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.
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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
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3
Q

Name 4 ways in which investments become beneficial?

A
  1. Return on capital (through a flow of income)
  2. Return of capital (through an increase in capital value)
  3. Psychic benefit (personal enjoyment, intangible benefits)
  4. Social welfare (raising profile & community benefits)
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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
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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
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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

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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
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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

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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
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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
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11
Q

Name other market assets?

A
  • Govt bonds & index linked gifts
  • Commodities (oil, silver, gold)
  • Cash
  • Property interests
  • Treasury bills
  • Derivatives
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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)
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13
Q

When was the London Stock Exchange formally created?

A

1802

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14
Q

When was the stock market ‘big bang’?

A

1986 - became computerised, system replaced

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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
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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
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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

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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
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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
Q

What is Real income?

A

Refers to the purchasing power of the money in terms of some base year and doesn’t account for inflation

26
Q

What is the difference between shares and bonds?

A

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
Q

What are the 2 imperfect & complex property cycles?

A

Development and investment

28
Q

What sectors interact in the property cycle and what do they reflect?

A
  • Occupation sector –> market demand
  • Development sector –> supply
  • Investment sector –> investment demand
29
Q

What are the key influential elements when deciding to invest in the property market?

A
  • 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
Q

Real estate risks are….

A

multi-dimensional, complex and numerous

31
Q

Real estate pricing is influenced by…

A

what is happening in other investment classes

32
Q

Leases in the UK

A
  • 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
Q

Who pays business rates?

A

The tenant. So a positive for landlord as rates are approximately 50% of rental value of property

34
Q

What is Debt/leverage/gearing?

A
  • How much are you going to have to borrow as an investor in order to make this investment?
35
Q

Are higher or lower geared investments more risky?

A

Higher are generally more risky - you are accruing more debt - and are likely to be repayable at a higher interest rate.

36
Q

UK stamp duty rates

Non-resi & mixed-use properties

A

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
Q

Causes of systematic risk

Isaac & O’Leary, 2011: 234

A

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
Q

Causes of unsystematic risk

Isaac & O’Leary, 2011: 234

A

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
Q

Why invest in indirect property?

A
  • 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
Q

What are REITs?

A

Real estate investment trusts.

close ended funds - only a limited number of shares available - trust structure - listed on the LSE.

41
Q

What are PAIFs

A

Property authorised investment fund - open ended - unlisted, structured as an open ended investment company (OEIC).

42
Q

What are PUTS?

A

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
Q

What are derivatives?

A

The value of the investment is derived from the underlying assets, ‘derived’ from it - options and futures…

44
Q

Over the last 25 years, what does the capital return index show for UK real estate?

A

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
Q

Over the last 25 years, what does the total return index for UK major asset classes show?

A

Direct real estate has delivered a similar total return to shares and bonds.