Direct Real Estate Investment

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Direct Real Estate Investment by Mind Map: Direct Real Estate Investment

1. tenant demand dependant upon level of general economic activities.

2. consider impact of surplus vacant property

2.1. generally inelastic supply

3. fixed in the short term

4. Planning law

5. Real estate investment implies that property should be treated as a financial asset.

6. Fundamentally, technologically and legally, real estate is a very stable asset class and this is reflected in its low level of volatility

7. There is evidence that real estate return is linked to equity market and interest rate.

8. Impact of leases - e.g. wording of rent review clause

9. In the long term, direct real estate investment is risk diversifier in mixed-asset portfolio and likely to improve risk-adjusted performance of that portfolio.

9.1. But this has to be set against practical issues and obstacles associated with investment in direct real estate

10. Real Estate Investment Types

10.1. Agricultural

10.2. Leisure:

10.2.1. hotels,

10.2.2. cinemas,

10.2.3. pubs,

10.2.4. restaurants,

10.2.5. nightclubs,

10.3. Residential - unpopular for most of post-war era because of impact of legislation but making a comeback.

11. Do valuations accurately reflect traded prices?

12. Characteristics of Direct Property Investment

12.1. Income (Income accounts for about 70% of property total returns in the long run)

12.1.1. fixed for five years

12.2. suffers very little from depreciation due to changes in technology.

12.3. Taxation

12.4. Reliance on property valuations because of heterogeneous nature of property.

12.4.1. Can valuations keep pace with rapidly changing market sentiment?

12.5. Statutory control - e.g. fire regulations

13. Characteristics of Real Estate Investment

13.1. Supply

13.2. Demand

13.2.1. investor demand subject to weight of money, attractions of property as compared to other asset classes and outlook for the market.

14. Real Estate Market

14.1. User market (demand)

14.2. Financial asset (financial market)

14.3. Development market (supply)

15. Investment Return

15.1. Value of a building

15.1.1. Pt=It/Kt

15.1.1.1. P: the price or value of a building

15.1.1.2. I: the net income derived from letting the building

15.1.1.3. K: capitalisation rate*

15.1.1.3.1. considerations make up the capitalization rate:

15.1.1.4. t: in any period

15.2. rate of return

15.2.1. r=(P1-P0+a1)/P0

15.2.1.1. r=rate of return

15.2.1.2. P1 =the price at the end of period 1

15.2.1.3. P0 = the price at the end of period of 0.

15.2.1.4. α1 =the income received during the holding period

15.3. Investors are concerned with their total returns

15.4. Total return is obtained by adding the income return to capital change

15.5. It is generally expressed as a % per annum

15.6. The total return is effectively the internal rate of return

16. investors get vs want

16.1. want

16.1.1. Over-reliance on the UK

16.1.1.1. Concentration on 3 sectors

16.1.2. Predicable/stable income oriented returns

16.1.3. Diversification away from equities (+economic/geo-political)

16.1.4. Some liquidity options (rightly or wrongly)

16.1.5. Skilful asset management

16.1.6. Value for money

16.2. get

16.2.1. Too benchmark focused

16.2.2. Liquidity-when they don’t need it and illiquidity when they do

16.2.3. Fees not always properly structured

17. summary

17.1. Real estate is a major investment market.

17.2. The real estate investment market is very imperfect and property is a complicated investment vehicle because of the fact that is a physical asset.

17.3. The relationship between real estate and other assets varies over time.

18. Illiquid

18.1. lengthy marketing period

19. Indirect investment: invest in property companies or property funds through holding the equity shares

19.1. Dividend

19.2. Changes in share price

20. Core investment types

20.1. office

20.2. industrial

20.3. retail

21. lengthy transaction period

22. full management control

23. one of many Investment Assets

23.1. Equities

23.2. Bonds

23.3. Gilt edged securities (gilts)

23.4. Gold

23.5. Cash

23.6. Currencies

23.7. Paper derivatives

23.8. Works of art

24. transactions can grind to a halt under certain market conditions

25. U.K. lease structure - traditionally 25 years, upward only rent reviews, but now shorter terms and break clauses

26. initial returns may be high

27. What is an Investment ?

27.1. Giving up a capital sum now to receive future monetary benefits

27.2. The monetary benefits may consist of :

27.2.1. capital gain

27.2.2. Property (commercial and residential)

27.2.3. income

28. security depends on tenant covenant strength

28.1. Direct investment involves the ownership of a freehold or long leasehold interest in property.

28.1.1. The benefits are the rental income stream and

28.1.2. any capital appreciation to the investor.

29. Limited ability to switch sectors or move in and out of the market

29.1. The equity market returns lead direct real estate returns.

30. property benefits from long term population growth and restricted land supply and

31. Real Estate Investment Direct vs. Indirect

32. Characteristics of Direct Real Estate Investment

32.1. Physical asset:

32.1.1. Depreciate

32.1.2. fixed location

32.1.3. land and buildings

32.2. limits market participation

32.3. Heterogeneous

32.3.1. possible opportunities

32.3.2. each property is unique

32.4. Large lot size

32.4.1. issues of risk spread

32.4.2. excludes small private investors

32.5. For property the income comes in the form of rent ( normally quarterly in advance)

32.6. Indivisible

32.6.1. but property unit trusts are available

32.6.2. limited partnership vehicles are available

32.6.3. Management intensives

32.6.3.1. cost and skill implications

32.6.4. all or nothing

32.7. High trading costs

32.7.1. stamp duty paid

32.7.2. Capital gains tax (not for REITs)

32.7.3. solicitors and surveyors needed

33. Characteristics of Real Estate Investment Market

33.1. No central market place

33.2. Restricted entry

33.3. Illiquid

33.4. No set price to trade

33.5. Imperfect knowledge

33.6. Trading costs are high

33.7. Difficult to construct a measure of market performance

33.8. The market consists of a number of geographical and type sub-markets

34. Advantages vs. Disadvantages

34.1. AD

34.1.1. ability to add value

34.1.2. high yield

34.1.3. stable income stream

34.1.4. physical asset

34.1.5. low corelation with equities

34.2. DISAD

34.2.1. transaction cost

34.2.2. illiquidity

34.2.3. large lot sizes/lack of divisibility

34.2.4. depreciation

34.2.5. value takes time to materialise