Week 2 Flashcards
6 steps of market analysis
1) Property productivity analysis
2) Market delineation
3) Demand analysis and forecast
4) Supply analysis and forecast
5) Calculation of Market Volume, Capture rate and absorption rate
6) Market movement prediction by supply and demand model
Then recommendations to the investor
property investment process
- ) identify the objective, goals and constraints of the investor
- analyse the investment climate and market conditions (market analysis)
- ) cash flow forecasting
- ) apply decision making criteria
- ) investment decision
explain step 1 of the investment process - investor analysis
Goals and objectives:
o Financial objectives (periodic income, capital appreciation)
o Non-financial objectives (control over tangible assets etc.)
o Securing projects that meet certain criteria
o Minimization of certain costs (e.g. Minimizing tax liability)
Constraints:
o Financial, legal, environmental and tax
Strategic Focus: o Market sector – types of properties? o Activity – investment, development o Investment quality – low or high end o Locality o Size of project(s) o Investors investment horizon and risk preference (important for superfunds etc)
explain step 1 of the market analysis ‘property productivity analysis’
What attributes of the subject property offer to the market:
o Physical attributes of the site
e.g. size, frontage, amenities and facilities available
o Physical attributes of the building – E.g. quality of construction, design, building grade, size and tenant mix, sustainability elements etc.
o Local attributes – e.g. locational advantages compared to competition, proximity to services, proximity to other competitive buildings, traffic conditions, movement of demand in relation to the direction of urban growth etc
o Legal and regulatory attributes, E.g. any legal restrictions on the land use etc
o Market appeal attributes, E.g. identification of specific features such as design or amenities that appeal to market participants
o Any other relevant attributes
explain step 2of the market analysis market delineation
Identify the boundary of the potential uses of the subject property – e.g. shopping centre must be accessible to local community
o Defined geographically
o Vary by property type
o Can vary between rental and transaction market
explain step 3 of the market analysis demand analysis forecast
Start from the growth of end users – people actually using the office space e.g. employees
Basic method of estimation-example of office
o Forecast employment growth for the specific period considered (e.g. 3 years)
o Estimate the size of the work force occupying space in the subject’s class of office building
o Calculate demand for the specific class of office space
Office Space per Employee o Will vary by area o Will vary by office building type o Conversion into office space demand Number of increased office workers – 12,500 m2 per office worker – 15m2 Total demand for new space = 187,500m2
explain step 4 of the market analysis supply analysis forecast
o Analysis of existing and anticipated supply of the property type under investigation
Estimation method:
estimated vacancies in the current competitive office space within the subject building class
(+) competitive buildings under construction
(+) forecast new space
(-) space anticipated for demolitions, renovations and conversions
= total supply of space
step 5 of market analysis - market volume
Investigate the interaction of supply and demand to determine if marginal demand exists and then MAKE PREDICTIONS as to when the market will move out of equilibrium
Market Volume: Forecast demand – Forecast supply
Example:
Forecast supply – 30,000m2
Forecast demand – 40,000m2
Market Volume– 10,000m2
Decision rule
Positive Market Volume – good, further analyse the investment opportunity
Negative Market Volume– reconsider the investment
market volume formula
Market Volume: Forecast demand – Forecast supply
step 5 market share and absorption rate - market volume
Step 5 – market share and absorption rate:
Capture Estimation:
o Judgement of the market share that the subject property should have and what the likely capture rate would be over the forecast period given market conditions and supply
Market share = Subject property (in m2) x 100
total new market supply (in m2)
Step 5 – Absorption Rate:
The absorption rate estimates the expected time for the rentable space to be absorbed into the market, depending on the demand and supply trends in the market.
Absorption rate = Lettable floor area of the building considered (over)
Average size of space leased per month X market share
Example:
Lettable area of the investment considered = 15,000m2
Average size of space leased per month in the area = 5,000m2
Market share of the subject property= 50%
5000x50% = 2500 = 6
what is the market share formula
Subject property (in m2) / total new market supply (in m2)
x 100
absortion rate formula
Lettable floor area of the building considered (over)
Average size of space leased per month X market share
Lettable area of the investment considered = 15,000m2
Average size of space leased per month in the area = 5,000m2
Market share of the subject property= 50%
5000x50% = 2500 = 6
explain step 6 of market analysis - market movement
Demand curve- Depicting the relationship between the price of property (transaction/rental) and the amount of it that consumers are willing and able to purchase at that given price.
Supply curve- Depicting the relationship between the price of property (transaction/rental) and the amount of property space that developer, household or other economic agents are willing to provide to the market.
Equilibrium-Theoretical balance toward which supply of and demand for real estate move over the long run.
Disequilibrium- A general status of real estate markets over the short-term in which the supply and demand for real estate are out of balance.
2 purposes of investment analysis
- Rental/transaction price and vacancy rate forecast
2. Sales volume estimation (through estimating total market demand volume and market share)
The current annual rent rate of an office property in Sydney is $450 per m2, and current annual outgoing rate of this property is $50 per m2. The area of this property is 6,000 m2. The Net Operating Income, in this case, is simplified as the difference between gross rental income and total outgoing. If the rent of this property is expected to grow by 5% per annum, and the outgoing is expected to grow by 3% per annum, what will be the Net Operating Income of Chadstone shopping center for each year in the next six years?
week 3 answers
