Real Estate Finance and Investments: Lecture 2

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Real Estate Finance and Investments Lecture 2

• Investment Strategy and Market Efficiency

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Demand

• Relationship between market price and the
  quantity of a good or service that will be bought
  per time period, over the entire range of
  possible prices
• For real estate assets, demand is inversely
  related to their price

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Demand Curve
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Determinants of Demand

• Shift in demandthe entire range of relationships
  between price and quantity demanded changes.
  Among determinants of location and shape of
  demand curves for real estate assets, and of
  changes in demand are
• Number of prospective tenants
• Changes in operating expenses
• Yields available on other assets
• Technology
• Tastes

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Shifts in Demand Curve
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Example Shifts in Demand Curve

• Demand schedule for downtown office space
• Price changes alter quantity demanded
• Decline in after-tax cash flow
• Market areas become relatively more desirable,
  drop bidding for downtown property
• Less downtown space purchased at each possible
  price per square foot

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Shifts in Demand Curve
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Supply

• Relative Scarcity
• Property in abundance commands no substantial
  value
• Supply is defined as the relationship between
  price and the quantity of a product suppliers
  place on the market during a specified time
  period, for all possible prices

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Supply

• Supply function differs as specified time period
  is lengthened or shortened
• Short runvariations in the supply of real estate
  placed on the market are an individuals
  perceptions of the relationship between market
  value and investment value
• Long runthe supply curve of real estate is
  influenced by cost of construction

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Supply

• Quantity supplied refers to amount of product
  that will be placed on the market per period of
  time at a specified price
• Supply the relationship between price and
  quantity supplied over the entire range of
  possible prices

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Equilibrium Price

• Price at which there will be sufficient quantity
  of a product to satisfy desires of all consumers
  at that price, but with no surplus remaining on
  the market. Quantity demanded and quantity
  supplied meet at the point where the supply and
  demand functions intersect.

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Market Efficiency and Profit Opportunities

• Markets institutional arrangements or mechanisms
  whereby buyers and sellers are brought into
  contact with each other. There are not
  necessarily physical entities or geographical
  location

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Defining a Market

• Marketscommonality of product
• Owner-occupant market
• Renter-occupant market
• Multifamily investment
• Nonresidential market

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Markets Within Markets
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Cities, Counties, Metropolitan Areas
County
Metropolitan Area

Central Business District
Central City
Smaller Cities
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Atlanta Metropolitan Area
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Market Structures

• In an absolute monopoly, there is only one
  supplier or a good or service for which there are
  not reasonably acceptable substitutes.
• In an atomistic market, each participant is so
  insignificant relative to the size of the total
  market that he has no perceptible effect on
  price. Every buyer can purchase as much as
  desired, every seller can sell as much as desired.

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Price Searchers

• In an efficient market, information is
  transmitted quickly and without cost, eliminating
  above average profit
• Sellers must be aware of the impact pricing
  decisions will have on decisions of competitors
  causes sales
• Every Buyer searches for the best deal
• Time required for information to be reflected in
  price is a measure of market efficiency
• In less efficient market, information is scarce
  and costly greater degree of price searching

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Sources of Market Inefficiency

• Information costly and difficult to obtain
  comparison shopping expensive and time consuming
• High transaction costs prohibit portfolio
  adjustment
• No two properties exactly alike

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Real Estate Finance and Investments Lecture 2

• Land Utilization and Rental Value of Real Estate

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Economic Factors inLand Utilization

• Location choice is primarily economic decision
• Economic models investigate land development
  patterns
• Clusters of stores for multiple nuclei that
  create peaks in local land values

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Economic Factors in Land Utilization

• Linkages
• Transfer (transportation) costs
• Processing (corporate) costs

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