LE5003: Land and Property Economics Lectures 46: Use, investment and development markets in real pro

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LE5003 Land and Property EconomicsLectures
4-6 Use, investment and development markets in
real property

• Geoff Keogh
• (Property, University of Aberdeen Business School)

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Lecture 4 User markets in property

• Main topics
• identifying user interests
• user demand for property
• supply of property for use
• demand-supply interaction to determine rental
  value
• Basic references
• Fraser (1993) chs 14-16
• Harvey (1996, 2000) ch 4
• Keogh (1994)

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Defining user interests

• User interests are legal rights to use property
  on specified terms, and include
• licence ( pure use)
• lease ( pure use or hybrid use-investment)
• freehold ownership (owner-occupation hybrid
  u-i)
• User interests are demanded by
• households (for shelter and other consumption)
• businesses and other corporate bodies (for
  production)
• User interests are supplied by
• landlords/operators (licence or lease)
• owner-occupiers (licence, lease or sell or
  self-supply)
• developers (new buildings licence, lease or
  sell)

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A conceptual model of the real property market
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Demand and supply in the user market

• Demand factors
• price
• transaction costs
• product prices
• input prices
• production technology
• other factors?

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Demand and supply in the user market

• Supply factors
• price
• transaction costs
• tenure conditions
• new development
• existing use values
• existing non-financial benefits
• other factors?

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Determining demand price individual user
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Determining demand price individual users,
different sub-markets
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Determining demand price individual users,
single vs. multiple letting periods
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Determining demand price from individual demand
to market demand
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Determining demand price effective vs.
underlying demand
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Determining supply price single vs. multi-period
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Determining supply price comparing sub-markets
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Determining supply price let vs. owner-occupied

• Total floorspace may be divided between O-F1
  let floorspace, and F1-F2 owner-occupied
  floorspace.
• St indicates the short run supply of let space
  created through transfer of property out of
  owner-occupation.

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Demand and supply interaction user market

• In an efficient market, market price equals
  underlying value (both PF1).
• If suppliers withold supply irrationally or due
  to non-financial factors (curve Sé), market price
  will be higher (at PF2)

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Demand and supply interaction market outcomes
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Modelling the UK office market (Tsolacos et al
1998)
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Modelling UK office rents (Tsolacos et al 1998)
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Modelling UK office rents (Tsolacos et al 1998)
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Lecture 5 Investor markets in real property

• Main topics
• categories of financial investment in real
  property
• investor demand for property assets
• supply of investment interests in property
• demand-supply interaction to determine price and
  yield
• reconciling investment and use
• Basic references
• Fraser (1993), Chs 10-13, 20-23
• Harvey (1996, 2000), Ch. 5
• Keogh (1994)

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A conceptual model of the real property market
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Defining investment interests

• Investment interests are legal rights to receive
  a financial and other returns on property assets
  and include
• freehold ownership
• leases which allow assignment and/or sub-lets
• Financial returns include
• rent payments
• capital appreciation
• contributions to risk reduction
• Non-financial returns include
• pride in ownership
• symbolism, social status, etc.

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Defining investment interests (contd)

• Property investors include
• households (for shelter, as a store of wealth
  and/or to generate income)
• businesses and other corporate bodies (for
  production, as a store of wealth and/or to
  generate income)
• financial institutions and property investment
  companies (for income and/or growth)
• Investment objectives include
• control over residential or operational property
• balancing income and growth
• balancing risk and return
• diversification

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Defining investment interests (contd)

• Suppliers of investment interests include
• freehold owners
• selling freehold interest (with or without
  leaseback)
• granting leases with investment potential
• leaseholders who are able to sell on or assign
  lease
• developers
• selling freehold interest
• granting leases with investment potential

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Demand and supply in the investment market

• Demand factors
• price
• transaction costs
• rents
• target rate of return
• diversification
• flow of funds
• investor attitudes
• other factors?

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Demand and supply in the investment market

• Supply factors
• price
• transaction costs
• new development
• tenure conditions
• existing non-financial benefits
• other factors?

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Demand price for investment interests (fixed rent)
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Demand price for investment interests (variable
rent)
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Demand price for investment interests
relationship between assets
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Demand price for investment interests substitute
assets

• Financial investors seeking specific financial
  characteristics from investment
• many investors NOT looking for property
  investment per se
• Property assets have characteristics ranging
  between
• equity type asset carries full risk and
  benefit of unconstrained ownership
• and fixed interest type asset carries limited
  risk and limited benefit of ownership
• Investors substitute between
• equity type property and non-property
• fixed-interest type property and non-property

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(No Transcript)
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Supply price of investment interests
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Demand and supply interaction investment market
In an efficient market, market price equals
underlying value (both PF1). If suppliers
withhold supply irrationally or due to
non-financial factors (curve Sé), market price
will be higher (at PF2)
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Demand and supply interaction indicators of value

• Measures of property price
• demand/supply interaction generates a market
  price (capital value)
• property yields as a proxy for property prices
• Use of yield as indicator of property worth
• Current yield income/price (Current yield also
  Initial yield)
• Equated yield (income capital growth)/price
  (Equated yield (DCF yield) derived by discounting
  projected cash flows to produce an annual rate of
  return for the duration of the cash flow).

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Demand and supply interaction yield analysis

• A switching hypothesis
• assets with similar investment characteristics
  should have similar yields, and these yields
  should move in line with each other
• there is a spectrum of current yields reflecting
  differences in growth prospects and risk
• there will be a restructuring of the yield
  spectrum if there are changes in the respective
  investment characteristics of different financial
  assets
• See Harvey (1996 pp62-63, 2000 pp64-65) for yield
  evidence

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Demand and supply interaction yield analysis
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Demand and supply interaction market outcomes
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Demand and supply interaction market outcomes
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Modelling the UK office market (Tsolacos et al
1998)
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Modelling UK office CVs (Tsolacos et al 1998)
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Modelling UK office CVs (Tsolacos et al 1998)
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Lecture 6 Development and redevelopment

• Main topics
• the development process
• the economic basis of development/redevelopment
• demand for real property for development purposes
• supply of real property for development purposes
• determination of development land values
• development finance
• Basic references
• Fraser (1993) chs 17-19, 23-26
• Harvey (1996, 2000) chs 4, 6-9

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A conceptual model of the real property market
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Defining development

• Legislative definition
• the carrying out of building, engineering,
  mining or other operations in, on, over or under
  land, or the making of any material change in the
  use of any buildings or other land
• Economic definition
• a property may be said to have development
  potential whenever an element of latent value may
  be released by the expenditure of capital upon
  that property

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Defining development (contd)

• Development carried out by (amongst others)
• Residential developers
• individual households
• housebuilders
• Non-residential developers
• businesses and other corporate bodies (for use)
• property investment companies and financial
  institutions (as asset)
• property development companies (as asset or to
  sell on)

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Defining development (contd)

• Complexity of development process, includes
• Recognition of opportunity
• Estimation of value
• Acquisition of site
• Obtaining planning permission
• Arranging finance (short and long term)
• Coordinating construction
• Marketing development

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Demand and supply in the development market

• Demand factors
• price
• transaction costs
• expected capital values
• expected development activity
• short term finance
• long term finance
• incentives

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Demand and supply in the development market

• Supply factors
• price
• transaction costs
• existing use values
• non-financial returns
• land owner attitudes
• land use controls

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Development and redevelopment value of a building
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Development of a greenfield site
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Redevelopment of a brownfield site
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Redevelopment of a brownfield site negative land
value
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Redevelopment of a brownfield site with
externalities
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Development and redevelopment in aggregate
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Demand and supply interaction market outcomes
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Demand and supply interaction market outcomes
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Modelling the UK office market (Tsolacos et al
1998)
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Modelling UK office development (Tsolacos et al
1998)
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Modelling UK office development (Tsolacos et al
1998)
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Modelling UK office development (Tsolacos et al
1998)
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Modelling UK office development (Tsolacos et al
1998)