power point class 1 Flashcards
The term “Real Estate” can be used in which THREE fundamental ways?
- Real estate as a tangible asset.
- Real estate as a bundle of rights.
- Real estate as an industry and profession.
Real Estate as a Tangible Asset
“Raw” land
Improvements to the land
–> Excavation and fill
–> Sewers and other utilities
–> Roads and driveways
Structures (improvements on the land)
Real Estate as a Bundle of Rights
Exclusive possession of the real property
Use or enjoyment
–> Can use as rental property to generate cash flow
Disposition
Can be unbundled in many ways
–> E.g., owner leases property to renter
Real Estate represents how much of the World’s wealth?
Canada?
US?
50%
between 12 and 13% of GDP
US is 25% of GDP
What Determines Real Estate Values?
determined by interactions of supply & demand in 3 distinct markets/sectors
–> User (Space) markets
–> Capital markets
–> Property markets
RE and Capital Markets
RE competes for funds in capital market with other asset classes, such as stocks and bonds
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Investors select a mix of investments based on expected returns & risk
The bidding by investors in capital markets determines what?
risk free rates of various maturities (i.e., the Treasury “yield” curve)
required risk premiums for risky investments (can vary significantly)
The 4 quadrants of RE capital Markets
On the right side:
–> Equity owners
–> Debt lenders
On the top:
–> Private Markets
–> Public markets
Equity and Private Markets
Individuals
partnerships
limited liability corporations
private equity funds
debt and private markets
banks
insurance companies
finance companies
private lenders
equity and Public Markets
REITs
Real Estate operating companies
Debt and Public Markets
Commercial mortgage-backed securities (CMSB)
Mortgage REITs
Public Capital Market
Small homogeneous units (shares) of ownership in assets trade in public exchanges
Many buyers and sellers
Price quotes available for all to see
Characterized by a high degree of liquidity
Informationally efficient
Private Capital Market
Absence of centralized market (or even price lists)
Assets trade infrequently in private transactions (thus a lack of transparency)
Common for “whole” assets to be traded in a single transaction (indivisibility)
Less liquidity than public markets
Higher transaction costs (typically)
Investment value
Maximum price an investor is willing to pay for an ownership interest in real property or mortgages
