Chapter 1 Flashcards
(45 cards)
Definition of Investment
- Committing / sacrificing present resources for expected future benefits
- Necessitates release of capital in return for an anticipated return to be received
What is ‘present resources’ in investment?
equity + debt
what is ‘capital’ in investment
effort, money, ideas
what is investor is compensated for?
- resources committed
- expected inflation
- uncertainty of future payments
Expected Future Returns
- periodic payment such as monthly rentals, yearly dividends, interests etc
- accumulated sums such as capital gains
Shareholder vs Bondholder
Shareholder:
* invest in shares
* dividend paid to them
* owners
Bondholder:
* invest in bonds
* interest paid to them
* outsiders
Speculation
- acceptance of large risks & unsecured gambles often with borrowed funds for the sole purposes of fast returns
- risk of loss > expected return
expected return in speculation needs to be…
very appealing that ppl is willing to take risks
Characteristics of Real Estate
- Immobility & Heterogeneity
- Illiquidity & Information Inefficiency
- High Transaction Costs & Capital Outlay
- High Sensitivity to External Forces
- High Degree of Management
- Inflation Hedge
- Income Stability & Capital Appreciation
- High Financial Leverage
Immobile & Heterogeneous
- cannot be moved from one location to another
- each property is unique
- can lead to the delineation of sub markets according to property types and location.
Illiquid & Informationally Inefficient
- cannot be converted into cash readily.
- considerable time is often required to find a buyer, negotiate a sale, arrange financing, conduct title search & legal documentation.
- information on real estate transactions is not readily available or transparent.
- illiquidity exposes property investors to significant market risks. Therefore, real estate investments are viewed as longer term investments.
High Transaction Costs and Capital Outlay
- due to the complexity of property transactions, several intermediaries are usually involved
- fees incurred during a property transaction
- property is generally a big-ticket item
Highly Sensitive to External Forces
- highly susceptible to credit conditions such as interest rates movements and credit availability.
- government intervention over land use and introduction of cooling and heating measures etc., can significantly influence property values.
What does it mean by external forces?
OUTSIDE of the real estate market
High Degree of Property/Asset Management
- real estate is more durable compared to other goods
- STILL a physical asset and subject to depreciation
- asset managers incur capital expenditure on
property maintenance & asset enhancements to preserve or enhance the asset values
three forms of depreciation
(i) functional,
(ii) economic
(iii) physical obsolescence
Why make enhancements?
increase in value = make market value, still be in demand
Physical obsolescence
wear and tear of the building
examples of physical obsolescence
cracks in the roof and structure, peeling of paint and breakdown of
heating and cooling system.
Functional obsolescence
property is no longer able to perform the function it is originally designed to, often due to technological changes or changes in infrastructural requirements.
example of functional obsolescence
increase in the size and weight of storage goods mean that a warehouse with insufficient floor loading and floor plate size
Economic obsolescence
- loss of value resulting from external forces
- NOT curable & requires a change in the property use.
example of economic obsolescence
the decline of a ‘sunset’ industry.
Hedge against Inflation
- how much rents move w or exceed inflation rates
- uses fixed rate debt
