Property Cycles Flashcards
1
Q
Who invests money?
A
- Private individuals (or a retail investor, which is an individual who purchases securities for his or her own personal account rather than for an organisation)
- Corporate investors
- Main investors are ‘financial institutions’ (i.e. banks)
- Insurance companies (life insurance / general insurance) (insurance-linked securities, or ILS, are essentially financial mechanisms which are sold to investors whose value is affected by an insured loss event. As such the term insurance-linked security encompasses catastrophe bonds and other forms of risk-linked securitization)
- Pension funds
- Investment companies
- Investment banks
- Investment trusts and unit trusts, real estate companies, charities, sovereign wealth funds.
- Society: illustrated through collections of art, museum pieces, antiques etc.
2
Q
What is the aim of investing money?
A
- Maximum return for minimum financial outlay
- Minimise risk
- Find investment that provides the ‘best value’
- 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
- Do investors want assets that behave and respond in similar ways to the market?
- Is there a need for liquidity?
3
Q
How does risk diversification work?
A
- Higher number of investments = lower risk
draw risk chart against no. of investments
4
Q
What are the types of risk?
A
- Unsystematic / Specific (to the property) / non-Market Risk:
- Risks affecting investment where investor has some control
- Examples: investment financing & gearing (higher gearing = more risk), tenant selection, property selection, property characteristics and location
- 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 extrinsic factors beyond the control of the investor.
- Market risk (dependent on the general economic conditions).
- Examples: economic, social, environmental, political changes, changes in interest or inflation
There is no such thing as a ‘risk free’ investment!
5
Q
What is decision making generally affected by?
A
- The investor’s available capital (Capital investment may also refer to a firm’s acquisition of capital assets or fixed assets)
- Equity (value of an asset less the amount of liabilities: assets-liabilities = equity)
- Market prices (the current price at which an asset or service can be bought or sold)
- Projected and expected future cash flows
- Availability/comparison of alternative investment cost & potential return (occ)
- Asset risk & security
- Time value of money (present value) and duration of investment
- Liquidity (Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Cash is considered the most liquid asset, while real estate, fine art and collectables are all relatively illiquid.)
- Marketability & transaction costs
- Ease of management
- Investor’s investment strategy (core values)
- Transparency
- Amount of investment control
- Nature of governance
- Nature of taxation
6
Q
What are the characteristics of assets such as shares/equities and direct property?
A
Shares / Equities:
- Equities are stocks – shares in a company. If you buy stocks, you’re buying equities (they represent ownership in a firm). We can think of equity as one’s degree ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered entirely the owner’s equity because he or she can readily sell the item for cash, and pocket the resultant sum.
- Homogeneous (a portfolio may be homogeneous if its securities are largely in the same industry or type. E.g. if portfolio is only stocks = homogeneous)
- Liquid
- Central marketplace
- Low transaction costs (transaction costs can include brokers’ commissions and spreads)
- Easily & quickly traded
- Many buyers/seller
- High turnover potential (turnover is the net sales generated by a business, while profit is the residual earnings of a business after all expenses have been charged against net sales).
- Mobile / fluid asset
- Responds quickly to market information
- Can be Short Term / MT / LT holding
Direct Property:
- Heterogeneous (results in variation from one service to another, or variation in the same service from day-to-day or from customer-to-customer. Heterogeneity makes it hard for a firm to standardize the quality of its services)
- 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.
7
Q
What are the three asset classes?
A
- Shares
- Stocks (stock market)
- Bonds
8
Q
What is the ‘Share’ asset class?
A
- Offer wide range of investment opportunities
- Interests can be easily diversified & distributed
- Purchasing a legal right through an equity interest
- NO guaranteed return (capital or income)
- Dividends (regular payments to investors) are distributed only if the company chooses to pay out profit (retained earnings vs. dividends)
- No tangible responsibilities (i.e. management etc)
9
Q
What is the ‘Stock’ asset class?
A
- Assets can be traded on the stock market (stock market = collection of markets and exchanges where the issuing and trading of equities / stocks of publicly held companies, bonds and other sorts of securities takes place)
- Both a primary and secondary market.
- Provides a large amount of LT capital finance.
- Provides a wide range of securities to investors (securities = tradeable financial assets, such as equities or fixed income instruments, purchased to be held for investment)
- Encourages retention of earnings by firms.
- Encourages optimal allocation of capital resources.
- Provides active information to allow investment decisions and future projections to be made.
- This information can also be used for performance measurement, identifying strengths/weaknesses (e.g. FTSE 100 indices)
10
Q
What is the primary ‘Stock’ 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.
11
Q
What is the secondary ‘Stock’ market?
A
- The trading of existing shares.
- Most active part of the market, enables investors to liquidate assets quickly
12
Q
Who are the key investors in markets?
A
- Private investors
- Foreign investors
- Institutional investors (which now dominate)
The stock market offers more efficient management of assets, to reflect the changing demographics of the ‘global’ market
13
Q
What is the ‘Bonds’ asset class?
A
- A bond is a debt security / finance, similar to an IOU (for example Government bonds from Sustainable property).
- Issuers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
- When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal amount when it “matures,” or comes due after a set period of time.
- People who buy bonds: usually professional investors, including insurance companies, pension funds, and banks on behalf of customers or on their own account.
- Individual investors can also buy them, usually through a broker.
- Seen as the least riskiest investment (involves the government).
- Government bonds = ‘gilts’ (typically very secure).
- ST <5yrs / MT 5-15 yrs / LT 15-25 yrs / undated bonds.
- Corporate bonds (issued by companies, less secure).
- Index-linked bonds (ILG), introduced in the UK in 1981. Typically low return, purchased for face value.
- ILGs will go up (or down) in line with inflation. Differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI)
- ‘Coupon’ paid out regularly until the bond matures, paid annually or bi-annually.
- Typical return 4.5% 2014-2017 / Tr 8% 2020
- Double dated gilts – if there are two dates then the government can choose to redeem the bond at any point between these two dates.
14
Q
Which is better - shares or bonds?
A
- Shares/equities are better and typically outperforms gilts/bonds.
- If £100 was invested in 1999, in 2009, the UK real return for:
- Equities would be £22,400
- Bonds would be £450
Therefore Equities > Bonds :)
15
Q
What is the difference between REAL and NOMINAL income?
A
- Real: Real value is the money in comparison or relation to a specific base year. To get the real return, you account for / adjusted for the impact of inflation with the nominal values and bring the figures back to a comparable value to the base year.
- Nominal: Nominal is the present value, i.e. the value of the money right now, so current prices / values which are not adjusted for the impact of inflation.
- The difference is inflation. This is due to the effect of the time value of money.
- If prices go up, nominal income (dollar income) being the same, real income goes down.
- If prices go down, nominal income (dollar income) being the same, real income goes up.
- Prices being the same, if nominal income (dollar income) goes up, real income goes up.
- Prices being the same, if nominal income (dollar income) goes down, real income goes down.
