Chapter 1

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McGraw-Hill/Irwin. Real Estate is Property. • Two types of property: –Tangible. ❑ physical assets that can be owned. –Can be real or personal property. 1-2.

Real Estate is Property • Two types of property: – Tangible

Chapter 1

physical assets that can be owned –Can be real or personal property

– Intangible  The Nature of Real Estate and Real  Estate Markets

• Non‐physical assets such as stocks, bonds,  mortgages, leases.

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McGraw-Hill/Irwin

The Term “Real Estate” Used Three Ways

The Term “Real Estate” Used Three Ways

2. Real estate as a bundle of rights

1. Real estate as a tangible asset:

– Exclusive possession of the real  property – Use or enjoyment Use or enjoyment

– Structures (improvements on the land) – Improvements to the land  • • •

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Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Excavation and fill Sewers and other utilities Roads and driveways



Can use as rental property to generate  cash flow

– Disposition – Can be unbundled in many ways

– “Raw” land 1-3

The Term “Real Estate” Used Three Ways

Real Estate in the Economy

3. Real estate as an industry and profession  Brokerage  Development  Leasing  Property management  Asset management  Real Estate Law  Appraisal  Market consulting  Counseling

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• Half of the world’s wealth • Generates over 28% of U.S. gross  domestic product (GDP)

 Planning  Government regulation and taxation  Housing assistance  Mortgage finance

– Housing alone accounts for almost 20% g

• Generates nearly 70% of local  government revenue (property tax) • Creates jobs for nearly 9 million  Americans

 Construction finance  Long-term finance

 Investment management

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Aggregate Market Values of Selected Asset  Categories: 2008

Land Use in the United States: 2003

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Selected Household Assets as a Percentage  of Total Assets

U.S. Household Wealth: 2008

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Real Estate Values are Determined by  Interactions in Three Sectors

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Space vs. Property vs. Capital Markets User Market: • Market for the physical real estate • “Buyers” receive right to use space 

• User (Space) Markets • Capital Markets • Governmental Sector Governmental Sector

– sometimes called “space” market or “rental  i ll d “ ” k “ l market”

• Where rental rates are determined

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User Market

Segmentation of User/Space Markets

• On demand side: 

• Both demand & supply side of user  markets are very specific to location & building type

– individuals, households, & firms who require  space either for consumption or production  purposes 

– Implies user/space markets are highly  segmented!

• On supply side: 

• Compare to nationally integrated markets  (gasoline, steel, financial capital; i.e.,  homogeneous commodities that can be moved  from place to place)  

– real estate owners/operators who rent  space to tenants

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Segmentation of User Markets

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Capital Markets • RE competes for funds in capital market with  other asset classes, such as stocks and bonds • Investors select a mix of investments based on  expected returns & risk • Bidding by investors determines:

• Because of segmentation, rental  prices for physically similar space can  vary widely  –across locations,  across locations & –across property types.

– risk free rates of various maturities (i.e., the  Treasury “yield” curve) – required risk premiums for risky investments 

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Public Capital Markets

Private Capital/Property Markets

• Small homogeneous units (shares) of  ownership in assets trade in public exchanges • Many buyers and sellers • Price quotes available for all to see • Characterized by a high degree of liquidity • Informationally I f i ll efficient ffi i

• Absence of centralized market (or even price  lists) • Assets trade infrequently in private  transactions (thus a lack of transparency) • Common for “whole” assets to be traded in a  single transaction (indivisibility) • Less liquidity than public markets • Higher transaction costs 1-17

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Property (Asset) Market

The Four Quadrants of Real Estate Capital  Markets

• Market for ownership claims to RE assets • Buyers/owners receive rights to cash flows  generated by leasing space to tenants • Demand (supply) side of property market is  made up of investors wanting to buy (sell) made up of investors wanting to buy (sell)  property • Property market is integrated, not segmented  like space market – i.e., investment capital can come from anywhere

Private

Public

(directly held)

(indirectly held)

Equity/ Individuals, partnerships, firms, & owners institutions

Investors in publicly traded real estate companies & equity REITs

Commercial banks, Debt/ savings institutions, lenders credit unions, mortgage

Investors in mortgagebacked securities and mortgage REITs

banks, insurance companies, private lenders 1-19

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Characteristics of Real Estate Markets • • • • •

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Heterogeneous products Immobile products Localized markets Segmented markets Segmented markets Privately negotiated deals with high  transaction costs

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End of Chapter 1

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