Exam

Question 1

What is a property syndicate?

Answer 1

Property syndication, is a joint purchase by a group of investors who come together and pool their funds to purchase and hold a property.

Question 2

The core differences between a property syndicate and an investment trust are?

Answer 2

1. Property syndicates are less volatile than RT.
2. Syndicates are on a fixed term basis where RT’s are essentially perceptual.
3. Syndicates often can secure much higher gearing compared to RT (Higher yields)
4. Syndicates are considered ‘real assets’ where RT are considered ‘financial assets’

Question 3

Reasons to invest in a property syndicate?

Answer 3

1. Best risk adjusted returns
2. Less volatile than shares / trusts
3. Protection from inflation
4. Secure income
5. High predictability
6. Best after tax returns

Question 4

What is a LPT?

Answer 4

A listed property trust

Question 5

How does syndication and LPT’s differ in the short run?

Answer 5

Syndicates behave like property and LPT’s behave like shares.

Question 6

What are the main diversification benefits achieved from property syndication?

Answer 6

1. A negative correlation factor (meaning that direct property performs well when shares and bonds do not)
2. Reduced risk through diversification

Question 7

What is CAPM?

Answer 7

the Capital Asset Pricing Model.

Question 8

What is the CAPM equation?

Answer 8

Ke= Rf + B (Rm-Rf)

Question 9

How do you calculate beta?

Answer 9

Stock volatility / Market volatility * Market correlation

Question 10

What is Beta?

Answer 10

The correlation between an investment and the market. Also interpreted as systematic risk (that which cannot be diversified away).

Question 11

What are the Pros of REIT/LPT’s?

Answer 11

1. They are relatively liquid
2. High returns
3. Low geared investment
4. A good tax aversion

Question 12

What are the Cons of syndication?

Answer 12

1. Relatively non-liquid
2. No market for resale
3. an investment in real estate

Question 13

What are the primary CAPM assumptions?

Answer 13

1. Capital markets are in equilibrium
2. No market imperfections
3. estimates based of historical data

Question 14

What is a gross lease?

Answer 14

Where landlord pays all expences

Question 15

What is a net lease?

Answer 15

Where tenant pays all expences

Question 16

What are the shortfalls of direct capitalization?

Answer 16

1. Does not account for varying cash flows.

2. It assumes the cap rate is constant

Question 17

What is Idiosyncratic risk?

Answer 17

The risk associated with the change in price of a security, due to unique circumstances which are security specific.

Can be diversified away.

Question 18

What is systematic risk?

Answer 18

Overall market risk, can be diversified away.

Question 19

What are the three key points of the portfolio theory?

Answer 19

1. Ensure assets in the portfolio are not perfectly correlated
2. Any combination of not perfectly correlated will reduce risk.
3. Negatively correlated assets reduce risk on highest levels

Question 20

What is the main issues with portfolio theory?

Answer 20

1. Limited available data.

2. There are to many unrealistic assumptions; no inflation, divisible market, no transaction costs, no taxes.

Question 21

How is the Sharpe ratio calculated?

Answer 21

SR = Re - Rf / Standard deviation.

Re = effective portfolio return
Rf = risk free rate
0 = Standard deviation of company returns

Question 22

What is the Sharpe ratio used for?

Answer 22

To evaluate the performance of one portfolio with another.

Question 23

What is the statistical concept of market value?

Answer 23

a statistical average of the sales price as opposed to a true market valuation which is often estimated using the sales comparison method.

Question 24

What is the definition of market value?

Answer 24

Market value (MV)

• What you can sell the asset for today
• Expected most likely price at which we could do a deal on the market (objective)

Question 25

What are economic influences which drive demand?

Answer 25

1. Stage in the growth cycle 2. Natural advantages 3. Employment opportunities 4. Access to transport 5. Quality of life

Question 26

What are economic influences which drive supply?

Answer 26

1. Interest rates 2. LTV ratios 3. Zoning 4. Land terrain 5. Building codes 6. Neighborhood amenities (schools, shops ect)

Question 27

When is the cost approach used?

Answer 27

When valuing special use property or new homes.

Question 28

What are the effects of the Taxation (Budget Measures) Act 2010?

Answer 28

1. Depreciation for buildings has been set to 0 if they have useful lives of over 50 years. 2. Building fit-outs and services with long life are not depreciable. 3. Clawblack for previous depreciation will still apply.

Question 29

Depreciation can be claimed on?

Answer 29

1. Structure (useful life less that 50yrs) 2. Fit out (short term) 3. Chattels

Question 30

Rental property has a tax advantage because?

Answer 30

1. No capital gains tax 2. Write of losses against other income 3. Interest payments are tax deductible 4. Depreciation

Question 31

Investment value definition?

Answer 31

- What the asset is worth to you if you don’t sell it for a long time - With respect to a specified investor (subjective)

Question 32

What are the Pros of DCF?

Answer 32

1. Produces the closest thing to intrinsic stock value 2. Relies on FCF, which are trustworthy because FCF cut through reported earning "guesstimates" and tracks the money left over for investors 3. Identifies where companies value is coming from and if current stock price is justified

Question 33

What are the cons of DCF?

Answer 33

1. If assumptions are wrong/incorrect then the output will be inaccurate 2. Terminal Value calculation projects the FCF into the future at the same rate, which will clearly never happen 3. The debt to equity ratio is held constant in the WACC

Question 34

What is a dominant portfolio?

Answer 34

- A portfolio with more expected return then those portfolios with less risk. - All investors, regardless of risk preference would prefer a dominant portfolio to a dominated portfolio.

Question 35

What is a efficient portfolio?

Answer 35

- One which provides largest expected returns with given risk - smallest risk for given return

Question 36

What is the efficient frontier?

Answer 36

-A set of all possible efficient portfolios.