1. Management in the Built Environment Lesson 7 – Inherent Relationships

2. Aim of this lecture Understand the relationship between Economy,
construction and the firm/individual
Factors affecting these relationships
Risks involved in Real Estate investments
REIT and how it works

3. Difference between Real Estate, Developer and the Construction Industry
Generally, real estate firms deal in land and finished construction, whether it be commercial or residential.
Developer is usually the owner of the land , may or may not be the building contractor, built with intend to sell / lease.
Generally, a construction firm does not deal in land dealings or buying and selling of "real" assets,
instead they build for clients on the client's property. ... homes to sell through an in-house realtor or external property agents

4. Inherent Relations between Economy, Construction and firm
Global Macro Factors
Government Policies
Construction Industry
Investors (Firm/Individual)

5. Construction Industry Investors (firms/Individual)
Factors affecting the Inherent Relationship
Trade Tariff – import/export of raw material
The sand story
Global Macro Factors
Additional tax on Development Charge/ Stamp duties
Restriction on foreign labor
Government Policies
Availability of resources – labor/land/demand
Technology – safe and fast
Construction Industry
Affordability
Rational Choice
Opportunity Cost
Investors (firms/Individual)

7. REALITY ON GDP VS CONSTRUCTION INDUSTRY

8. Under normal circumstances, construction of economy should go hand in hand with the country’s GDP
What is happening in Singapore ?
What are the macro factors ?
What are the micro factors ?

9. Latest Development in Singapore
Construction Industry and Property Sector
Ministry of Trade and Industry (MTI) on Friday (Jul ) showed the industry shrunk by 4.4 per cent year-on-year in the second quarter, as weakness in private sector construction activities persisted
While this marked the sector’s eighth straight quarter of contraction, the decline eased from the previous quarter’s negative 5.2 per cent
On Jul , Government surprised the industry with the more surprise property curbs.
 Aimed at cooling the market and keeping “price increases in line with economic fundamentals”, the Government hiked the Additional Buyer's Stamp Duty (ABSD) rates and tightened loan-to-value (LTV) limits on residential property purchases
Developers were also slapped with a non-remissible five per cent ABSD when they purchase en bloc properties for redevelopment, alongside a 10-percentage-point increase in the waivable ABSD to 25 per cent

10. CHANGES in ADDITIONAL BUYER’S STAMP DUTY RATES

11. Latest LTV Limits on Housing Loans Granted by Financial Institutions

13. 8 types of Real Estate investors Risk
General Market Risk
Asset-Level Risk
Idiosyncratic Risk
Liquidity Risk
Credit Risk
Replacement Cost Risk
Structural
Risk
Leverage
8 types of Real Estate investors Risk

14. 8 risks of the Real Estate Investors
Investors can’t eliminate market shocks, but they can hedge their bets against booms and busts
diversified portfolio and strategy based on general market conditions.
General Market Risk
risks are shared by every investment in an asset class.
multifamily real estate is considered low-risk and therefore often yields lower returns.
Office buildings are less sensitive to consumer demand than shopping malls, while hotels are seasonal
Asset-Level Risk
Idiosyncratic risk is specific to a particular property.
Entitlement Risk/Environment Risk/Location Risk
Idiosyncratic Risk
Taking into consideration the depth of the market and how one will exit the investment needs to be considered before buying.
How fast can you turn the asset into cash
Liquidity Risk

15. 8 risks of the Real Estate Investors
The length, predictability and stability of the property’s income stream is what drives value.
A property leased to Apple for 30 years will command a much higher price than a multi-tenant office building with similar rents
Credit Risk
if rent can rise high enough to make new construction viable
Enbloc potential – leasehold vs freehold
Potential built up area / additional development charge
Replacement Cost Risk
This has nothing to do with the structure of a building;
it relates to the investment’s financial structure and the rights it provides to individual participants
Structural Risk
The more debt more risky it is and the more investors demand in return.
Leverage is a force multiplier :return on assets is it enough to cover interest payments, cash flow and capital gain
Leverage Risk

16. What is REIT ?
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate held in trust ,with investors (individual/ firm investors) each holding a unit of interest of the group of assets.
REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and timberlands.
Some REITs engage in financing real estate.
REITs can be publicly traded on major exchanges, public but non-listed, or private. The two main types of REITs are equity REITs and mortgage REITs (mREITs).

17. REITs
EQUITY
Responsible for acquiring, managing, building, renovating and selling real estate
. Equity real estate investment trusts' revenues are mainly generated from rental incomes from their real estate holdings.
Equity REITs typically invest in office and industrial, retail, residential, and hotel and resort properties.
MORTGAGE
Generally lend money to real estate buyers or acquiring existing mortgages or mortgage-backed securities (MBS). While equity REITs typically generate their incomes from renting out real estate,
mortgage REITs mainly generate their revenues from the interest that earned on their mortgage loans

18. REIT CYCLE
Investors Pooled fund to purchase properties and/or mortgages
Gestation period of investment
Tax on Investment
Return on investment and distribution to investors

19. REITS in SINGAPORE
Commonly referred to as S-REITs, there are 31 REITs listed on the Singapore Exchange, with the latest REIT, Cromwell European REIT, listed on 30 November 2017.
The first one to be set up being CapitaMall Trust in July They represent a range of property sectors including retail, office, industrial, hospitality and residential.
S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties
Some of the regulations that S-REITs have to adhere to includes:
Maximum gearing ratio of 35%
Annual valuation of its properties
Restriction to certain types of investments the S-REITs can make
Distribution of at least 90% of its taxable income
S-REITs benefit from tax advantaged status where the tax is payable only at the investor level and not at the REITs level. The total market capitalisation of the listed Trust on Singapore Exchange approximate SGD 100 billion (as at 30 Nov 17).

20. Risk with REITs Potential Tax Consequences
Not properly explained to prospective investors.
Income distributions that occur from current or accumulated earnings are usually taxed as ordinary income.
These taxation rates change when the dividends are taxed, which can carry a tax rate of 15-20% depending on income bracket.
Higher risk if the assets are located overseas
Non-Traded REITs Can Have Inconsistent Value
Many REITs are not publically traded,
Inconsistency in valuation of property and market value
Restrictions & Excessive Costs Regarding Early Redemption
Potential hidden terms within REIT investments where there is a limit on the number of shares that can be redeemed prior to liquidation.
Excessive fees might be charged.

21. Risk with REITs Excessive Fees
Expensive and excessive Management fees.
Fees can occur related to selling compensation and expenses along with “issuer costs,” which are also paid from the proceeds of the initial offering.
Unspecified Properties
Full portfolio of an REIT might not have specified properties.
When this happens, investors have an enormous risk because they are not guaranteed reliable investment properties.
Look at the percentage of the REIT that has specified properties to determine whether the investment is worthwhile.
Lack of Diversification
REITs can lead to lack of diversification in portfolios.eg too much investment in hotel subjected to seasonal demand

22. Key takeaways in Lesson 7
What are the keys words that you have learnt in this lesson
Under what circumstances would you investment directly in real estate and or REITS ?