lesson 3: the market environment Flashcards

1
Q

the market environment

A

one of four environments that need to be analyzed in order to assess the investment climate and market conditions

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2
Q

true or false

Information about the market environment can be costly to obtain

A

true

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3
Q

do a lot of people analyze the market?

A

nah boy

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4
Q

can market inflation be reduced if companies invest in real estate?

A

ye boy

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5
Q

what do studies show when they compare real estate vs stocks and bonds?

A

real estate outperforms stocks and bonds


real estate offers higher returns with no increase in risk compared with other investments

provides higher overall returns with lower variance if one does not require a high level of liquidity


There are a limited number of stocks and bonds


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6
Q

The Morguard Index of the Toronto Stock Exchange

A

indicates high returns and low risk


uses proxy data (appraisal values)

uses quarterly appraisal values to determine returns


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7
Q

what is the issue with the Morguard Index of the Toronto Stock Exchange using proxy data (appraisal values)?

A

can cause inaccuracies because it fluctuates with market conditions

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8
Q

why is it difficult to analyze data on the Morguard Index?

A

Studies on the Morguard Index show annual data

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9
Q

what happens when appraisal values are understated or overstated?

A

will cause errors in returns

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10
Q

do studies determine the relationship between appraisal values and actual values?

A

nah boy

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11
Q

what happens when an appraiser deliberately understates the value of a house?

A

indirectly increases the rate of return for the client

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12
Q

what happens when an appraiser deliberately overstates the value of a house?

A

it decreases the rate of return

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13
Q

how do you calculate the rate of return?

A

simply divide the cash flow by the market value

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14
Q

what are the different segments of the real estate market?

A

residential

commercial (retail and office)

industrial

special purpose

others

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15
Q

how does the segmentation of the real estate market affect information costs?

A

it increases the information costs

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16
Q

what is the real estate segmentation based on?

A

on local market conditions


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17
Q

what do information costs do to real estate portfolios?

A

• Information costs increase the cost of operating real estate portfolios


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18
Q

in which real estate markets is the information hardest to find?

why?

A

commercial

industrial

special purpose

because of low turnover or low number of transactions given in a special period (compared to residential)

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19
Q

if there is low turnover, where is real estate info available?

what does this do to the info costs?

A

available through proxy

increases information costs

20
Q

what is proxy

A

the use of appraisal values

the value of a property returned by appraisers

21
Q

what are capital gains?

A

selling price minus original costs (basically profits)

Capital gains make up a large portion of estimated returns

22
Q

how much of the real estate market Is diversifiable and how much isn’t?

A

86% is diversifiable

14% is not diversifiable

23
Q

what does it mean for real estate to be segmented geographically?

A

different cities, municipalities makes the real estate priced/reacting differently to market conditions

permits the investor to diversify his portfolio in two possible ways

24
Q

what does the geographic segmentation do to info costs?

why?

A

It increases information costs

different markets and tenants

25
Q

what are the two possible ways that an investor can diversify his portfolio using geographic segmentation?

A

▪ Invest in one type of real estate in different cities

ex: invest only in residential in Anjou, Cote-Saint-Luc, NDG, DDO, etc

▪ Invest in different types of real estate

ex: residential, commercial and industrial in only one city

26
Q

what can diversifying to to info costs?

A

reduce them

27
Q

what are the different asset types that segment the real estate market?

A

residential

commercial

industrial

special purpose (e.g. old people’s home)

others (land).


28
Q

what does market segmentation suggest about risk?

A

Market segmentation suggests the possibility of lowering risk through diversification.

29
Q

why is there a barrier to entry in real estate? what does it create?

A

large amount of money required

Imperfect competition

30
Q

how much is down payment when you start investing in Real estate?

A

approximately 25% down payment

31
Q

what happens to info costs when you invest in different real estate segments?

A

they do be increasing doe

32
Q

Why Is Real Estate a Puzzle?

A

The present model being used to value real estate is doing a poor job because it does not consider cash payments

33
Q

what is The present model being used to value real estate?

A

Capital Asset Pricing Model – CAPM

34
Q

why should the market develop new models to value real estate?

A
  • The performance of real estate compared to the other investments in the market justifies this
  • Studies show that companies are including large amounts of money in real estate in their portfolios

  • The performance of real estate investments outperforms other investments in the market as many studies have indicated

  • There is enough order in the financial market to justify this

  • current models do not capture the qualitative aspects that are taken into consideration during a real estate transaction, they only consider risk and return, which is not sufficient
35
Q

why do companies hire specialists in real estate for consulting services and to write reports on how good the market is for real estate investments done only in good times?

A

The companies know that the report will favour investing in real estate prior to acquiring the professional services; they simply need a professional’s name on the report

it is very rare to find any study conducted when markets are down

36
Q

since the appraisal values estimated by the appraiser are not the same as the actual values (actual selling price), when is the true market value found?

A

value can only be found when the property is sold

appraiser is hired to determine a property’s value prior to selling tho

37
Q

why are short term evaluations whack?

A

cause real estate should be long term evaluation

38
Q

why will sample size cause sampling errors?

A

in real estate the sample size is smaller and therefore the difference between ¼ and ½ is quite significant

39
Q

why is rent income less risky than other income from other investments?

A

because of contractual agreements or leases

Stocks and bonds are affected by other factors such as human resources, lumpy investments, immobility and market segmentation

40
Q

what is not included in the real estate analysis which reduces risk or variance?

A

Management costs

41
Q

does less risk or variance = excess returns?

A

nah boy

42
Q

why would you stay within the same real estate market or segment even when you diversify?

A

to reduce info costs

ex: do not have to evaluate different classes of real estate such as residential, commercial and office

43
Q

what should prices reflect?

A
  • Price should reflect mean evaluation of investors.

* Prices should reflect highest and best use

44
Q

“Prices should reflect highest and best use”, why is this not true in real estate?

A

a) there is no short selling
b) price adjustment is slower
c) optimistic opinion (pessimistic will not buy)

45
Q

why are real estate prices are biased upwards?

A

because of the sequential bidding process

46
Q

what do real estate prices vary between?

A

between the average value of potential buyers and the best use of the property

47
Q

why can price inefficiency arise?

A

markets are segmented

not everyone has the capital required to conduct a feasibility study