1. ECONOMY FOR REAL ESTATE (BPE 33902)
Prepared By:-
Sr Norjariah binti Arif,
Department of Real Estate Management,
FPTP, UTHM.

2. AN INTRODUCTION TO REAL ESTATE
CHAPTER 1
AN INTRODUCTION TO REAL ESTATE

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:
a factor of production
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.

8. Example Rent paid/received RM50 000 annually Required Yield 5%
Therefore CV of the property:
RM x 20 = RM

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 Real estate market
The economy

12. Model of Real Estate Market
Property Stock
Letting sector
Economic Factors

13. London Office Market Cycle 1986-93
Causes:
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 sub-lessee/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 RM per annum. In 2010, J sub-let the property to K for 10 years at a rent of RM If let now, the property could attract a rent of RM
Discuss

24. NOTES
The freeholder
The head tenant
The sub-tenant
Value the three legal interests

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

26. THANK YOU
THANK YOU