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Questions and Answers
What is a significant factor that has increased real estate investment by institutions like REITs?
What is a significant factor that has increased real estate investment by institutions like REITs?
Real estate investment analysis has recently become more aligned with mainstream finance and investment thought.
Real estate investment analysis has recently become more aligned with mainstream finance and investment thought.
True
What federal law directed pension fund managers to diversify their portfolios, which led to increased investment in real estate?
What federal law directed pension fund managers to diversify their portfolios, which led to increased investment in real estate?
Employee Retirement Income Security Act of 1974
Foreign investors own approximately _____ percent of U.S. real estate.
Foreign investors own approximately _____ percent of U.S. real estate.
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Match the factors with their influence on foreign investment in U.S. real estate:
Match the factors with their influence on foreign investment in U.S. real estate:
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What is a characteristic of passive investors in real estate?
What is a characteristic of passive investors in real estate?
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Investing in mortgage-backed promissory notes is classified as a real estate investment.
Investing in mortgage-backed promissory notes is classified as a real estate investment.
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Which investment performed better according to the analysis of commingled real estate funds from 1972 to 1983?
Which investment performed better according to the analysis of commingled real estate funds from 1972 to 1983?
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Real estate investments tend to outperform common stocks during periods of inflation.
Real estate investments tend to outperform common stocks during periods of inflation.
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What does 'investment value' reflect in real estate?
What does 'investment value' reflect in real estate?
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The relationship between REIT returns and large capitalization stocks has become less ______ over time.
The relationship between REIT returns and large capitalization stocks has become less ______ over time.
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Match the analysis period with the corresponding results:
Match the analysis period with the corresponding results:
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What is the lower end of the transaction price range determined by?
What is the lower end of the transaction price range determined by?
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The most probable selling price is the maximum price a prospective buyer is willing to pay.
The most probable selling price is the maximum price a prospective buyer is willing to pay.
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What must a prospective seller conclude for a sale to be motivated?
What must a prospective seller conclude for a sale to be motivated?
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Investment value from the perspective of the most likely buyer determines the ______ end of the range of transaction prices.
Investment value from the perspective of the most likely buyer determines the ______ end of the range of transaction prices.
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Match the terms with their definitions:
Match the terms with their definitions:
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Study Notes
Real Estate Investment Decision
- Real estate investment analysis has lagged behind mainstream finance, but recent years have shown progress.
- Modern analysis treats real estate as a capital asset, focusing on future benefits. This aligns with capital budgeting.
Who Invests in Real Estate?
- Real estate investment is often spurred by federal regulations:
- REITs (Real Estate Investment Trusts) are exempt from corporate taxation on distributed income. In 2018, 184 member REITs controlled over $960 billion in real estate assets.
- ERISA (Employee Retirement Income Security Act of 1974) directed pension funds to diversify, leading many to heavily invest in real estate. In 2016, pension fund capital in real estate equities exceeded $3.1 trillion.
- Foreign direct investment in US real estate fluctuated, with significant increases in the early 1980s and the early 1990s. Foreign ownership is often concentrated in specific geographic areas and types of properties.
- Key factors influencing foreign investment include foreign currency exchange rates (a lower cost of dollars in foreign currency makes US real estate more attractive), and differences in interest rates (high US interest rates tend to depress real estate prices).
Why Invest in Real Estate?
- Investors can be classified as either passive (hire professionals to manage the property) or active (directly manage the property).
- Investors also take either an equity or debt position in real estate (owning part or all of an asset or lending money to own an asset.)
- A clear distinction exists between investing in real assets (property) and financial assets (mortgage-backed securities).
How Have Real Estate Investments Performed?
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Reliable yield data for real estate is scarce. Initial findings suggest that returns were comparable to equities, with greater predictability.
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Recent institutional involvement and reporting requirements have provided more accurate comparisons between real estate returns and other investment types. Specific findings critically depend on the time period of analysis.
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One study (1972-1983) found real estate funds outperformed the S&P 500 index and bond index (Ibbotson Associates). Another (1978-1989) found that similar periods favored common stocks.
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Some analysis in 1984 implied that real estate and common stocks yields were similar, but real estate tended to outperform in inflationary periods.
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Subsequent research highlighted a less strong relationship between returns on real estate investment trusts (REITs) and large capitalization stocks. Similar returns exist but are more associated with smaller capitalization stocks.
Definitions and Concepts
- Investment Value: The worth of a property from an investor's perspective (considering factors like future cash flows, holding period, selling price, risk, and financing). It's subjective.
- Most Probable Selling Price: The predicted price at which a property could be sold (a range bound by the buyer and seller's perceived values). This range considers the various considerations involved in the actual transaction.
- Transaction Range: The likely range of transaction prices bound by investment value from various participants (buyer, seller).
- Market Value: The most likely price at which a property would sell in a properly functioning market, given a reasonable time frame, with rational and involved market participants.
Estimating Investment Value
- Estimating investment value involves estimating future cash flows, factoring in time differences, assessing risk, and comparing different alternatives.
- Financial analysts widely recognize investment value as the sum of the value of outstanding debt and equity, representing the asset's overall worth.
- Present value(s) of future cash flows during the estimated ownership period and disposal proceeds help determine investment worth.
Investor Objectives and Risk
- Investors are diverse and seek a balance of return and risk.
- Emotional aspects influence risk tolerance and investment decisions. Rational investors prefer higher returns with appropriate levels of risk considered.
- Investors tend to avoid increased risk as total perceived risk increases.
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Description
Explore the evolution of real estate investment analysis as it increasingly aligns with capital budgeting principles. This quiz delves into the factors influencing real estate investment, including federal regulations and the role of REITs and pension funds. Understand who invests in real estate and the dynamics of foreign direct investment.
