Chapter 1 The Nature of Real Estate and Real Estate Markets Real Estate FIN 331

“Real estate is the single largest component of wealth in the global economy. The importance of real estate is highlighted in terms of its roles in the global and domestic economies, as well as its prominence in the investment portfolios of U.S. households.” [Ling & Archer, Real Estate 4 th ed]

Chapter 1 General Concepts

Wall Street: Money Never Sleeps Gecko’s talk on Financial Crisis

THE GREAT REAL ESTATE VALUE MELT- DOWN

HOMEWORK ASSIGNMENT A.Important Key terms: Real Estate, Capital Markets, User Markets, Property Markets, Capitalization Rates, Tangible & Intangible Assets, Real Property B.Study Questions: 1, 3, 4, 5, 7

Real estate as an industry and profession  Brokerage  Development  Leasing  Property management  Asset management  Real Estate Law  Appraisal  Market consulting  Counseling  Planning  Government regulation and taxation  Housing assistance  Mortgage finance  Construction finance  Long-term finance  Investment management

Land Use in the United States: 2007

Aggregate Market Values of Selected Asset Categories: 2011

U.S. Household Wealth: 2011

User Market A. Market for the physical real estate B. “Buyers” receive right to use space 1. Called the “space” market or “rental market” C. Where rental rates are determined D. These markets are very “local” and usually highly competitive E. Separate local markets for various property types: retail, office, industrial, etc.

Capital Markets A.RE competes for funds in capital market with other asset classes, such as stocks and bonds B.Investors select a mix of investments based on expected returns & risk C.Bidding by investors determines: 1. risk free rates of various maturities (i.e., the Treasury “yield” curve) 2.required risk premiums for risky investments

Public Capital Markets A. Small homogeneous units (shares) of ownership in assets trade in public exchanges B. Many buyers and sellers C. Price quotes available for all to see D. Characterized by a high degree of liquidity E. Informationally efficient

Private Capital/Property Markets A.Absence of centralized market (or even price lists) B.Assets trade infrequently in private transactions (thus a lack of transparency) C.Common for “whole” assets to be traded in a single transaction (indivisibility) D.Less liquidity than public markets E.Higher transaction costs

Property (Asset) Market A. Market for ownership claims to RE assets B. Buyers/owners receive rights to cash flows generated by leasing space to tenants C. Demand (supply) side of property market is made up of investors wanting to buy (sell) property D. Property market is integrated, not segmented like space market 1. i.e., investment capital can come from anywhere