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  1. 1. ECONOMY FOR REAL ESTATE (BPE 33902) Prepared By:Sr Norjariah binti Arif, Department of Real Estate Management, FPTP, UTHM.
  3. 3. OBJECTIVES    Give an overview of the real estate market and its relationship with the overall economy Explain how real estate markets are always a collection of sub-markets. Outline how the three principal sectors of the market are inter related
  4. 4. REAL ESTATE CYCLES “ buying real estate is not only the best way, the quickest way and the safest way but the only way to become wealthy” because the common view that investment in real estate is financially secured
  5. 5. Booms and crashes were characterised by:        Deregulation of the financial markets Large surge in bank lending to real estate Relaxation of development control Unsustainable economic activity Rapidly rising interest rates A plunge into recession Widespread company failures
  6. 6. Point: the cycle was a result of political decisions, regulatory change and oconomic events, none of which had any obvious link with the real estate market. Real estate is an integral part of the nation’s economy: anything which has implications for the economy will have implications for real estate.
  7. 7. REAL ESTATE AND THE ECONOMY Two functions of real estate eg commercial properties such as shops, offices and factories: 1. a factor of production 2. an investment Value of commercial real estate reflects both of these functions. The cv is a multiple of the net annual rent paid by the tenant. The level of rent depends on the value of the property to the tenant for business purposes. The multiple reflects the value of the rent to the investor and may be ten or even twenty times the annual rent.
  8. 8. Example   Rent paid/received RM50 000 annually Required Yield 5% Therefore CV of the property: RM50 000 x 20 = RM1 000 000
  9. 9. The three real estate market sectors:    Letting(often called the rental or space market) the level of rents depends on the level of demand from tenants to occupy real estate Investment (often called the capital market) capital prices are determined by demand from real estate investors. Development Both rents and capital prices are also influenced by the ss of new real estate produced in the development sector of the market
  10. 10. Sub-sector: Type of use Location Land size Building size Quality The real estate market in any country is the amalgamation of these market sub-sectors. Exercise: consider your own locality. What real estate markets are represented there? Try to identify some of the sub-markets within it.
  11. 11. A Model of the Real Estate Market Rental and capital values are set by the forces of demand and supply Forces are determined by local economic conditions: which are influenced by regional, national and international economies Property stock . The economy Real estate market
  12. 12. Model of Real Estate Market Property Stock Letting sector Economic Factors
  13. 13. London Office Market Cycle 1986-93 Causes: 1. 2. 3. 4. the deregulation of the London stock market The information technology revolution The debt crisis in developing countries The abolition of foreign exchange controls in Britain
  14. 14. The deregulation of the stock market    Known as the Big Bang. Single firms were allowed to act as both brokers and dealers in stock market, resulted the creation of large conglomerates. Face to face dealing dealing through computers and telephones Boom in the financial services, demand for office space in terms of unit size and amount of floor space, boosting the rental value of modern offices
  15. 15. The information technology revolution Widespread introduction of computers changed the requirements for the internal design and structure of office buildings  Obsolescence of existing offices  Increase the profitability of development, promote increase in office redevelopment 
  16. 16. The debt crisis in developing countries  Forced international bank to seek new outlets for their lending. This resulted an enormous increase in loan to real estate developers - development boom
  17. 17. Abolition of foreign exchange controls Money could flow freely in and out of Britain, since 1930  Control of money supply and management of national economy  Combined effect of deregulation and abolition caused huge lendind  Economic boom and a boom in property values as business required more floor space 
  18. 18. Continuation… Major investors favour overseas investment  Development financed by banks and could not be sold on completion  Development companies unstable and vulnerable  Real estate values started to tumble as the economy sank into recession 
  19. 19. Interest in Real Estate Real estate comprises:  Land  Buildings (and fixtures attached to land) The goods traded in the market are not physical units of land and buildings. They are the legal rights over land and buildings.
  20. 20. Legal Rights in Real Estate    Freehold - perpetual right to use or dispose of the land as she wishes, subject to statute Leasehold – right to posses and use the property for a specific period, subject to the payment of rent Sub-lease – lessee conferring the occupation right to another tenant. The first called Head lessee/head tenant and occupier as sublessee/sub-tenant
  21. 21. Continuation…  The value of property interests depends crucially on the conditions to which the are subject. Value of freehold interest in a let property depends on: rent payable by the tenant the duration of the lease remaining
  22. 22. Continuation…  The value of the Head Tenant interest: -the duration of both the head lease and the sub-lease -the rent paid to the freeholder -the rent received from the sub-tenant
  23. 23. Example  A freeholder, H, let a retail property to J in 2005 for 15 years at a rent of RM50 000 per annum. In 2010, J sub-let the property to K for 10 years at a rent of RM60 000. If let now, the property could attract a rent of RM70 000. Discuss
  24. 24. NOTES The freeholder  The head tenant  The sub-tenant  Value the three legal interests
  25. 25. Investment and Occupation interest Investment interest - a freehold interest - a head tenant’s interest  Occupation interest - valuable when paying a rent below rental value - no value if the tenant is paying at rental value 