Overview Flashcards
Usually when shares don’t perform so well, properties do, and vice versa. Why is that?
this is because cyclical peaks and troughs of property’s business cycle usually doesn’t coincide with that of the sharemkt.
Why is real estate especially direct property considered a commodity relatively fixed in supply with low level of liquidity?
Because:
* not a standardised product
* cannot be traded readily
* cannot be hedged using futures
* involves high trans costs
What are the 6 steps involved in real estate investment?
Step 1: Identify investor’s objectives and constraints (study the unique creature)
Step 2: Study the macro-economic environment (scan the big environment for the creature)
Step 3: Identify the investment opportunity (what opportunity can we spot for the creature?)
Step 4: Prepare and analyse a tenancy schedule
Step 5: Apply investment techniques
Step 6: Make the god damn property investment decision!
What factors should be analysed when we are identifying investor’s objectives and constraints?
- Objectives and constraints
- Set up periodic reviews as objectives may change over time.
- funds availability - determined by size of the institute, institute’s source of funds, investment climate
- return expectation
- risk profile - represented by min required rate i.e. hurdle rate = usually margin of 2-7% + bond yld. note: higher rate usually reflects investor’s willingness to accept higher risk vs low risk prop
- Exit strategy
What are the main macro factors when studying the macro-economic environment?
- strength of the economy,
- supply of credit,
- socioeconomic and political factors,
- inflation (prop inv considered a hedge against inflation),
- phase of business cycle (i.e. early contraction, late contraction, early recovery, late recovery) affect prop Rs
- socioeconomic political environment
What factors affect the inv oppo though?
we are looking at type, size, location, buiding design features, (and even competing supply) of the prop.
What institutional investors consider most suitable?
usually commercial, industrial and retail props. as a rule of thumb, the more specialised the prop, the less inclined the institution is to invest in that prop coz it gets very mangagement-intensive and for many institutions, management-expertise can be a major restraining influence, which limits the oppo to invest in specialised or prop that presents large number of leases and turnover of lease areas.
What location considerations should be made when identifying re investment opportunity?
generally RECOGNISED LOCATIONS are better than off-pitch locs (off-pictch ones may offer higher yld to compensate for lower rental growth prospects) and attract price prems as capital g prospects and tenancy demand are more certain.
* note that there has been increasingly evident tenancy movement (by esp. large spaces users like govts and banks, and advancing tech enabling remote work and control supported this movement too) to off pitch locs to better tenant’s profitability. (hey, less the rental the better for business profit. )
* however, recognition/geographic environment still plays a critical role in the success of a real estate inv. e.g. you’d put a shopping cetnre in a strong primary trading area (strong population in the immediate vicinity) to be successful not a rural centre.
What design considerations should be made when identifying re inv opp?
we are talking **functionality** of the prop which can attract **prem to the extent it meets the tenant’s needs** e.g. office-to-warehouse ratio, on-site car parking area, size of the office floor plate, height of the ceiling, height of the warehosue.
Name the 4 main valuation techniques.
* capitalisation of NI
* DCF
* summation of land and improvements
* direct comparison
What is the difference b/w investment value and market value?
Investment value is determiend by the investor’s view on future rental and capital grow prospects and minimum hurdle return required from the investment; market val is determined from sales evidence
