% cut-offs.

A

A hybrid REIT invests in both equity and debt and does not comply with either of the 50% cut-offs.

20
Q

___ markets include major metropolitan areas

A

Primary markets include major metropolitan areas

21
Q

___ markets are medium-sized regions, such as suburban areas of primary markets

A

Secondary markets are medium-sized regions, such as suburban areas of primary markets

22
Q

___ markets are lesser-known regions, smaller populations, and smaller real estate projects.

A

Tertiary markets are lesser-known regions, smaller populations, and smaller real estate projects.

23
Q

Most commercial real estate is (publicly/privately) held

A

Most commercial real estate is privately held

24
Q

Anticipated inflation (should/should not) be a return driver.

A

Anticipated inflation should not be a return driver.

25
Q

The ___ ___states that nominal interest rates are a combination of real interest rates and a premium for anticipated inflation.

A

The fisher effect states that nominal interest rates are a combination of real interest rates and a premium for anticipated inflation.

26
Q

___ ___is the difference between realized and anticipated inflation.

A

Unanticipated inflation is the difference between realized and anticipated inflation.

27
Q

Unanticipated inflation (is/is not) a key risk and return driver since it can change ___ ___rates.

A

Unanticipated inflation is a key risk and return driver since it can change anticipated inflation rates.

28
Q

Many commercial real estate leases in the U.S. contain an ___ ___, which periodically adjusts rental payments based on some measure of inflation.

A

Many commercial real estate leases in the U.S. contain an escalator clause, which periodically adjusts rental payments based on some measure of inflation.

29
Q

The ___-___ ___, is a framework that divides real estate market into two markets: one for real estate space and one for real estate assets.

A

The four-quadrant model, is a framework that divides real estate market into two markets: one for real estate space and one for real estate assets.

30
Q

The four-quadrant model provides a graphical representation of the dynamics of a real estate system, which concists of three components: 1) market for ___ ___ ___, 2) ___market, and 3) ___ ___.

A

The four-quadrant model provides a graphical representation of the dynamics of a real estate system, which concists of three components: 1) market for real estate space, 2) asset market, and 3) construction industry.

31
Q

What is the price of a real estate asset in terms of rent and cap rate? (Equation)

A
32
Q

The construction level is established when ___ equals ___ ___.

A

The construction level is established when price equals replacement costs.

33
Q

___ levels of construction result in excess profits, while ___levels of construction are not profitable.

A

low levels of construction result in excess profits, while high levels of construction are not profitable.

34
Q

The change in stock equals ___ ___minus the ___ ___times the ___.

A

The change in stock equals new construction minus the depreciation rate times the stock.

35
Q

Equation for change in stock

A
36
Q

In the long run, increased construction will ___ the supply of space.

A

In the long run, increased construction will increase the supply of space.

37
Q

A number of factors change the demand for real assets:

  1. ___ ___
  2. ___
  3. ___treatment
  4. ___financing
A

A number of factors change the demand for real assets:

  1. Interest rates
  2. Risk
  3. Tax treatment
  4. Construction financing
38
Q

If interest rates increase, then yield from real estate assets becomes ___ relative to fixed income securities and demand will ___.

A

If interest rates increase, then yield from real estate assets becomes low relative to fixed income securities and demand will drop.

39
Q

If the risk associated with real estate increases, then the yield may be too ___, ___demand.

A

If the risk associated with real estate increases, then the yield may be too low, reducing demand.

40
Q

Depreciation rules ___ real estate’s after-tax yield, which ___the demand for real estate.

A

Depreciation rules increase real estate’s after-tax yield, which increases the demand for real estate.

41
Q

Higher short-term rates ___ the cost of construction, which ___supply and ___rents/prices.

A

Higher short-term rates increase the cost of construction, which constrains supply and increases rents/prices.

42
Q

A lower cap rate ___ asset prices

A

A lower cap rate increases asset prices

43
Q

Higher interest rates, greater perceived risk or unfavorable tax changes result in an ___ slope of the cap rate line.

A

Higher interest rates, greater perceived risk or unfavorable tax changes result in an increasing slope of the cap rate line.