Space, Investment, Development

Question 1

Real Estate market characteristics

Answer 1

• No central market (real estate vs stock market, direct linkage between buyer and seller)
• Locationally segmented
  -incomplete and asymmetric information (local buyers provide better performance than distant buyers)

Question 2

Physical characteristics

Answer 2

• durable (good source of collateral)
• vulnerable to natural disasters
• depreciation
• maintenance

Question 3

Investment characteristics

Answer 3

• long term holding
• lumpy (expensive, high transaction costs, illiquid investment)
• leverage (real estate collateral)
• inflation hedging

Question 4

Public vs private markets (tx size, mkt participants, liq, tx cost, search cost, info efficiency)

Answer 4

• Transaction size: private > public
• market participants: private < public
• liquidity: private < public
• transaction cost: private > public
• search cost: private > public
• information efficiency: private < public

Question 5

Debt vs equity assets (priority of claim on underlying asset, risk, avg returns, control over managing the underlying asset, maturity, benefit from appreciation of the underlying asset)

Answer 5

• priority of claim on the underlying asset: debt > equity
• risk: debt < equity
• average returns: debt < equity
• control over managing the underlying asset: debt < equity
• maturity: debt < equity
• benefit from appreciation of the underlying assets: debt < equity

Question 6

Capitalisation rate (OAR or Current yield)

Answer 6

k = current net income / property value

Question 7

Determinants of cap rate

Answer 7

• Opportunity cost of capital (interest rate increases => higher bond yield = less RE investors)
• growth expectation of investors (positive expectation => more RE investors)
• Risk (less risky => more RE investors)