Property Market

Question 1

Define covenant

Answer 1

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.

Question 2

Define easement

Answer 2

Specific rights over property by someone other than tenant or owner. Ex: right of way through a property.

Question 3

Define freeholder

Answer 3

The absolute owner in perpetuity. Every property in our isles has a freeholder. Ex: Monarchy,

Question 4

Define ground rent

Answer 4

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).

Question 5

Define lease

Answer 5

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).

Question 6

Define marriage value

Answer 6

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).

Question 7

Explain prime property

Answer 7

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.

Question 8

Explain rack rent

Answer 8

Rent achievable if able to rent on market today. Rent goes up in line with inflation

Question 9

Explain reversion interest

Answer 9

Interest of a longer term leaseholder to whom property reverts to an expiry of lease.

Question 10

Explain void and what its an issue

Answer 10

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.

Question 11

What are freeholder rights on property limited by

Answer 11

Terms of unexpired lease, Easements, Covenants, Building regulations, Statutory requirements – on usage, etc.

Question 12

What are the characteristics of direct property investment

Answer 12

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

Question 13

Name a possible classification system for property

Answer 13

Function: offices, industry, retail

Question 14

What are the qualities of office property for landlords

Answer 14

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.

Question 15

Who would be ideal tenant in offices

Answer 15

Government - would never move

Question 16

What are the qualities of retail property for landlords

Answer 16

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.

Question 17

What are the qualities of Industry property for landlords

Answer 17

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.

Question 18

Name some other types of property investment directly

Answer 18

Warehouses
Shopping centres
Parking
Agricultural & forestry
Residential

Question 19

What are the qualities of residential property investment

Answer 19

High management costs, Poor image of landlord’s (and institutions), Poor quality tenants, tax disadvantage, political interference

Question 20

How does occupational demand driven property

Answer 20

Tied to buoyancy of economy –
employment , real interest
Structural changes in demand for property – move to industrial/office parks in suburbs

Question 21

How does supply impact property what about supply

Answer 21

Lag in coming on stream –creating a cycle
Restrictions on planning permission
Supply/demand disequilibria can persist

Question 22

What are the qualities of property investment that might make a good portfolio addition

Answer 22

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

Question 23

What are the direct methods of investing in property

Answer 23

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

Question 24

What are the indirect methods of investing in property

Answer 24

Shares in property companies. These substantial portfolios of properties with rental income which helps fund development costs.
Pooled property funds – unit trusts.

Question 25

What is meant by gearing in property

Answer 25

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.

Question 26

What are the advanatges of direct property investment

Answer 26

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

Question 27

What are the disadvanatges of direct property investment

Answer 27

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.

Question 28

Compare Property unit trusts and property shares under taxation

Answer 28

Property UT will reflect taxation status of investors hence being more tax efficient than property shares.

Question 29

Compare Property unit trusts and property shares under price stability

Answer 29

Property UT valued at NAV while property shares priced by demand meeting supply on market.

Question 30

Compare Property unit trusts and property shares under marketability

Answer 30

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

Question 31

Compare Property unit trusts and property shares under liqudity

Answer 31

Property UT generally has high liquidity, limiting the exposure to the property market.