Chapter 10: Property

Question 1

Explain the cashflow from property

Answer 1

Initial cash outflow
- Purchase price and transaction cost

Income

• Rental income, which step increases over time
• Real return

Question 2

What factors affect how prime property is

CAL ST(REET)

Answer 2

C- Comparability (makes it easier to value)
A - Age and condition
L - Location
L - Lease structure 
S - Size (physical and monetary value)
T - Tenant quality

Question 3

What are the characteristics of property?

Answer 3

S - Security

• Depends on the quality of tenant
• Risk of voids
• Risk of obsolescent (big expense)
• Government intervention (rent or planning controls)

Y - Yield
* Running yield = Net income / gross purchase price

S - Spread

• Volatile over longer-term
• Infrequent valuation reduces short-term volatility
• Cyclical, related to the economic situation

T - Term
* Long term investment

E - Expenses
* High management and maintance cost

E - Exchange rate
* Currency risk

M - Marketability

• Unmarektabiity
• High dealing cost
• Large in size and indivisible
• Each property is different, making it difficult to value
• Indivisible
• Each valuation will give a different value

T - Tax
* Tax on income, and also on capital gains

Question 4

What is the advantage and disadvantage of indirect property investment?

Answer 4

+ Diversification

- Less control of the management of property

Question 5

How can investors indirectly invest in companies?

Answer 5

• Pooled property fund
• closed or open-ended
• Property company shares
• shares are usually available at a discount to net asset value
• can invest in very large properties and property development