Is the CAPM applicable for Real Estate?
No, because Real Estate is not listed, so running a regression for beta is not possible
Classification of Total Return
Classification of IRR
How is Capital Gain Return calculated in a multi-period case?
Calculate the total return as in the one-period case, but then divide the return by the number of periods
How can the property risk premium be estimated?
Ex-Post: Difference between the average historical return on the activity and the risk-free rate
Ex-Ante: Difference between the future expected return and the risk free rate
What do Cap Rate and Discount Rate correspond to?
Cap Rate: Yield
Discount Rate: IRR
When should GOCR < GICR?
When the building is to be improved through CAPEX or the land is expected to significantly increase in value or in case of Quantitative Easing (higher liquidity)
Reasons for GOCR > GICR
Uncertainty about the future
Obsolescence of the building (“wasting asset theroy”)
What elements need to be considered when estimating GOCR?
Length of the valuation time horizon
Conditions of the building
Expected Investments
Expected changes in market rates
What requirements must all information sources fulfill?
Reliability
Recentness
Uniformity
Specificity
Discount rate - when is the tax effect included?
Only when considering INVESTMENT VALUES, as the valuer would take a subjective approach
What influences the financial structure of the company (in terms of WACC)?
Availability of credit
Types of properties
Specific characteristics (e.g., creditworthiness of tenants)
What types of risk does the cost of equity include?
Operational risk (property)
Financial risk (financial structure)
What is usually used as a proxy for the growth rate of future income?
The expected inflation
What could also be used for the cost of equity?
Target rates of funds
What type of real estate assets can sustain the highest leverage?
Income producing properties. Development projects can show high volatility of cash flows, meaning that only lower leverage may be used
Common risk elements in Real Estate
Capital markets
Change in risk-free rate, risk premium
Liquidity
Since assets are more diverse than stocks
Financial structure
High leverage
Regulation
Impose restrictions on the usage
Location
Macro- and micro-location
Intended use and types of properties
Most flexible sectors (residential, offices) carry less risk
Specific risk elements: Development projects
Authorisation
If permits can be obtained
Environmental
Presence of polluting substances in the land or building
Construction-related
Higher costs, delays non-conforming to plans
Market
Uncertainty about future interest among users and investors
Specific risk elements: Income-producing properties
Physical and technical features
Technical and functional obsolescence
Management and market
Market: Risk about selling the use of space
Management: Asset management is not carried out properly
Rental and contractual situation
High creditworthiness means guaranteed income
Analyse the contractual clauses, such as break options and duration
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