L1: Commercial RE Investors, Asset Characteristics & the Investment Universe Flashcards
1
Q
Importance of investment market
A
- We don’t exist in isolation as individuals, but are inherently connected to other markets and economies.
- To understand how our professions interact in the wider economy, how they fit in a globalised world.
- The response to changes across the world, be it finance, technology or conflicts, are reflected in the behaviour of the investment market and the different commodities being traded.
- Investment & economy are key to national and international governance.
2
Q
What is Investment?
A
‘Sacrifice of something now for the prospect of later benefits’
- OED: ‘the action of investing money in something for profit
- OED: ‘a thing worth buying because it may be profitable or useful in the future
3
Q
Name 4 ways in which investments become beneficial?
A
- Return on capital (through a flow of income)
- Return of capital (through an increase in capital value)
- Psychic benefit (personal enjoyment, intangible benefits)
- Social welfare (raising profile & community benefits)
4
Q
Who invests?
A
- Private individuals, ‘retail’ investors
- Corporate investors
- Financial institutions(Main investors); insurance companies, pension funds, investment companies, investment banks
- Investment trusts and unit trusts, real estate companies, charities, sovereign wealth funds.
- Also society itself: illustrated through collections of art, museum pieces, antiques etc
5
Q
What are the aims of investment?
A
- Maximum return for minimum financial outlay
- Minimise risk
- To find ‘Best value’ investment
- Typically high risk = high return
- Investors must compromise, depending on their own investment strategies
- Diversification of the investment portfolio
- Perform within a specific time period
6
Q
Unsystematic/specific/non-market risk
A
- Applies to individual assets (shares/property)
- Some ability to reduce these risks through prudent asset selection & portfolio diversification
7
Q
Systematic/Non-specific/ Market risk
A
- Risk related to factors beyond the control of the investor
- Market risk (dependent on the general economic condition)
- Higher proportion of total risk in properties are non-diversifable
8
Q
Risk spectrum: Market - Specific
Damodaran, 2002
A
Ranges from Firm-specific to Market (Affects few firms to affects many firms)
Risks involved:
- Projects doing better/worse tahn expected
- Competition (stronger/weaker)
- Entire sector may be affected by action
- Exchange rate & Political risk
- Interest rate, inflation & news about economy
9
Q
What are characteristics of shares/equities?
A
- Homogenous
- Liquid
- Central marketplace
- Low transaction costs
- Easily & quickly traded
- Many buyers/sellers
- High turnover potential
- Mobile/fluid asset
- Responds quickly to market information
- Can be ST/MT/LT holding
- More informed knowledge base
10
Q
What are characteristics of direct property?
A
- Heterogenous
- Illiquid
- No central marketplace
- High transaction costs
- Slower to trade
- Limited buyers/sellers
- ‘Lumpy’ asset
- Immobile: location specific
- Inelastic in the short term
- Typically a MT - LT holding
- Imperfect knowledge base
11
Q
Name other market assets?
A
- Govt bonds & index linked gifts
- Commodities (oil, silver, gold)
- Cash
- Property interests
- Treasury bills
- Derivatives
12
Q
Asset Class 1: Shares
A
- Offer wide range of investment opportunities
- Interests can be easily diversified & distributed
- NO guaranteed return (capital or income)
- Dividends are distributed only if company chooses to pay out profit (retained earnings vs. dividends)
- No tangible responsibilities (i.e. management etc)
13
Q
When was the London Stock Exchange formally created?
A
1802
14
Q
When was the stock market ‘big bang’?
A
1986 - became computerised, system replaced
15
Q
The stock market
A
- All of these assets can be traded on the stock market
- Both a primary & secondary market
- Provides a large amount of long term capital finance
- Provides a wide range of securities to investors
- Reduces the cost of capital finance to industry
- Encourages retentions of earnings by firms
- Encourages optimal allocation of capital resources
- Provides active information to allow investment decisions and future projections to be made
- This info can be used for performance measurement, identifying strengths & weaknesses
16
Q
What is the primary market?
A
- Brings together investors & those who need finance
- Initial public offering (IPO): Sell privately held stakes in a company to the public, ‘going public’ or being ‘floated on the market’
- Seasoned equity offering (SEO): Sale of additional shares by listed companies
17
Q
What is the secondary market?
A
- The trade of existing shares
- Most active part of the market, enables investors to liquidate assets quickly
18
Q
What do you have to do to become listed on the London Stock Exchange?
A
- Sign a listing agreement that commits directors to certain standards of behaviour & levels of reporting to shareholders
- The UK Listing Authority (UKLA) enforces a set of demanding legal rules
- shares have to be admitted to the Official List by the UKLA & be admitted to LSE for trading
- the status & visibility of a company can be enhanced by being included on prestigious list
- Company directors have to prepare a prospectus
19
Q
Asset Class 2: Bonds
A
- Seen as the least riskiest investment
- Government bonds = ‘gilts’ (typically very secure)
- ST <5yrs / MT 5-15yrs / LT 15-25yrs / undated bonds
- Corporate bonds (issued by companies, less secure)
- Bond is debt finance
- Index-linked bonds (ILG), introduced in the UK in 1981
- Typically low return, purchased for par value
- ‘Coupon’ pain out regularly until the bond matures
- Tr 4.5% 2014-2017 / Tr 8% 2020
20
Q
When can coupons be paid?
A
annually or bi-annually
21
Q
When can the government redeem a double dated gilt?
A
any point between 2 dates
22
Q
What type of bond goes up (or down) in line with inflation?
A
Index-linked bonds (ILG)
23
Q
What is the difference between Index-linked gilts and conventional gilts?
A
With Index-linked gilts, both the semi-annual coupon payments and the principle payment are adjusted in line with movements in the General Index of Retail Prices in the UK (RPI)
24
Q
What is Nominal income?
A
Current money terms
‘How much is the investment worth today?’
25
What is Real income?
Refers to the purchasing power of the money in terms of some base year and doesn't account for inflation
26
What is the difference between shares and bonds?
Equities consistently outperform gilts/bonds, 1900-2008
- Evident in Money (nominal) return and real return
- Difference is inflation. This is due to the effect of the time value of money. What was worth £50 in 2011 is not the same as £50 in 2001 and due to devaluation, will be less in 2021.
27
What are the 2 imperfect & complex property cycles?
Development and investment
28
What sectors interact in the property cycle and what do they reflect?
- Occupation sector --> market demand
- Development sector --> supply
- Investment sector --> investment demand
29
What are the key influential elements when deciding to invest in the property market?
- Where the market is at?
- Capital value & debt
- Security of income & capital?
- The lease
- Direct or indirect property?
- Rent/income
- Physical aspects (Building style/quality/age/lifespan?
- Stamp duty
30
Real estate risks are....
multi-dimensional, complex and numerous
31
Real estate pricing is influenced by...
what is happening in other investment classes
32
Leases in the UK
- changed in recent years, use to 25yr terms, but now decreased in length.
- typically include a rent free period (better to be occupied than not)
- Not linked to inflation in UK (unlike other European countries)
- Terms subject to negotiations
33
Who pays business rates?
The tenant. So a positive for landlord as rates are approximately 50% of rental value of property
34
What is Debt/leverage/gearing?
- How much are you going to have to borrow as an investor in order to make this investment?
35
Are higher or lower geared investments more risky?
Higher are generally more risky - you are accruing more debt - and are likely to be repayable at a higher interest rate.
36
UK stamp duty rates
| Non-resi & mixed-use properties
Purchase price/lease premium or transfer value - Rate of SDLT (percentage of the total purchase price)
Up to £150,000 - annual rent is less than £1,000 = Zero
Up to £150,000 - annual rent is £1,000 or more = 1%
Over £150,000 to £250,000 = 1%
Over £250,000 to £500,000 =3%
Over £500,000 = 4%
37
Causes of systematic risk
| Isaac & O'Leary, 2011: 234
Caused by extrinsic factors which affect all investments and over which the property investor has no control.
- E.g.'s: economic, social, envr, political changes... changes in legislation & policy, changes in inflation & interest rates.
38
Causes of unsystematic risk
| Isaac & O'Leary, 2011: 234
Risks affecting particular investments and over which the investor has some control.
- E.g.'s investment financing & gearing (high gearing = more risk), tenant selection, property selection, property characteristics, location.
39
Why invest in indirect property?
- Desire to capture benefits of investing in property while avoiding issues linked with direct property.
- Diversification
- Property Co. Shares
- REITs (closed)
- Unlisted property vehicles
- PAIFs (open)
- PUTs
- Real estate derivatives
40
What are REITs?
Real estate investment trusts.
| close ended funds - only a limited number of shares available - trust structure - listed on the LSE.
41
What are PAIFs
Property authorised investment fund - open ended - unlisted, structured as an open ended investment company (OEIC).
42
What are PUTS?
Property unit trusts. Buy and sell units of the trust, which is likely to have a substantial (but not all of its) investment in property.
43
What are derivatives?
The value of the investment is derived from the underlying assets, 'derived' from it - options and futures...
44
Over the last 25 years, what does the capital return index show for UK real estate?
Direct real estate has delivered a low capital return compared to shares. It is the income return (rent) that has been the main driver of its performance.
45
Over the last 25 years, what does the total return index for UK major asset classes show?
Direct real estate has delivered a similar total return to shares and bonds.
