RE2704 Official summary along with case studies PDF

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Lecture1: What is real estate? - Real estate as space and asset - The 3 dimensions of real estate - Significance of real estate - Characteristics of real estate - Real estate markets - Real estate industry What is valuation? - Terminologies - Significance of valuationWhat is real estate (1) - It is ...

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Lecture1: What is real estate? - Real estate as space and asset - The 3 dimensions of real estate - Significance of real estate - Characteristics of real estate - Real estate markets - Real estate industry What is valuation? - Terminologies - Significance of valuation What is real estate (1) - It is a unique asset class. - Physical, Economic and legal dimension of real estate - Real estate Market What is real estate (2) - It is the basis of wealth, heritage of the wise - Handed down to children as thing of the greatest worth. - It’s worth always increases Real Estate is about space - It is all “under land” - Real estate is about the provision of space that is required by people. - Physical dimensions of real estate is the most obvious- hence taken for granted. - Real Estate cover all land and buildings, including infrastructures What is the legal definition of space? - It is a column of spaces that stretches from the bowels of land to the heaven above – subjected to 30m, below and height restrictions Real estate as space as well as assets - Real estate is a shelter for human needs - Real estate is a space for economic activities such as agriculture, manufacturing, trading and administration - Real estate uses are increasingly needed as humans needs increase and diversify such as recreation, data centers However, not all users of real estate own their own spaces, creating an investment market for real estate such as REITS. -> furthermore, there has been new trends in co-working Importance of real estate - Real estate is important for any city. - Real estate development is one of the first main areas of activities in a growing country. - Real estate amounts can be measured by: volume of space, value of property or value of investment in fixed assets.

SG gross Fixed Capital formation

Real estate uses 3 categories 1) Built up – Residential, office, retail and factories 2) Non- Built up – Vacant land, agriculture and foster, plantation 3) Specialized – hotels, schools, religious 4) Others- infrastructure roads and rails Real estate and real estate value - Real estate has no value as a physical space unless it possesses the other characteristics of value utility demand, scarcity and transferability. - Utility is the ‘usefulness’ of real estate - Demand and scarcity provide the economic dimensions for real state – people are willing to pay for economic reasons and supply is always limited - Transferability is the legal dimension- it does not have value unless it is legally recognized and transferable Legal Dimension - Fundamental as it governs the rights and laws, concerning its use and development Ownership rights - Tenure, lease, easements, licenses State land vs private - Strata-titles, air and subterranean rights ownership Power of eminent - Compulsory acquisition such as road widening domain Planning and land use - Zoning, Density and various terms and conditions Financial regulations - Taxes Physical Dimension - The physical space is the most obvious and yet taken for granted the most Physical site and building as an integrate - Valuation is based on the parcel of interest parcel -> check legal rights - The significance of construction Physical dimension is about the site and building Physical dimension is about the location, - Reflects about the past terrain, shape and size - Gives the different standards, sense of size Physical dimension is defined by measurement

Economic Dimension - Economic dimension can be summed up by understanding demand and supply Urban economics - Understanding of the demand and supply in an urban setting Understanding economics - Fundamental to real estate valuation of the real estate market What are the characteristics of real estate?

Real Estate investment Advantages Security of income Security of Capital Hedge against inflation Capital appreciation Financial leverage Estate building through refinancing Pride of ownership Owner’s use and enjoyment

Disadvantages High capital costs High transition costs Lack of liquidity Burden of management and maintenance Subject to legal complexities and constraints

Real Estate Market (1) Concepts of marketplace

Functions of market

Characteristics of real estate market

- Exchange economy - Link between buyers and sellers - On-line - Allocation of scarce resource - Dissemination of information, price and rents Importance: We need to know this as it is important for a valuer to interpret market’s viewpoint - No central market - Information inefficiency - Imperfect competition

Real Estate Market (2) - Types of properties - Property features - Market area (location) - Substitute properties - Complementary properties - Special properties - Mixed use developments

Real estate Market (3) Characteristics of real estate market Market information efficiency

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Likely to be semi-strong efficient- prices reflect all public information

Stratified supply and demand Inelastic supply Volatile demand Real Estate supply and demand Factors affecting demand - Political and institutional factors - Social factors - Economic factors Real estate Cycles & Real estate market systems

Institutions in real estate Government, Ministries and Agencies National development URA, HDB, NPB, BCA Finance IRA Environment NEA, PUB Law SLA – state land authority Trade & Industry JTC, STB, ECB Professions involved in Real estate - Architects - Planners - Surveyor’s - Engineers - QS - PM - Property and facility managers - Valuers/appraisers

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Factors affecting demand Supply of vacant and redevelopable land Economic factors including interest rates Construction technology

An Eco system for RE professionals

What is valuation? - The art and science of estimating different types of value pertaining to an interest I real estate at a specific time - Valuation is science because it needs scientific information about the property: GFA, method of construction] - Valuation is art as it is ultimate an estimate/ opinion of an individual- it cannot be a finite number - Valuation requires an understanding of the market -> thus valuation is local Terminologies of valuation - Valuation = Process of arriving at the value - Valuer = person undertaking the valuation - Value = Carry out process - Market value = Capital value -> most common objective - Measurement is commonly = per sq f Significance of Valuation - Valuation underpins all activities in real estate market. - Valuation is required by all stakeholders at some point in time - Valuation is required by all properties at some point in time through its life cycle. - Valuation is required in both public and private sectors. - Real estate valuation is a professional discipline + academic domain

RE2704 Lecture 2 (most important lecture) Objectives 1. Definition of Value 2. Concepts of Value 3. Determinants of Value 4. Examine the differences between Cost, Price and Value 5. Establishment of Price and Market Value

Definition of Value 1) Relates to something that people want 2) Value implies capacity to satisfy wants What do things need to have economic value? (Read the reading) SUMMER  Characteristics of utility, scarcity. Desire and effective demand  Intrinsic and extrinsic value characteristics: INTRINSIC Intrinsic refers to characteristics which are inherent in the thing itself. (natural and physical) (Summer Transfer Window)

EXTRINSIC Extrinsic refers to the characteristics which are ascribed to the thing itself. (market value) – created in the minds of the people who constitute the market.

EG: Diamond has Intrinsic value as it is a metal and is useful Land has Intrinsic value as it has minerals

EG: Land has Extrinsic value from market demand such as conservation properties.

Concepts of Value Factors that interact to create economic Value Factors that interact – reflected by supply and demand of a good  Utility  Scarcity  Effective Purchasing Demand Determinants of Real Estate Value  Value as function of intrinsic and extrinsic factors. Extrinsic Intrinsic Physical (location) – proximity Economic (mainly extrinsic) Political and Legal (URA wants to do a change of use, it could revalue the whole land) Environmental and Physical Social Most of these factors are dynamic, formed over a period of time (depends on history and location) Article: Dover Forest to be demolished and condos to be built

1) Impact of Economic Factors Supply and Demand – the relationship between current and anticipated supply and effective demand.    

Wages stagnate ----residential will be affected. Availability of mortgage facilities- interest rate movements Construction costs Forecast of economic growth

2) Impact of Social Factors – gestation period a) Population characteristics, Demographics  Composition by age and gender  Rate of household size and dissolution  Lifestyle options – Co-living Space b) Historical, Cultural and Social Beliefs and Norms  Historical Events  Geomancy and Customs – certain numbers are more lucky  Numerology and superstitions There is a need to do a market analysis to know the market value. 3) Political and Legislative Factors  Governance and Political Stability  Rule of Law  Provision of Public Services  Land Use Policies - Type of Use and Intensity (Our plot ratio/density has gone higher)  Property-Specific Policies (Read Mansion tax in NY and Rent Freeze in Berlin)  Land Acquisition  Abolition of Land Control 4) Impact of Physical and Environmental Factors a) Physical Factors  Site Location (Location no longer key to success)  Accessibility  Proximity to positive and negative externalities  Other physical attributes (Manhattan view worth US$11 million) b) Environmental Factors (SG likely to suffer from climate changes)  Natural Floods  Man-made, proximity to dis-amenities, negative externalities

Summary: Real Estate does Possess Value Real Estate has Characteristics the defines its value.

These Characteristics are intrinsic and extrinsic

What is the basis of valuation? Look at Summary What is intrinsic and extrinsic value?

Since it has value due to its characteristics, we need to understand the value

What are the main concepts of different concepts of real estate value? Different/Multi-faceted Concepts of Real Estate Value Utility

Definition: usefulness of a product/service from the user’s point of view In answering his needs or specific purpose. Real Estate provides Shelter (part of physiological needs) To differentiate utility from other forms, use VALUE IN USE (usefulness of things) Definition: Estimated worth an individual puts on a thing  

Subjective Value

maybe solely influenced by sentimental factors Maybe solely influenced by market-orientated Maybe both Market value is a product of subjective values (relate to subsequent investment values) Definition: Present Worth of anticipated future. Benefits (rental) accruing during the intending holding period    

Investment Value

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Based on specific requirements of the individual and Set of information & Expectations IV is subjective (to investor) thus IV and MV are different

However, if you are buying for an investment it may be higher than what you need to pay. Everyone one of us can be an investor in a sense where we have our own investment value according to our own expectations. Every investor is different and the IV is subjective. That why when we do an investment analysis of investment value, it depends on who asked you to do it. There will be a difference between your investor who has very high income and pay a lot of tax and compared to someone with lower income tax. Investment value to any people is unique. Reservation IV is deemed as RP. Price SELLER IV is the minimum price he is prepared to sell.

BUYER IV is the maximum price he is prepared to pay for property interest.

A rational buyer offer lowest price and seller will ask for highest price

Value in Exchange

INVESTMENT VALUE IS NOT THE MARKET VALE OF AN INVESTMENT PROPETY. Definition: The essential worth that something has on the market fixed by the current price of the goods or services that may be actually bought or sold.

Definition: The necessary quantity to exchange that thing on the market for something else Barter as a form of exchange in the past. 

  

The pandemic has made many countries resorted to this barter trading system. As market is not functioning properly, they are exchanging for other stuffs instead of monetary. The value in exchange occurs when buyer and seller are in an agreement. Exchange represents transaction. Transaction price refers to what was agreed during an exchange.

Example For a transaction to take place between these two parties, SELLER Motivations for divesting her property interest – private information

BUYER Motivations for buying (private information)

Information Set (Public as well as Private)

Information Set (Public and Private)

Expectations of Market

Expectations about the market

Competition from other sellers

Competition from other buyers

Formulae Reserve Price: IV (The lowest flooring cell she is prepared to ACCEPT).

Formulate Reserve Price IV (The highest or ceiling price he is prepared to OFFER)

ESTIMATE OMV (open Market Value): The price she will is likely to achieve.

ESTIMATE OMV: The price she is likely going to pay for the property

If her IV < =OMV, it is FEASIBLE

If her IV> = OMV, it is FEASIBLE

FLOW CHART OF WHY WE NEED To understand how IV influence information 1)Valuation of Price Relies on Empirical Evidence (rents and Prices) 2)Rents and Prices are influenced by IV 3) IV are influenced by player’s information sets and their expectations of future.

DIFFERENCE Between Value and Price A property that has been transacted has many values depending on who is going to buy it. But there is only 1 transacted price. Concept of Price  Many Values but one Price  Price is Factual but value has diverse meanings. Concept of Value  Value in Use (subjective)  Value in Exchange (Objective) – derived from the market which is also transacted price What is the meaning of valuation?  Valuation is an estimate of value that fixes of price.  It is basically finding out what is the transacted price. It is created by buyers and sellers who cause a synthesis of forces of supply and demand.  It is the prediction of the most probable selling price. It is considered Bona Fide when it has been assumed to have sufficient exposure in a free, open competitive market

She wishes SG to be mature “Mr S Rajaratnam, once said that Singaporeans were in danger of becoming a people who knew the price of everything and the value of nothing” Singapore has 3 assets: a strategic location, natural harbour and intelligent/hardworking people

DISTINCTION BETWEEN price, cost and Market Value

PRICE  Offer Price (buyer)  Asking Price (Seller)  Transacted Price – Actual price paid

COST  Amount required to create or produce the good/service

MARKET VALUE  An economic concept  Not a Fact but Estimate Worth of a property based on our interest at a given time  Reflects a market view of the benefits that accrues from owning the property interest

#Fair value is not the same as Market value. Fair value is only fair to restricted parties. Means you are a board of directors you are declaring a fair value to your board of directors and not the whole universe # it is not always lower than the market Establishment of market price talks about how buyers and sellers come together  Information sets can change and IV will change too  Different individuals may have different values as they change according the circumstances and needs.  An individual may have more information  An individual may have change in the circumstances, and he will take changes in decision making process.  Property market is composed of whole range of subjective valuations which regularly changes  Buyers and sellers combine and interact to give a transaction price

Question: 1) Main difference in Price and Difference what is the difference between Price and Value a) Price is a fact and value is a concept. b) Price is historical and value is about future. c) Price is negotiated and Value is estimated d) Price is an outcome of value estimations. e) None of Above  

A C and D are all arguable A is most likely correct. B is definitely wrong

2) The main difference between Intrinsic and extrinsic value concept is a) Intrinsic can be measured while extrinsic needs to be analyzed b) Intrinsic cannot be measured while extrinsic can c) Intrinsic is more important than extrinsic. d) Intrinsic applies to only natura things while extrinsic applies to all  A

3) a) b) c) d) e) 

Which of the following concepts of value is the least important to valuation? Investment value Exchange value Utility Value Fair value Sentimental value E

LOCATION NO LONGER KEY TO CORPORATE BANKING SUCCESS: STUDY Location used to be the most important reason for ROE divergence. But now it is the nimbleness in cross-selling and loan pricing which is worth much more. A McKinsey study reported that there is A ROE gap of more than 15 percent between top and bottom performers across regions. Even though ROE for global corporate banking has increased from 5% to 9% (2009 to 2016), there is still worries. 1) A cyclical economic reversal could bring about normalization of risk costs 2) Bank face on going regulatory requirements to set aside more capital to comply with strict liquidity and funding rules The Ability to cross sell effectively accounted for the large difference in revenue between banks. Lower income costs and accounted for the stronger productivity and coordination by bankers 

Banks from developing countries in Asia experienced 12 % revenue expansion between 2009 to 2016

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Banks from Western Europe and North America experienced flat revenue expansion

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Banks in developed countries from financial crisis have cut back o risk assets and lightened up on costs to be in game.

In order to achieve healthy ROE, new revenue sources must be injected into traditional corporate banking models. Cutting costs by Shrinking franchise will not help. Innovation is key for the corporate banks.

BERLINE RENT FREEZE GIVES REAL ESTATE INVESTORS COLD FEET Berlin is deciding to freeze rents for 5 years. Noted bank such as Deutsche Women has experienced a quarter drop in its shares afer the announcing its intention to rein landlords. Berlin used to be a city known for its ultra-low living costs. But a property boom drove up rents by 50% in rents in 2011. As asset values are soaring around the world (even though incomes stagnate), policies are shifing from taxing over overseas buyers to cap rents. The consequences of this policy are still unclear but could face legal challenge.

In response to the measures,  Investors are reducing our investments even though Berlin is their home market as these measures will not help average renters at all. 

German biggest landlord is urging the government to use the measures as an opportunity to find long term solutions to its housing crisis.

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Portfolio managers are advising not to invest in Berlin real estate companies in light of the political climate even though Berlin rents are still cheap.

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Senior Analyst are positive that despite of the measures, German cities will still be able to attract investors as other European cities such as Barcelona are taking steps to control rents.

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