3. OBJECTIVES
Give an overview of the real estate market and its
relationship with the overall economy
Explain how real estate markets are always a
collection of sub-markets.
Outline how the three principal sectors of the market
are inter related
4. REAL ESTATE CYCLES
“ buying real estate is not only the best way, the
quickest way and the safest way but the only
way to become wealthy”
because
the common view that investment in real estate is
financially secured
5. Booms and crashes were characterised by:
Deregulation of the financial markets
Large surge in bank lending to real estate
Relaxation of development control
Unsustainable economic activity
Rapidly rising interest rates
A plunge into recession
Widespread company failures
6. Point: the cycle was a result of political
decisions, regulatory change and
oconomic events, none of which had any
obvious link with the real estate market.
Real estate is an integral part of the nation’s
economy: anything which has implications
for the economy will have implications for
real estate.
7. REAL ESTATE AND THE ECONOMY
Two functions of real estate eg commercial properties
such as shops, offices and factories:
1.
a factor of production
2.
an investment
Value of commercial real estate reflects both of these
functions. The cv is a multiple of the net annual rent
paid by the tenant. The level of rent depends on the
value of the property to the tenant for business
purposes. The multiple reflects the value of the rent to
the investor and may be ten or even twenty times the
annual rent.
9. The three real estate market sectors:
Letting(often called the rental or space market)
the level of rents depends on the level of demand
from tenants to occupy real estate
Investment (often called the capital market)
capital prices are determined by demand from real
estate investors.
Development
Both rents and capital prices are also influenced by
the ss of new real estate produced in the
development sector of the market
10. Sub-sector:
Type of use
Location
Land size
Building size
Quality
The real estate market in any country is the
amalgamation of these market sub-sectors.
Exercise: consider your own locality. What real
estate markets are represented there? Try to
identify some of the sub-markets within it.
11. A Model of the Real Estate Market
Rental and capital values are set by the forces of
demand and supply
Forces are determined by local economic
conditions: which are influenced by regional,
national and international economies
Property stock .
The economy
Real estate market
12. Model of Real Estate Market
Property
Stock
Letting
sector
Economic
Factors
13. London Office Market Cycle 1986-93
Causes:
1.
2.
3.
4.
the deregulation of the London stock market
The information technology revolution
The debt crisis in developing countries
The abolition of foreign exchange controls in
Britain
14. The deregulation of the stock market
Known as the Big Bang. Single firms were allowed
to act as both brokers and dealers in stock market,
resulted the creation of large conglomerates.
Face to face dealing
dealing through
computers and telephones
Boom in the financial services,
demand for
office space in terms of unit size and amount of floor
space, boosting the rental value of modern offices
15. The information technology revolution
Widespread introduction of computers
changed the requirements for the internal
design and structure of office buildings
Obsolescence of existing offices
Increase the profitability of development,
promote increase in office redevelopment
16. The debt crisis in developing countries
Forced international bank to seek new
outlets for their lending. This resulted an
enormous increase in loan to real estate
developers - development boom
17. Abolition of foreign exchange controls
Money could flow freely in and out of
Britain, since 1930
Control of money supply and management
of national economy
Combined effect of deregulation and
abolition caused huge lendind
Economic boom and a boom in property
values as business required more floor
space
18. Continuation…
Major investors favour overseas
investment
Development financed by banks and could
not be sold on completion
Development companies unstable and
vulnerable
Real estate values started to tumble as the
economy sank into recession
19. Interest in Real Estate
Real estate comprises:
Land
Buildings (and fixtures attached to land)
The goods traded in the market are not
physical units of land and buildings. They
are the legal rights over land and
buildings.
20. Legal Rights in Real Estate
Freehold - perpetual right to use or dispose of
the land as she wishes, subject to statute
Leasehold – right to posses and use the
property for a specific period, subject to the
payment of rent
Sub-lease – lessee conferring the occupation
right to another tenant. The first called Head
lessee/head tenant and occupier as sublessee/sub-tenant
21. Continuation…
The value of property interests depends
crucially on the conditions to which the are
subject. Value of freehold interest in a let
property depends on:
rent payable by the tenant
the duration of the lease remaining
22. Continuation…
The value of the Head Tenant interest:
-the duration of both the head lease
and the sub-lease
-the rent paid to the freeholder
-the rent received from the sub-tenant
23. Example
A freeholder, H, let a retail property to J in 2005 for
15 years at a rent of RM50 000 per annum. In 2010,
J sub-let the property to K for 10 years at a rent of
RM60 000. If let now, the property could attract a
rent of RM70 000.
Discuss
25. Investment and Occupation interest
Investment interest
- a freehold interest
- a head tenant’s interest
Occupation interest
- valuable when paying a rent below rental
value
- no value if the tenant is paying at rental
value
