Chapter 16: Property Markets Flashcards
SYSTEM T
Security Yield Spread Term Expenses Marketability
Tax?
Property
A legal title to the use of land and buildings.
Direct property investment
Involves the purchase and management of tangible assets.
- Are large and indivisible.
Indirect property investment
Investment via shares in property companies or units in a pooled property fund.
Prime property
Property most attractive to investors. Score highly on:
- location
- age & condition
- quality of tenant
- number of comparable properties available to determine the rent at rent review / valuation
- lease structure
- size
Property as a hedge
Property is a real asset and would be expected to provide a hedge against unanticipated inflation.
Marketability of property
Very unmarketable
It can take a long time to buy or sell and dealing costs are high.
3 Characteristics that make property unmarketable
- Unit size
- Uniqueness
- Valuation
Unit size
Unit size of most property investment is large and in general, single properties are indivisible.
Uniqueness
Each property is unique.
Makes it harder to value, reduces marketability.
Valuation
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.
Security of property income
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 and there is a risk of “voids” - periods when the property is not let.
Obsolescence
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.
Spread
Capital values of buildings can be volatile over the longer term, although infrequent valuations and stable valuation methods reduce short-term volatility.
Yield
Property is less marketable & less secure than index-linked government bonds.
Investors thus require a higher return from property.