Property Market Flashcards
Define covenant
a legal agreement that attaches to the lease of land or property, often restricting its use/alteration.More colloquially, means the quality of the tenant (in ability to pay the rent). Important, especially in recessionary times.
Define easement
Specific rights over property by someone other than tenant or owner. Ex: right of way through a property.
Define freeholder
The absolute owner in perpetuity. Every property in our isles has a freeholder. Ex: Monarchy,
Define ground rent
Rent to the owner in respect of a ground lease granted to a developer who has the right to develop the land (who may then include it as liability in terms of purchase of property).
Define lease
An agreement which allows the leaseholder the use of the land or part of the building for a specified period in return for rent (the property is said to be leasehold).
Define marriage value
The value-added when all the separate interests in a property are combined, (especially in the sense that the leaseholder and freeholder are the same).
Explain prime property
Most attractive sort of property when viewed by location, age & condition, covenant of tenant, lease structure, size, other properties in area. Ex: jewellery store in Monaco where the footfall suits business.
Explain rack rent
Rent achievable if able to rent on market today. Rent goes up in line with inflation
Explain reversion interest
Interest of a longer term leaseholder to whom property reverts to an expiry of lease.
Explain void and what its an issue
Void means vacated property with no rent paid to the owner. If property is not earning and it could be deteriorating can be costly. Property is a liability until you get a tenant.
What are freeholder rights on property limited by
Terms of unexpired lease, Easements, Covenants, Building regulations, Statutory requirements – on usage, etc.
What are the characteristics of direct property investment
Lumpy investment – requiring specialist management.
Each property is unique
High on-going expenses of management and dealing costs
Diversification difficult with amount of capital needed
Return expected to rise with inflation
Leases tend to have periodic rent reviews
Running yield around 3 or 4%.
Marketability very low
Risk better than equity but voids are expensive.
Capital values are volatile but valuation methodologies tend to understate short-term volatilities.
Valuation - subjective
Obsolescence
Investment characteristics can be altered by the owner.
Political risk
Expected return higher than bonds
Name a possible classification system for property
Function: offices, industry, retail
What are the qualities of office property for landlords
Tenant covenants are generally good
Large market and diversified.
Multi-let office spreads default risk, smooths income
Leases - 5 year rent reviews usually.
Market split into capital city and provinces
Yields lie between the low yields of prime retail and high yield of
prime industrials.
Prime – easily accessible by transport, generally attractive to best tenants.
Many comparables - help in rent reviews.
Depreciation with refurbishment.
Who would be ideal tenant in offices
Government - would never move
What are the qualities of retail property for landlords
Average value is less than for offices.
flexible - many different tenants possible.
Indicator for this sector is consumer expenditure.
Pitch is key to tenant’s turnover and hence rent- Frontage particularly
Shops have lower running costs than other property types. Low depreciation
Rent is large proportion of total costs of retailer – hence retail growth tied to profitability of tenant
Many comparables.
What are the qualities of Industry property for landlords
Smallest in unit value , not flexible
Rents linked to strength of manufacturing
Prime :well-placed for transport and close to a suitable supply of labour.
High rental yield
Fabric of building deteriorates, Site value low.
Cyclical - possible void that is hard to fill as property not suitable to many tenants.
Scope for rental growth is limited, few comparables and depreciation is high.
Name some other types of property investment directly
Warehouses
Shopping centres
Parking
Agricultural & forestry
Residential
What are the qualities of residential property investment
High management costs, Poor image of landlord’s (and institutions), Poor quality tenants, tax disadvantage, political interference
How does occupational demand driven property
Tied to buoyancy of economy –
employment , real interest
Structural changes in demand for property – move to industrial/office parks in suburbs
How does supply impact property what about supply
Lag in coming on stream –creating a cycle
Restrictions on planning permission
Supply/demand disequilibria can persist
What are the qualities of property investment that might make a good portfolio addition
Good inflation hedge (if frequent rent reviews) - might stay in line with salaries.
Real yields – as they move up then property values fall and vice versa.
Institutional cash flow - provides source of income
What are the direct methods of investing in property
Buy the freehold or leasehold interest in property
Mortgages – make long-term fixed rate mortgages available to commercial property investors
Sale & Leaseback – the owner (and occupier) sells the property to an institutional investor and leases it back.
Development finance – co-develop a property with a property developer, taking an equity interest
What are the indirect methods of investing in property
Shares in property companies. These substantial portfolios of properties with rental income which helps fund development costs.
Pooled property funds – unit trusts.
What is meant by gearing in property
Property companies generally borrow to invest more than equity capital in the market, financially gearing the returns from the property market.
Generally buying a house 10% is capital investment but the other 90% is gearing investment.
What are the advanatges of direct property investment
Control
Movements are more uncorrelated with the stock market
Taxation : especially those otherwise not be subject to tax.
Loss on forced sale
Management expenses may be higher
What are the disadvanatges of direct property investment
Need a big fund to achieve reasonable diversification
Market price and transparency in property shares
Marketability
Management expertise
Property co. comes with breadth of management
Property companies can develop large properties
Property shares are a better way to gain exposure to specialist areas.
Compare Property unit trusts and property shares under taxation
Property UT will reflect taxation status of investors hence being more tax efficient than property shares.
Compare Property unit trusts and property shares under price stability
Property UT valued at NAV while property shares priced by demand meeting supply on market.
Compare Property unit trusts and property shares under marketability
Property shares are always tradable but UTs may temporarily be ‘closed’.
Unit trusts are for the secondary market, people can now invest in this market. Buying and selling to one another without changing the underlying price of property
Compare Property unit trusts and property shares under liqudity
Property UT generally has high liquidity, limiting the exposure to the property market.
