100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Real Estate Finance and Investment Lecture summary $7.23   Add to cart

Class notes

Real Estate Finance and Investment Lecture summary

 27 views  3 purchases
  • Course
  • Institution

This is an extensive summary about all lectures given in the course Real Estate Finance and Investments

Preview 4 out of 77  pages

  • March 26, 2023
  • 77
  • 2022/2023
  • Class notes
  • J. rouwendal
  • All classes
avatar-seller
Final Summary Real Estate Finance and Investments

Lecture 1 – Intro

Most important aspects real estate
- Note that the value of a building is not only the structure but also the land
underneath it
- Location
▪ The characteristics of the location affect the value of the building
▪ That value is capitalized in the price
▪ Examples
o Walking score
o Shops/ restaurants near by
o Access to transportation
o Etcetera
▪ 50% of the house price per square meter could be attributed to
neighborhood characteristics
- Durability
▪ Many buildings were constructed a long time ago
o 17th century canal houses are still very expensive
▪ Modern buildings look very different
▪ In the course of their lifetime, the function of buildings may change
o Large residences are converted into apartments
o Warehouses are transformed into apartments

Lecture Wheaton & Torto – Office rents

Why do we construct price indices?
- To get a summary statement of market conditions
▪ Changes in ‘the’ price for owner-occupied housing are published regularly
and get a lot of attention

Repeat-sales analysis
- Compare the prices of houses that have been sold twice
▪ Characteristics are (mostly) identical
- They cancel out
▪ Unobserved characteristics are not a problem!
▪ ∆𝑙𝑛𝑃𝑖 = 𝑙𝑛𝑃𝑖𝑡 − 𝑙𝑛𝑃𝑖𝜏 = 𝛼𝑡 − 𝛼𝜏 + ∑𝑘 𝛽𝑘 𝑋𝑘𝑖 − ∑𝑘 𝛽𝑘 𝑋𝑘𝑖

Hedonic price analysis
- Purpose: measure a constant-quality price index
▪ Prices of real estate (= value of buildings) have a price component and a
quality component
▪ The state of the market is reflected in the price component
▪ So, we want to measure the value or price conditional upon quality
- Methodology:

, ▪ OLS with dummies for geographical market and/or time period and quality
aspects
- The coefficients of the quality components can be interpreted as the marginal
willingness to pay for them by market participants
▪ They can be used to make references more comparable to an object under
consideration
- The specifications we consider impose that buildings with any given set of
characteristics have the same evolution of their price:
▪ With a linear specification: the same absolute change
▪ With a log-linear specification: the same relative change

Estimation
- Hedonic price estimation strategy:
▪ 𝑃𝑖 = 𝛼𝑚(𝑖),𝑡(𝑖) + ∑𝑘 𝛽𝑘 𝑋𝑘𝑖 (𝑙𝑖𝑛𝑒𝑎𝑟)
- Log of LHS is generally taken:
▪ 𝑙𝑛𝑃𝑖 = 𝛼𝑚(𝑖),𝑡(𝑖) + ∑𝑘 𝛽𝑘 𝑋𝑘𝑖 (𝑙𝑜𝑔 − 𝑙𝑖𝑛𝑒𝑎𝑟)
▪ The price index is:
o exp (𝛼𝑚(𝑖),𝑡(𝑖) )
- quality differences are absorbed by the 𝛽𝑘 s

Wheaton-Torto analysis
- Price/sqm is the dependent variable
- Characteristics of the lease contract are the explanatory variables
- If the market is competitive:
▪ Price differences reflect the value of characteristics
▪ Renters compare the various buildings and choose the one that suits them
best on the basis of price and characteristics
▪ The trade-offs they make are reflected in the estimates
- Example
▪ Gross vs net lease
▪ Taxes passed through or not

Average and hedonic rents
- Hedonic rents differ from average or median prices because they control for quality
differences
▪ A hedonic price index is an attempt to describe the development over time of
a building of constant quality
- If in a particular period more high-quality buildings are sold/rented this is reflected in
the average rent
▪ But the higher rent does not reflect a higher price, but a higher quality

Housing versus commercial real estate
- For houses often many characteristics are known
▪ For instance, in NVM data
- For commercial property this is typically not the case
▪ Although the general impression is that heterogeneity is as important in
commercial real estate

, ▪ Concern about omitted variables is therefore real
- For housing many more observations than for commercial real estate

Dutch commercial real estate
- Index based on transaction information collected by real estate agents
- For some years the only index available in the Netherlands
- Separate series for retail, offices, industrial
- Since the euro crisis prices of commercial real estate appear to lag behind those of
residential real estate

Hedonic price functions and references
- Hedonic price analysis is (more or less) an academic activity
▪ Abstract analysis, based on large numbers of observations, often with
considerable differences
- Real estate agents use references to estimate the value of a building
▪ Specific buildings, small number of observations, selected because of
similarity
- Approaches can be combined
▪ For instance, one can use coefficients of hedonic price equation to make
references more comparable to the building under consideration

Discussion
- Prices reveal a lot of useful information about the functioning of real estate markets
- Price, absorption, and vacancies are not independent variables
▪ Are simultaneously determined by the market
▪ Endogeneity is a potential problem

Lecture 2 – Chapter 5 & 6

Real estate valuation
- What determines the willingness to pay (reservation price) of an investor?
▪ The investor is a profit maximizer
▪ (Net) revenues from the property are important
▪ These revenues originate from the users
- Net present value is the difference between the willingness to pay and the asking
price
- Separation of ownership and use is common in real estate
▪ Associated with durability
▪ Note the difference in time horizon of users and owners

Discounted cash flow (DCF) approach
- Buying an asset means exchange of present good for future good:
▪ Present good
o The price you pay today
▪ Future good
o Cash flow you expect to earn
o It calls for forward-looking behavior

, • Expectations are important
• Uncertainty is key aspect, but not always made explicit!
- Note, this is directly related to the durability of real estate

The basic valuation formula
- Formula to determine the price of asset:
𝐶𝐹𝑡
▪ 𝑃0 = ∑𝑇𝑡=1 𝑡
(1+𝑟)
▪ 𝑃0 = the price of the asset
o i.e., the present good
o what you are willing to pay now
▪ 𝐶𝐹𝑡 = the (net) cash flow expected in period t
o i.e., the future good
▪ 𝑇 = the time horizon
▪ 𝑟 = the discount rate
o Required return, reflect the uncertainty associated with the project

Simple application
- You are expected to get familiar with the basic valuation formula
- E.g., how would you calculate the price if we suppose a five-year term?
𝐶𝐹1 𝐶𝐹2 𝐶𝐹3 𝐶𝐹4 𝐶𝐹5
▪ 𝑃0 = (1+𝑟) 1 + (1+𝑟)2 + (1+𝑟) 3 + (1+𝑟) 4 + (1+𝑟) 5

An important special case
- If cash flows are constant over time and continue indefinitely:
𝐶𝐹𝑡 𝐶𝐹
▪ 𝑃0 = ∑∞ 𝑡=1 (1+𝑟)𝑡 = 𝑟

▪ Note that there is no suffix for CF
- This gives a (very) simple relationship between price (=value) and annual return:
▪ The value of the building equals (1/r) times the yield
- The yield CF/𝑃0 is equal to the capitalization rate r
▪ Often used with the initial cash flow
▪ Net or gross initial yield

Capitalization rate (or cap rate)
- The expected rate of return on a real estate investment property
- It is used in the world of commercial real estate to indicate the rate of return that is
expected to be generated on a real estate investment property
- It is calculated by:
𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
▪ 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑟 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒

- This ratio, expressed as a percentage, is an estimation of an investor’s potential
return on a real estate investment
- It is most useful as a quick comparison of the relative value of similar real estate
investments

A finite sum
𝐶𝐹𝑡
- 𝑃0 = ∑𝑇𝑡=1 (1+𝑟) 𝑡 = a finite sum

- Can be interpreted as the difference between two infinite sums

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller Neeson. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $7.23. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

72042 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$7.23  3x  sold
  • (0)
  Add to cart