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Real Estate Notes 2 20

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Louisiana State University
FIN 3351

Chapter 1 The Nature of Real Estate and Real Estate MarketsAn Introduction to Real EstateReal estate is the single largest component of wealth in our societyAppxof the worlds total economic wealthAdequacy of housing stock and public infrastructure affect quality of lifeReal estate includes homes businesses recreation and institutional activities assoc w development purchase use and sale of land and buildingsReal estate is a bundle of rightsExclusive possession of the real propertyUse or enjoymentDisposition The term real estate is used in 3 ways1Tangible assets1 Improvements on the landfixed structures 2 Improvements to the landmaking land suitable for construction etc often referred to as infrastructure Walkways drainage electric excavation and fill 3 Raw landReal property is fixed to the land Personal property is moveable 2RightsownershipExamples of rights shelter security privacy businessresidential activitiesThe value of a bundle of rights is a function of physical locational and legal characteristics3Industry related to acquisition operationdisposition of assetsReal estate professions1Brokerage leasingproperty management2Appraisalconsulting3Site selection acquisitionproperty development 4Construction5Mortgage financesecuritization 6Corporate and institutional real estate investment7Government activities planning land use regulation environmental protection and taxationReal Estate and the EconomyReal estate is 28 of GDP employs 9 million Americans is 70 of local government revenues property taxHousing sector alone is 20 of GDPAcre43560 sq ft 640 acres in 1 sq mile The US is 23 billion acres Typical family lot bw 14and 15 acreContinental states 19 billion acres71 nonfederalrural 6 developed landUndeveloped land 23 water areafederal land 21 croplandconservation reserve program 21 forestland Total market value of real estate256 trillionIncludes housinginvestible commercial land but excludes nonreal estate corporation propertygovernment propertyA households net worth portfolio consists of 27 real estate higher than any other investmentIts importance is still understated becausedoes not include investment in private real estate assets appts office buildings73 of household liabilities are home mortgagesReal Estate Markets and ParticipantsReal estate values derive from the interaction of 3 sectors of the economy User MarketsoWhere rental rates are determinedoMarket for physical assetoBuyers get the right to use the spaceSometimes called space or rental marketoReal estate assets are heterogeneous and immobile Each property is unique location value signatureLVS Access is importantoAsset markets are also localized and segmented Potential users are close and assets made distinct by type and price Privately negotiated w high transaction Investmentinstitutional grade10 millionoProperty Asset MarketMarket for ownership claims to RE assetsBuyersowners receive rights to cash flows generated by leasing space to tenantsDemand supply side of property market is made up of investors wanting to buy sell propertyProperty market is integrated not segmented like space marketo ie investment capital can come from anywhereoBoth demandsupply side of user markets are very specific to locationbuilding type Implies userspace markets are highly segmentedCompare to nationally integrated markets gasoline steel financial capital ie homogeneous commodities that can be moved from place to placeoBecause of segmentation rental prices for similar spaces can vary widely across locations and property typesCapital MarketsoAllocate resources among households and firms requiring RE competes for funds in capital market w stocks and bondsoIf financing for real estate is readily available the value Investors select a mix of investments based on risk and returnBidding determines risk free rates and risk premiumsoCan be divided into debt and equityEquityowners of the RE expect return on investment through rent collection and price appreciationoSpec job no buyeruser yet but building bc of expectationsDebtlenders that hold claim to interest on borrowed funds
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