Factors affecting the level of property market

Question 1

Economic factors have impact on property in the following interelated areas

Answer 1

• Occupation
  o Demand for property for occupation
  o Businesses seeking commercial property to rent
  o Occupational demand and supply of property affect the market levels of
  rent
  Development cycles
  o supply of newly completed property developments
• Investment market
  o supply and demand for property markets
  o The capital value for rented property is determined by the investment
  market

Question 2

Commercial property and occupation

Answer 2

• Economic growth
  o Tenant demand is linked to GDP
  o Increase in GDP, leads to increase in the demand for commercial property and
  industrial premises
  o The increase in demands feeds through the high rents and high property values
  o Any factor that affects economic growth, such as real interest rates ,will affect the
  demand for commercial property
  ▪ level of employment also has same effect affects occupational
  demand
  o The impact of economic growth is not uniform across different private sectors
• Structural Changes in Demand for property
  o New pattern of economic activity , domestically or globally will affect the demand
  for commercial property
  o Working from home or online shopping

Question 3

Commercial property and development cycles

Answer 3

• Property is fixed location and takes times to develop
• This works in both ways
  o Development can result in surpluses of available property when the economic cycle
  is downturn
  o Can lead to shortages in periods of economic bloom
• Property use may be subject to statutory control
• Local planning authorities may frequently restrict development
• Property is volatile due to the fact that supply side is inelastic (fixed) , therefore, when there
  is demand change , the supply side does not change with it , and so there are movements in
  property values.

Question 4

Commercial property and the investment market

Answer 4

• The property market depends on the occupancy market as it provides the investment
  income and potential for rent growth
• Inflation
  o the investment property provide a hedge against long run unexpected inflation
  o Freeholders should be able to increase rent inline with inflation ,
  o but inflation may erode the value of rents since reviews are infrequent and the
  prices of these will be lower when investors anticipate higher inflation
• Real interest rates
  o Higher real interest rates, should lead to lower valuations of future rents and
  therefore low capital values
  o This assumes that the capita values represent a discounted cashflow value
  of future rents yielded by property
  o In the long term, the long-term bonds tend to push up property investments
  yields
  o Increase in yields of bonds, the lower the demand for property, therefore
  the higher the prices

Question 5

Sources of investment

Answer 5

o Institutional investors
o Public/ private property companies using bank debt
o International investors – exchange rate will influence the demand levels

Question 6

Residential property

Answer 6

Driven by supply and demand
- The state can influence supply by constraints on new development in high demand areas
o Can be done through planning restrictions or
o Zonal prohibitions around major cities
- High house prices also limit the demand of property and cause prices to fall
o However if interest rates are low, there is other alternative demand from investors
to buy residential property and rent it out

Question 7

Other influences on the investment markets - demand

Answer 7

• Altering in the external influences which change demand on asset ( no change to
  characteristics of the asset )
  o Investor’s cashflow ( institutional inflow )
  ▪ amount of money available for investment by institutional investors can
  have impact on market prices
  ▪ This also has major impact on the demand for assets and hence market
  prices
  o Price of other investment classes ( returns on other investments )
  ▪ Availability of substitute goods
  o Investor’s preferences for a particular asset can be altered by
  ▪ a change in their liabilities
  o liabilities of a scheme may start preferring short term bonds rather
  than long dated bonds
  ▪ change in regulatory regimes
  o need for capital requirements and other onerous requirements on a
  share could reduce its attractiveness
  ▪ change in tax laws
  o investors try and maximise return after tax
  o if investors are taxed less heavily on income than capital gains, they
  will tend to prefer investments with high yield
  o this may alter attractiveness and hence the demand for assets
  ▪ uncertainty in political climate
  o investors prefer to invest in economies that are politically stable
  o may increase demand for safer investments in times of economic
  uncertainty
  ▪ fashion or sentiment altering
  ▪ marketing of the investment
  o if there are marketing campaigns to help investors better
  understand investments
  o then they may be more attracted to it
  ▪ investor education undertaken by the suppliers of an asset
  o if the investors are educated more about the asset, they are likely
  to be more attracted to it- through teaching their use and relevance
• The investor’s perception on the characteristics of the assets ,principally , the risk and
  expected return
  o There could be changes in perception of how the market views the asset
  o Riskiness of the asset

Question 8

Other influences on the investment markets - supply

Answer 8

Amount of investment in issue :
* Equities - Number of shares in issue ( rather than number of investors will supply )
Equity markets
* an increase in supply ( e.g. a lot of share issue ) will cause downward pressure on share
prices
* The supply of shares available increases as a result of
o Rights issue ( issuing to existing shareholders )
▪ by existing share based companies
▪ companies balance sheets are too weak to support the scale of operations
desired by the directors – recession effects
▪ companies directors think that the stock market is unusually buoyant( able
to keep up- at high level )
▪ share buy backs will reduce supply
o privatisation of previously nationalised companies – re- nationalisation
o new shares issue moving to a shareholder structure
Bond markets
* the supply in the bond market is largely driven by :
o government’s fiscal deficit
▪ amount of fiscal deficit
o government’s strategy for financing deficit
▪ different ways of financing _ using bonds , tax or printing money
o redemption of existing government bonds
▪ as the government will be needing more money to pay back the redemption
values

Question 9

Other investment markets

Answer 9

• supply is occasionally increased by technological innovation
  o increasing sophistication and availability of computer technology has enabled
  creative investment banks to come up with increasingly innovative and complex
  over the counter derivatives to meet requirements of clients
  ▪ investors can meet their needs and objectives more closely
  ▪ creation of more innovative products- tailor made derivatives
  ▪ derivatives can be created and destroyed on demand