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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