week 1 Flashcards
what is investment
o Sacrificing of certain present benefits for uncertain future benefits
o A choice between consumption in the present and consumption at a future time
o In finance and real estate: “Any activity focused on the creation of more money through the utilisation of capital”.
define an asset
A possession that has value in exchange.
define real assets
Physical or identifiable assets such as gold, land & equipment.
define financial assets
An asset that derives value because of a contractual claim.
E.g. Stocks, bonds, bank deposits. They represent paper claims by one person against another i.e.
define asset class
Refers to a category of investment media.
o There are four major asset classes: shares,
property,
cash, and
fixed interest.
All asset classes have different risk/return characteristics.
2 types of capital markets
public markets
private markets
define public markets
trade small homogeneous units (eg. stock market) and exhibit a high degree of liquidity (can be sold quickly).
define private markets
are private transaction traded “behind closed doors”. Generally less liquid eg. Property market
define market value
Probabilistic estimate of the price at which a future transaction will occur – The price at which the product is most likely to be traded at, determined by the entire market (supply + demand)
define investment value
Value of an asset as an investment to a present or prospective owner (to one specific investor) two different values to 2 different investors could arise
investment value:
‘investors are unlikely to arrive at same investment value because’
o Perceived levels of returns
o Perceived levels of risks
o Willingness to defer immediate consumption in interest of future benefits
o Economies of scale
e.g. chef v banker have different needs
define return
and the types of it
Amount of net cash flow generated by an investment every year
o Regular, Periodical Return
(e.g. dividend to stock share and rental income of property)
o Capital Value Change (increase or decrease in value)
(e.g. gold, undeveloped land)
o Combination of Periodic Return and Capital Value Change
(e.g. shares and property) (REIT)
define risk
The variability of returns or the chance that an investment’s actual return will be different than expected (uncertainty)
explain the trade off between risk and return
Trade off between risk and return:
o When one asset is riskier than another, it requires that the expected return increase to compensate investors for the additional risk
o Low potential returns are associated with low risks
o High potential returns are associated with high risks
explain defensive assets
o Offer lower risk and lower returns.
o May suit short term investors or those wanting to reduce the risk of market volatility.
Eg: Cash and fixed interest investments (more liquid, stable)
explain growth assets
o Provide the potential for longer term capital gains, but have a higher level of risk over defensive assets.
o May suit investors seeking capital gains over the longer term and who are willing to accept an increased risk of volatility over the short to medium term.
Eg: Property, Australian shares, and international shares
advantages and disadvantages of cash investments
o Investments in financial institutions which have a short investment time frame (e.g. bank accounts, fixed term deposits)
Advantages:
o Provide a stable (low) return, higher security
Disadvantages:
o Provide very little income and no capital growth
o Can be risky over the long-term as inflation might eat away the value of investment
explain bonds
o An interest-bearing certificate, issued by either government or listed companies to raise debt
o Pays a fixed amount of interest on specified dates, usually every six months, until maturity
Types:
o Treasury bonds - bonds issued by the Treasury and backed by the full faith of the federal government
o Corporate bonds – bonds issued by listed companies
explain shares
o A type of investment that gives you partial ownership of a listed company
o Return from investing in stock
Returns come through dividends and price appreciation
Common vs. preferred stocks
Preferred – carry the right to receive a dividend (fixed percentage ) which must be paid before any dividend payment
Common – no fixed percentage dividends, will only receive a dividend after other shares
how is property different form other common investment options
(think perfect market)
o Investment size (buy in e.g. $500K for apartment)
o Holding period
o Complexity of transfer system (agents, legal, financing, transactional costs)
o No formal market structure for real estate (different from stock market, no centralised market, varies between states)
o Absence of standardized performance information (different people use different measures to value property e.g. cap rate
o Uniqueness of each parcel of real estate (non homogenous, unlike shares)
3 forms of value and return to investing in property
- Periodic cash flow
- Equity build
- Tax shields (negative gearing)
explain direct and active property investors
o Acquire direct title to real property
o Either oversee property themselves or hire management firms
o Purchase rights through acquiring property/land
Examples: o Office o Retail o Industrial o Agricultural o Residential o Other (leisure, business parks, education)
explain indirect property investments
Investing/placing savings in funds which buy and control income-producing properties such as
o Property trusts (REITs)
o Institutional funds
Benefits of direct property investments
o Rental income (mostly fixed) o Potential for capital gain o Leveraging o Control of the investment o Tax shields o Security o Diversification of investor objectives o Less volatile values o Rents are paid in advance o Pride of ownership
disadvantages of property
o Slow trading capability
o Low liquidity
o No centralized market
o Imperfect information
o Changes in technology, design or working & living practices affect the value
o Impact of external influences (legal, tax, economic, gov’t policy)
o Frequent government interventions
o Reliance on valuation for pricing and possibilities for mispricing
2 main types of indirect property investments:
- REITS
o An REIT owns a portfolio of large properties
o These large investments are broken up into units of smaller value that can be purchased by private investors
o Westfield Group, Westfield Retail, Stockland, GPT Group, Goodman Group
o Do not have to pay company tax (unlike stocks 33%)
o Can only invest in property not stocks - Institutional funds
o Pool the money of many investors which is then invested and managed by professional fund managers
o Eg. AMP Limited
o Can invest in many types of assets e.g. bonds, stock, propety etc.
advantages of indirect investments
o Access to large scale, expensive properties
o Lower capital required
o Higher liquidity
o Diversification benefits (many properties at one time)
o Free of property administration (management free)
o Economies of scale (transactional price lower)
o Access to management expertise
o Investors are able to respond quickly to market changes (can quickly sell portion of shares when market is canging)
disadvantages of indirect investments
o Loss of control of the investment
o Reliance on the management company to manage the portfolio to maximize the return
o High management expenses can erode the benefits of the investment
o Difficulty in obtaining full information on the property assets and the development schemes of the fund (fund manajor may manipulate data)
o Property stock prices are more volatile
o Management may have different investment objectives
describe the relationship between risk and return
Risk – The variability of returns or the chance that an investment’s actual return will be different than expected.
Return – Amount of net cash flow generated by an investment every year
The risk-return trade-off is the principle that potential return rises with an increase in risk. Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns.
- Name and describe the three basic types of investment returns
(1) Regular, Periodical Return
(e. g. dividend to stock share and rental income of property)
(2) Capital Value Change (increase in value)
(e. g. gold, undeveloped land)
(3) Combination of Periodic Return and Capital Value Change (e. g. shares and property)
- What is the difference between a real asset and a financial asset
Real Assets - Physical or identifiable assets such as gold, land & equipment.
Financial Assets - An asset that derives value because of a contractual claim.
E.g. Stocks, bonds, bank deposits. They represent paper claims by one person against another i.e. piece of paper evidencing a claim on the issuer.
difference between investment and market value
Market value – Probabilistic estimate of the price at which a future transaction will occur
Investment Value – Value of an asset as an investment to a present or prospective owner
Investors unlikely to arrive at same investment value conclusions as they differ on:
Perceived levels of returns
Perceived levels of risks
Willingness to defer immediate consumption in interest of future benefits
Economies of scale
- If the average Australian inflation rate in the past ten years was 2% and the current price of milk is 1 dollar per liter, what was the price of milk ten years ago?
$1*(1+0.02)^-10 =$0.82
Consider the following investment options. In small groups discuss and list the pros & cons of investing in each category and the specific risks that may be related to each asset class.
•
• Equities (shares)
Strong growth potential, varying risk depending on market volatility and company performance
• Property
Typically strong growth, lower risk than stock shares, illiquid in nature, rental return, negative gearing
• Derivatives,
Such as option a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the “underlying”. Very high risk because of the very high gearing used, high potential return
• Bonds
A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. … Owners of bonds are debtholders, or creditors, of the issuer. Low risk and low return
• Cryptos?
High risk / high return
- Scentre Group was created in June 2014 when the Westfield Group separated its the United States and European businesses from its operations in Australia and New Zealand. It is one of the world’s leading shopping center companies with retail destinations operating under the Westfield brand in Australia and New Zealand. In Scentre’s portfolio, the value of property asset in the state of NSW takes 25%, VIC takes 25%, QLD takes 20%, SA takes 10%, WA takes 5%, NT takes 5%, and NZ takes 10%. The expected annual growth rate of retail property market value in NZ is 4%, in VIC and NSW is 5.5%, in QLD is 6%, and 5% in SA, WA, and NT. How much percentage will Scentre’ portfolio value grow by after five years?
- Scentre Group was created in June 2014 when the Westfield Group separated its the United States and European businesses from its operations in Australia and New Zealand. It is one of the world’s leading shopping center companies with retail destinations operating under the Westfield brand in Australia and New Zealand. In Scentre’s portfolio, the value of property asset in the state of NSW takes 25%, VIC takes 25%, QLD takes 20%, SA takes 10%, WA takes 5%, NT takes 5%, and NZ takes 10%. The expected annual growth rate of retail property market value in NZ is 4%, in VIC and NSW is 5.5%, in QLD is 6%, and 5% in SA, WA, and NT. How much percentage will Scentre’ portfolio value grow by after five years?
=0.25(1+5.5%)^5+0.25(1+5.5%)^5+0.2(1+6%)^5+0.1(1+5%)^5+0.05(1+5%)^5+0.05(1+5%)^5+0.1*(1+4%)^5-1= 29.8%
