Lecture notes
GY 462 Full Revision Guide
- Module
- FM 462 Real Estate Finance
- Institution
- London School Of Economics (LSE)
Full Revision Guide including all summaries of lecture notes, tutorials, examination questions and relevant readings.
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Joven Liew Jia Wen201506858
GY462 – Real Estate Finance
Lecture 1 – Real Estate Investment Analysis I
Property Valuation
The value of a property is fundamentally an assessment of the associated risks and
opportunities (Linneman, 2004)
Downside risks
1. Operating cost – utility bills, maintenance fees, management cost, taxes, insurance cost
2. Vacancy – not being able to lease out the property
3. Natural Disaster – Real estate is a physical and tangible asset that is affected by natural
disasters such as floods, earthquakes
4. Leasing – issues with payment from tenants like nonpayment
5. Liquidity – Real estate is an illiquid investment with high transaction cost hence it is difficult
to time disposing of the asset. It is large and indivisible so it takes up a large proportion of a
person’s portfolio (risky). Different from buying one share. Investors probably need to
leverage to buy real estate asset.
Depends on whether the owner is able to pass through the risks/operating cost to tenants.
Usually possible in commercial real estate (Triple net lease)
Opportunities
1. Operating cost – exploit synergies to reduce operating cost and get higher returns from
restructuring a previously derelict building
2. Terminal Value – Resale price, hope to buy low and sell high
3. Rental growth – Most of the value of the building comes from rental growth during the
holding period instead of hoping for a high resale price. If you are able to generate high
rental growth, it increases terminal value
Project Financing
If decided to buy real estate, how to finance the venture
How much to borrow
How to borrow ex. Fixed rate/ adjustable rate loan
Real estate (RE) as Financial Asset
Differences to other financial assets
Indirect RE investments to avoid downsides and take advantage of upsides of financial
positions in RE ex. REITs and mortgage backed securities
International/portfolio diversification
Differences of Direct Real Estate to other Financial Assets
1. Indivisibility and large lot size – affects both price and risk. Investment is usually in millions
for a building hence leverage is intrinsic in real estate. Not very diversified real estate
portfolio so risk is less thinly spread out.
2. Heterogeneity of assets – each real estate has its unique characteristics
3. Slow and expensive transactions – difficult to time selling (risky)
4. Poor liquidity and private trading – Requires leverage, not many comparable properties
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