Direct Real Estate Investment

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

1. Illiquid

1.1. lengthy marketing period

2. lengthy transaction period

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

4. consider impact of surplus vacant property

4.1. generally inelastic supply

5. fixed in the short term

6. Planning law

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

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

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

9.1. Dividend

9.2. Changes in share price

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

11. Core investment types

11.1. office

11.2. industrial

11.3. retail

12. full management control

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

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

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

16. initial returns may be high

17. 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.

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

18. one of many Investment Assets

18.1. Equities

18.2. Bonds

18.3. Gilt edged securities (gilts)

18.4. Gold

18.5. Cash

18.6. Currencies

18.7. Paper derivatives

18.8. Works of art

19. security depends on tenant covenant strength

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

19.1.1. The benefits are the rental income stream and

19.1.2. any capital appreciation to the investor.

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

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

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

22. Do valuations accurately reflect traded prices?

23. What is an Investment ?

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

23.2. The monetary benefits may consist of :

23.2.1. capital gain

23.2.2. Property (commercial and residential)

23.2.3. income

24. Real Estate Investment Types

24.1. Agricultural

24.2. Leisure:

24.2.1. hotels,

24.2.2. cinemas,

24.2.3. pubs,

24.2.4. restaurants,

24.2.5. nightclubs,

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

25. Real Estate Investment Direct vs. Indirect

26. Characteristics of Direct Real Estate Investment

26.1. Physical asset:

26.1.1. Depreciate

26.1.2. fixed location

26.1.3. land and buildings

26.2. limits market participation

26.3. Heterogeneous

26.3.1. possible opportunities

26.3.2. each property is unique

26.4. Large lot size

26.4.1. issues of risk spread

26.4.2. excludes small private investors

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

26.6. Indivisible

26.6.1. but property unit trusts are available

26.6.2. limited partnership vehicles are available

26.6.3. Management intensives cost and skill implications

26.6.4. all or nothing

26.7. High trading costs

26.7.1. stamp duty paid

26.7.2. Capital gains tax (not for REITs)

26.7.3. solicitors and surveyors needed

27. Characteristics of Direct Property Investment

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

27.1.1. fixed for five years

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

27.3. Taxation

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

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

27.5. Statutory control - e.g. fire regulations

28. Characteristics of Real Estate Investment

28.1. Supply

28.2. Demand

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

29. Real Estate Market

29.1. User market (demand)

29.2. Financial asset (financial market)

29.3. Development market (supply)

30. Characteristics of Real Estate Investment Market

30.1. No central market place

30.2. Restricted entry

30.3. Illiquid

30.4. No set price to trade

30.5. Imperfect knowledge

30.6. Trading costs are high

30.7. Difficult to construct a measure of market performance

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

31. Investment Return

31.1. Value of a building

31.1.1. Pt=It/Kt P: the price or value of a building I: the net income derived from letting the building K: capitalisation rate* considerations make up the capitalization rate: t: in any period

31.2. rate of return

31.2.1. r=(P1-P0+a1)/P0 r=rate of return P1 =the price at the end of period 1 P0 = the price at the end of period of 0. α1 =the income received during the holding period

31.3. Investors are concerned with their total returns

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

31.5. It is generally expressed as a % per annum

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

32. Advantages vs. Disadvantages

32.1. AD

32.1.1. ability to add value

32.1.2. high yield

32.1.3. stable income stream

32.1.4. physical asset

32.1.5. low corelation with equities

32.2. DISAD

32.2.1. transaction cost

32.2.2. illiquidity

32.2.3. large lot sizes/lack of divisibility

32.2.4. depreciation

32.2.5. value takes time to materialise

33. investors get vs want

33.1. want

33.1.1. Over-reliance on the UK Concentration on 3 sectors

33.1.2. Predicable/stable income oriented returns

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

33.1.4. Some liquidity options (rightly or wrongly)

33.1.5. Skilful asset management

33.1.6. Value for money

33.2. get

33.2.1. Too benchmark focused

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

33.2.3. Fees not always properly structured

34. summary

34.1. Real estate is a major investment market.

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

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