L1: Commercial RE Investors, Asset Characteristics & the Investment Universe Flashcards
Importance of investment market
- 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.
What is Investment?
‘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
Name 4 ways in which investments become beneficial?
- 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)
Who invests?
- 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
What are the aims of investment?
- 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
Unsystematic/specific/non-market risk
- Applies to individual assets (shares/property)
- Some ability to reduce these risks through prudent asset selection & portfolio diversification
Systematic/Non-specific/ Market risk
- 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
Risk spectrum: Market - Specific
Damodaran, 2002
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
What are characteristics of shares/equities?
- 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
What are characteristics of direct property?
- 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
Name other market assets?
- Govt bonds & index linked gifts
- Commodities (oil, silver, gold)
- Cash
- Property interests
- Treasury bills
- Derivatives
Asset Class 1: Shares
- 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)
When was the London Stock Exchange formally created?
1802
When was the stock market ‘big bang’?
1986 - became computerised, system replaced
The stock market
- 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
What is the primary market?
- 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
What is the secondary market?
- The trade of existing shares
- Most active part of the market, enables investors to liquidate assets quickly
What do you have to do to become listed on the London Stock Exchange?
- 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