Chapter 16: Property Markets

Question 1

SYSTEM T

Answer 1

Security 
Yield 
Spread 
Term
Expenses and Exchange rate
Marketability 

Tax

Question 2

Property

Answer 2

A legal title to the use of land and buildings.

Question 3

Direct property investment

Answer 3

Involves the purchase and management of tangible assets.

- Are large and indivisible.

Question 4

Indirect property investment

Answer 4

Investment via shares in property companies or units in a pooled property fund.

Question 5

Prime property

Answer 5

Property most attractive to investors. Score highly on:
S - Size
T - Tenant quality
A - Age & condition
L - Location
L - Lease structure

C - Comparability

Question 6

Property as a hedge

Answer 6

Property is a real asset and would be expected to provide a hedge against unanticipated inflation.

Question 7

Marketability of property

Answer 7

Very unmarketable

It can take a long time to buy or sell and dealing costs are high.

Question 8

3 Characteristics that make property unmarketable

Answer 8

• Unit size
• Uniqueness
• Valuation

Question 9

Unit size (Direct Property)

Answer 9

Unit size of most property investment is large and in general, single properties are indivisible.

Question 10

Uniqueness (Direct Property)

Answer 10

Each property is unique.

Makes it harder to value, reduces marketability.

Question 11

Valuation (Direct Property)

Answer 11

Matter of professional judgement.
No central market with quoted prices.
There may be significant variations in valuations carried out by different valuers or by the same valuer on different bases.
Lack of information due to infrequent sales.

Question 12

Security of property income

Answer 12

• Depends on the quality of the tenant.
• Rent payable by a company is a prior charge on its profits, but costs of recovery from tenants in arrears can be high
• There is a risk of “voids” - periods when the property is not let.

Question 13

Obsolescence (Property)

Answer 13

Slowdown in the relative rate of growth in value between old and new buildings.
Need for modernisation: large expenditure.

Susceptible to government intervention such as rent and planning controls.

Question 14

Spread (Direct Property)

Answer 14

Capital values of buildings can be volatile over the longer term, although infrequent valuations and stable valuation methods reduce short-term volatility.

Question 15

Yield (Property)

Answer 15

Property is less marketable & less secure than index-linked government bonds.
Investors thus require a higher return from property.

Question 16

Expenses (Direct Property)

Answer 16

Property management cost are high even if the tenant is responsible for building maintenance and insurance.

Question 17

Freehold ownership (Property)

Answer 17

Ownership in perpetuity.
Freeholder has the right to occupy the building, let it out, and refurbish the property or develop it.
There may be restrictions, ex covenants, easements such as rights of way, planning and building regulations & statutory requirements not to cause a nuisance to others.

Question 18

Easements (Property)

Answer 18

specific rights acquired by someone other than a landowner or tenant.

Question 19

Unencumbered freehold (Property)

Answer 19

No existing tenant, ie freeholder may choose to:

• add value by re-developing and/or refurbishing
• set up a lease and receive rents

Question 20

Leased freehold (Property)

Answer 20

Already has a tenant, so that the investor will receive the rents due under the terms of the existing lease, plus reversion of the unencumbered freehold at end of lease.

Question 21

5 Disadvantages of direct property holdings

Answer 21

• Size
• Diversification
• Lack of marketability
• Valuation
• Expertise needed

Question 22

Advantages of direct property investment

Answer 22

• Diversification of overall portfolio (property shares are subject to movements in equity market)
• Volatility (less volatile than property shares)
• Control over property portfolio management
• Loss on forced sale unlikely
• Exposure (property company may invest in buildings under construction, multiple risks associated)

Question 23

Advantages of indirect property investment

Answer 23

• Diversification within the property market (property companies offer greater spread of risk)
• Market prices / performance measurement - no visible market price for real property.
• Marketability - property shares are more marketable than direct investments.
• Management expertise (company can afford expertise)
• Advantage of size (large companies may invest in large properties, too big for direct investors)

Question 24

Financial Gearing w.r.t. property investment

Answer 24

Commercial property investments often provide secure income streams, making property investment / development companies ideal vehicles for financial gearing.

Question 25

Discount to net asset value w.r.t. property investment

Answer 25

property shares usually stand at a discount to NAV.

Property assets may be purchased cheaply.

Question 26

Investment and risk characteristics of property to be considered:

Answer 26

M-Marketability
U- Uniqueness
S- Size
T- Type of Property (determines the running yield)

P- Political Risk
R- Real long term RETURNS (property is a real asset)
O- Obsolescence
V- Valuation
I- Indivisibility
D- Diversification
E- High Management and dealing EXPENSES

F- FORCED sales
I- stepped INCOME stream
V- Volatility
E- Expertise available

Question 27

What to consider when comparing direct to indirect property investments:

Answer 27

C- Control
E- Expenses
D- Diversification
E- Expertise

M- Marketability
E- Exposure to other sectors
E- Equity correlation for instance
T- Taxation

Volatility
Valuation
Gearing
Forced Sales