Dancing Bird Essay

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11.431/15.426J
Real Estate Finance & Investments I:
Fundamentals & Micro-Level Analysis
Fall 2006

Introductory Lecture Slides
(Selections from Chs.1, 2, 7 of text.)

1

Overview:
1.

Magnitude of Real Estate Investment

2.

Performance of R.E. Investment

3.

The “Real Estate System” (role of capital mkts)

4.

The space market

5.

The asset market & investment industry

6.

Example real world R.E. development investment

2

Magnitude
Figure 1a:
Net Asset Value of U.S. Structures ($ billions, 2003, source BEA)
Total = $ 23,747

Govt. R.E.,
$5,751

Houses, $11,917

Commercial
R.E., $6,079

3

Magnitude

Figure 1b:
Net Asset Value of U.S. Commercial Real Estate Structures ($ billions,
2003, source BEA)
Total = $ 6,079 Billion

Institutional,
$955

Office, $1,131

Hotel &
Recreational,
$554
Retail, $1,313
Residential
(apts), $1,168
Industrial*, $958

4

Magnitude

U.S. Institutional Commercial Real Estate
Physical Stock: 44B SF

Capital Value: $3.3 Trillion

U.S. Commercial R.E. Physical Space (SF)

U.S.Commercial R.E. Capital Value ($)

Retail
25%

Apartment
25%

Apartment
41%

Retail
34%

Warehouse
9%

Office
18%
Warehouse
16%

Office
32%

Source: PPR, 2003

5

Asset Mkt

Exhibit 1-5: Major Types of Capital Asset
5:
Markets and Investment Products
Markets
Public
Markets:

Private
Markets:

Equity
Assets:

Stocks
REITs
Mutual funds

Real Property
Private firms
Oil & Gas
Partnerships

Debt
Assets:

Bonds
MBS
Money

Bank loans
Whole
Mortgages
Venture Debt

instruments

6

Magnitude

1.2.4 The Magnitude of Real Estate in the overall Capital Market…
Exhibit 1-7 US Capital Market Sectors, a $70 Trillion Pie…
U.S. Capital Market Sectors, a $70 Trillion Pie

Private Debt
(49% RE), 16%

Public Debt
(22% RE), 30%

Private Equity
(78% RE), 30%

*Corporate real estate owned by publicly traded firms, plus
REIT s.
Source: Authors' estimates based on Miles & T olleson
(1997) updated with FRB statistics.

Public Equity
(17% RE*),
24%

* Corporate real estate owned by publicly-traded firms, plus REITs.
Source: Authors’ estimates based on Miles & Tolleson (1997).

7

Magnitude

Exhibit 1-8: US Investable Capital Market with Real Estate
Components Broken Out
U.S. Investable Capital Market with Real Estate Components
Broken Out. (Source: Based on Miles & Tolleson 1997)

Private Debt
9%
Stocks
26%

Bonds
24%
REIT Equity
0%

Private Commercial
CMBS
Mortgages
1%
2%
RMBS
6%
Private Residential
Mortgages
6%

Agricultural/Timberl ands 2%
Commercial Real
Estate Equity
House Equity
7%
17%

8

Performance
Investment Total Return Performance (per annum avg) as of
June 30, 2006
20.00%

1yr.
3yr.
5yr.

15.00%

10yr.
10.00%

5.00%

0.00%
Real Estate
(NCREIF)

Stocks
(SP500)

Bonds
(Lehman G/C)

T-Bills

CPI

-5.00%

Total Investment Return as
Real EstateStocks (SP Bonds (Leh
1yr.
18.68%
8.63%
-1.52%
3yr.
15.79%
11.21%
1.60%
5yr.
12.01%
2.50%
5.13%
10yr.
12.42%
8.35%
6.25%
20yr.
8.17%
11.02%
7.32%

T-Bills
3.95%
2.31%
2.16%
3.68%
4.68%

CPI
4.01%
3.27%
2.59%
2.59%
3.12%
9

Exhibit 2-2: The “Real Estate System”: Interaction of the Space Market, Asset Market, & Development Industry
2:
SPACE MARKET
SUPPLY
(Landlords)

ADDS
NEW

LOCAL
&
NATIONAL
ECONOMY

DEMAND
(Tenants)

RENTS
&
OCCUPANCY

FORECAST
FUTURE

DEVELOPMENT
INDUSTRY
ASSET MARKET
IF
YES

IS
DEVELPT
PROFITABLE
?
CONSTR
COST

INCLU
LAND

SUPPLY
(Owners
Selling)

CASH
FLOW
PROPERTY
MARKET
VALUE

MKT
REQ’D
CAP
RATE

CAPI
TAL
MKTS

DEMAND
(Investors
Buying)

= Causal flows.
= Information gathering & use.
10

1.1.1 The Space Market…
Supply:
Property Owners
(Landlords)

Demand:
MARKET

Property Users
(Tenants)

•Rents (e.g.$/SF)…