property investments

Question 1

characteristics of property market

Answer 1

> segmented
indivisible
costs are higher
decentralized
requires maintenance
government regulation
returns less volatile
risk diversification benefits
income and capital gain (bonds and equity)
hedge against inflation
has residual value

Question 2

factories warehouses and shops produce

Answer 2

high yields and low yields

Question 3

rental yield

Answer 3

(gross rent - expenses)/all costs of buying property

Question 4

property bonds

Answer 4

life assurance company
coupons are paid from the rental flow of property portoflios

Question 5

property income certificates

Answer 5

linked to a specific property
income and growth

Question 6

REIT

Answer 6

pooled invesmtents
closed-ended funds
shares flactuate
can borrow to invest but cannot be highly geared
plc listed on LSE main market or AIM
Basic rate tax payers pay tax at 20% on dividends received from a REIT
90% of taxable income paid out to investors net of 20% witholding tax
no CGT witihn fund
no invesotr can own more than 10% of shares
at least 75% of assets and income must be linked to property
at least 3 properties must be owned with no single property representing more than 40% of total assets

Question 7

property derivative

Answer 7

financial contract based on real estate property index

Question 8

uses of property derivatives

Answer 8

exposure to property market
hedge positions
speculate
quickly and efficiently alter the composition of the portfolio

Question 9

limitations of indices

Answer 9

general market coverage non-specific
sample size
no standardised approach
time lags (agree prices and trade prices)
samples bias (represents only whats been bought or sold)

Question 10

valuation techniques

Answer 10

cost approach (cost of land + building)
sales comparison approach (based on similar properties bought and sold around same time)
income approach (net operating income / market capitalisation rate)

Question 11

paris accord: properties that are more efficient

Answer 11

decr. operating expenses
support higher rents
reduce vacancy rates
better experience for clients
productive employees

Question 12

largest investors in commercial property

Answer 12

Pension funds and insurance companies

Question 13

The 10% maximum stake in a REIT is intended

Answer 13

prevent tax avoidance by property management companies that convert into REITs.

Question 14

commercial leases are normally

Answer 14

maximum of 25 years

Question 15

Expenses that are deducted from gross potential income

Answer 15

vacancy rates
insurance
property taxes
maintenance costs

Question 16

Ground rent

Answer 16

rent paid by the leaseholder to the owner of the property every year

Question 17

IPD index swap

Answer 17

swapping LIBOR + margin for property index returns
> like equity swap