Class notes
47 Pages FBE 391 Full Class Notes
- Course
- FBE 391
- Institution
- University Of Southern California
FBE 391 Full Class Notes
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Grow perpetuity:Building Value = Sum of all PV value = Gross Value - Operating Expense
Annual Growth Rate = (Year 2 NOI / Year 1 NOI) - 1
Debt increases your Beta since there’s more risk
Require
Expenses make NOI goes down but doesn’t impact cap rate
NPV= sum(PV of PBTCF, cost of the building) OR (Required rate of return, PBTCF)
Risk-free rate in the economy
¤ ``Real’’ rate on short-maturity Treasuries, Fed Funds Rate
¤ Determined by economic conditions and monetary policy
Does expected inflation affect cap rates?
¤ r and g are nominal
¤ r = (1+real )(1+ π)
¤ π is general inflation rate in the economy
Price and Cap Rate Indices Calculated
¤ Price indices for financial assets are based on observed sales prices
Most financial assets are traded very frequently
¤ Annual stock market turnover >>100%
,¤ We can observe prices almost continuously
This is not the case for real estate
¤ Annual turnover in housing market is 6%
¤ Annual turnover is even lower in many CRE markets (2-3%) ¨ Issues with specificity and
segmentation make things even worse
So, in real estate:
¤ Typically, index is based on ``assessed values’’ (what does this mean?)
¤ When based on prices, there are methodological issues
Real Estate Capital Market
Public markets:
● Equity
- REITS
- Mutual funds
● Debt
- Bonds
- MBS
- Money Instruments
Private markets:
● Equity
- Private firms
- High-Net Worth Individuals
- Private equity funds
● Debt
- Bank loans
- Whole mortgages
Commercial Real Estate is: Land + Structures
Asset Class: 3rd
Features: role of location, segmentation, imperfect divisibility, illiquidity, dynamic
Owned by: Corporations, financial institutions (investment funds,life insurance companies)
Role of lenders: most CRE investments have large leverage (up to 75%), with medium-long
debt maturity (7-10 yrs)
The Space Market:
- Market for the use of real estate.
- Tenants considers property types and locations (Sub-markets and segments)
,Metropolitan Statistical Areas (MSAs):
- Sub area in counties (ex. Los Angeles, Long Beach, Anaheim)
- Locations for sub markets are a lot smaller
Real Estate Supply/Rent Price
- “Sticky” (rent stays the same): Time to build, Local Land Regulations, Geographic
constraints
- Regulation and geography are main drivers of increasing LRMCs
Land supply elasticity:
- extent to which the supply of land for development can adjust (increase) in response to
higher demand for space in a specific location
- x% increase in supply for a 1% increase in demand (rent price)
Time Value of Money: FV=PV(1+r)^t
Perpetuity:
NPV:
, IRR
Rate of return = (payoff / investment) - 1
Risk and Return:
- Total Return = Risk free rate + Risk premium
Yield Curve:
Downward sloping yield curve: A Predictor of Recessions:
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