Economic Evaluation of Projects PDF - The Real Estate Market, Course of

AUIC A.A. 2023/2024 Course of Economic Evaluation of Projects prof. Giulia Datola The nature of the Real Estate Market 2_September 25, 20234  Program of the course ECONOMIC EVALUATION OF PROJECTS A.Y. 2024/2025 18-set-24 8:15 - 11...

AUIC A.A. 2023/2024 Course of Economic Evaluation of Projects prof. Giulia Datola The nature of the Real Estate Market 2_September 25, 20234  Program of the course ECONOMIC EVALUATION OF PROJECTS A.Y. 2024/2025 18-set-24 8:15 - 11:15 L1_ Introduction to the course and project work L2_The Nature of the Real Estate Market. Information on Real Estate Market. How to Theoretical + practical 25-set-24 8:15 - 11:15 T1+ T2 develop Market Analysis example L3_Market Value: definition of the market value. Appraisal methods. Basics of Theoretical + exercise 02-ott-24 8:15 - 11:15 financial math in class L4_Market Value estimation: Sales Comparison Approach (SCA) + Income Theoretical + exercise 09-ott-24 8:15 - 11:15 Approach in class Theoretical + exercise T2 16-ott-24 8:15 - 11:15 L5_Market Value estimation: Cost approach + cost analysis in class Theoretical + practical 23-ott-24 8:15 - 11:15 L6_Private feasibility: Criteria and decision rules example 30-ott-24 8:15 - 11:15 L7_Project work revision I: Cost Analysis I revision Workshop in class for 06-nov-24 8:15 - 11:15 L8_Private feasibility: Business Plan - workshop "how to develop a business plan" PW Theoretical + practical T3 13-nov-24 8:15 - 11:15 L9_Public feasibility: Stakeholders Analysis and Multicriteria Analysis example 20-nov-24 8:15 - 11:15 L10__Project work revision II: Business plan II revision Workshop in class for 27-nov-24 8:15 - 11:15 L11_Public feasibility: Community Impact Evaluation (CIE) method + workshop PW 04-dic-24 8:15 - 11:15 L12_Project work revision III: final review III revision 18-dic-24 8:15 - 11:15 L13_Project work revision IV: final review IV revision  The nature of the Real L2 24/09 Estate Market  Outline 0_Theory of demand and offer 1_Real estate property characteristics 2_The real estate market 3_The Real Estate Operators 4_Sources of information Demand and Offer  Basics of microeconomics Microeconomics is the sector of economics that examines the economic choices made by individuals, businesses, and organizations (economic subjects) to satisfy their needs through scarce resources. (Samuelson et al., 1988) It is possible to identify two main classes of economic agents can be identified within the market: 1. Consumers or Buyers. These agents constitute the "demand" in the market. 2. Producers or Sellers: These agents represent the "supply" in the market. The market represents the mechanism through which relationships between buyers and sellers are established, facilitating the exchange of goods and services. The exchange is the basic concept of the market.  Demand and offer theory _Assumption_ We will examine these principles concerning an ideal market, specifically a perfectly competitive market. This assumption will help us analyze how demand and supply to provide a clear framework. Focusing exclusively on a perfectly competitive market makes it possible to analyze the behaviours of the two market participants—consumers and producers—separately. This approach allows us to derive a theoretical model of behaviour that is sufficiently explanatory, and capable of elucidating the choices made by both parties. La domanda Demand curve Si definisce «domanda» la quantità di un certo bene richiesta da un ndividuo o da una collettività di individui ad un certo prezzo ed in un certo istante. (Manganelli, 2011) The term "demand" is defined as the quantity of a particular good that is requested by an P P= prezzo D individual or a group of individuals at a specific Q= quantità price and at a given moment in time. D= domanda (Manganelli, 2012) La legge della domanda Q Demand depends by: P = price 1- price of the good Q = quantity 2- income of the consumer D = demand 3- price of alternative goods with the same utility Demand curve legge dell’offerta Offer curve P O The term "supply" refers to the quantity of a good that a producer is willing to produce (and sell) at a specific price. (Manganelli, 2012) P= prezzo Q= quantità O= Offerta Q P = price Q = quantity O = offer  Mercato immobiliare Demand Domanda e offerta: and il prezzo dioffer: equilibrio the equilibrium price P D O Px Prezzo di equilibrio Equilibrium price Q The meeting of the demand and overall supply curves lead to the formation of the price at a given equilibrium point. There is, therefore, only one price (Px) at which the quantity demanded is equal to the quantity supplied. This price is called the equilibrium price. For any other price, the quantity that the market is willing to absorb (demand) is always different from that which the market is willing to sell. Demand and offer: the equilibrium price The real estate market Basic Reference Manganelli B., Real estate Investing. Market Analysis, Valuation Techniques, and Risk Management, Editore: Springer, Anno edizione: 2015 *Chapter 1 and Chapter 2. Feature of real estate properties 1_Economic good anything that is capable of satisfying a need and that is available in limited quantities. The ability to satisfy a need is also referred to in economic science as a utility. UTILITY SCARCITY Specific characteristics of the economic goods *appraisal is the discipline for estimating the value of particular economic assets, namely real estate assets. 16 Feature of real estate properties Characteristics of real estate properties: 1- Immovability. Immovability of the real estate property and of the land. Therefore, the asset is related to the specific location. Thus, the context's economic conditions can affect the asset's value. 2- Location. The location is one of the main aspect that affect the value. 3- Scarcity. Real estate assets are limited, due to the limited nature of land, to the cost of production and the construction process. 4- Land has unlimited duration. Real estate properties are long term investment. 5- Illiquidity. Sometimes, real estate properties stand in the market for long time, according to (1) high unitary value of the land, and (2) the heterogeity of the land. 17 Feature of real estate properties Characteristics of real estate assets which affect the values Extrinsic characteristics of the environment in which it is located Location Asset Characteristics Intrinsic characteristics of the property itself Position Typology Functional/Economic 18 Feature of real estate properties Extrinsic characteristics of the environment in which it is located Location ▪ Location with respect to the center of a city ▪ Accessibility Public transport and connections ▪ Supply of services (schools, hospitals, ecc..) ▪ Private services (shop) ▪ Environmental quality (e.g. pollution,…) ▪ Socio-economic features Feature of real estate properties Intrinsic characteristics of the property itself Position ▪ real estate unit exposure ▪ View ▪ Light ▪ Floor ▪ Natural ventilation Feature of real estate properties Intrinsic characteristics of the property itself Typology ▪ Size ▪ Age ▪ Architecture ▪ Physical and economic decay ▪ Windows ▪ Secondary areas ▪ Potential for changes ▪ Lift Feature of real estate properties Intrinsic characteristics of the property itself Functional/Economic ▪ Limitation to property rights ▪ Seller ▪ Payment ▪ Free/occupied ▪ Technical equipement ▪ Quality of common areas Feature of real estate properties val.min. % val max. % caratteristiche di localizzazione 15 35 caratteristiche di posizione 10 25 caratteristiche di tipologiche 5 20 caratteristiche produttive 10 20 40 100 val.min. % val max. % caratteristiche di localizzazione 5 10 caratteristiche di posizione 15 25 caratteristiche di tipologiche 15 30 caratteristiche produttive 25 35 60 100 val.min. % val max. % caratteristiche di localizzazione 10 30 caratteristiche di posizione 10 20 caratteristiche di tipologiche 20 25 caratteristiche produttive 10 25 50 100 Nature and rationality of the economic players Two main reasons impel the economic player, household or company, to purchase an urban property, depending from their qualification, needs and aptitudes: Self-consumption: benefit are derived from direct use of the building or the asset is instrumental to production. Economic and financial profile influence the behaviour of the economic player (e.g. income, taxation, interest rate on loans etc.) but also extra-economic reasons like sociological, psychological, technological, etc. the real property is considered a consumer good Investment: the purchase of a property guarantees a flow of future income. Only economic purposes influences investors’ choice, depending on their income, the real property characteristics and its profitability with respect to alternative investments in the market. the real property is considered a capital good 24 Features of Real Estate market The Real Estate Market is an imperfect market. Main economic characteristics can be reflected in the following concepts: a) Multidimensional use nature: consumer good vs capital good b) Immovability of buildings and land: limited stock but unlimited duration -> urban rent c) Space dimension of the local market: evaluation of the property may take into consideration a local market very limited in space -> fixity location effect 25 Features of Real Estate market a) Multidimensional use nature Depending on offered services and benefits, a building can be considered a consumer good or a capital good. For consumer goods properties can meet primary needs (e.g. home, workplace, etc.) or secondary needs (e.g. expression o a social status). Properties can be indirect goods as contributes to production of other goods or services: con be instrumental factors of productions (e.g. a warehouse) or generate income (e.g. shopping centre). The value (utility) of a property in the market is directly proportional to the demand and inversely proportional to the supply. 26 Features of Real Estate market b) Immovability of buildings and land Real properties are limited in nature due to scarce of its production factors and/or cost production, and limited availability of urban land However, urban land has an unlimited duration and thus, it is subject to rent Urban rent has two components: a differential effect (intrinsic characteristics that makes more or less attractive the land like quality, presence of services, legal issues, etc.,) and an absolute effect (external characteristics to the land through which cost-effectiveness of an investment is determined). Urban rent (the land use) is the result of a combination of physical, regulatory, economic, and social conditions. Thus, urban rent can also increase or decrease over time due to changes in economic and social condition of the context (poor convertibility) 27 Features of Real Estate market c) Space dimension of the local market Real properties are non homogeneous as each is unique -> fixity location effect Fixity effect is derived by immovability condition of buildings and land Fixed location gives the unique nature of each property (land or building) but strongly influences usefulness and land value Immovability condition implies that the market of the property is considered a local market and at times is very limited in space (circumscribed) 28 Features of Real Estate market Segmentation The Real Estate Market can be disaggregated in different submarkets that are distinguishable through factors that determine the demand curve and supply curve, like the way the two functions interact. Inside each sub segmentations properties have a certain degree of substitutability (e.g. if price of A increases, also demand and prices of B increase) The price formation mechanisms (demand and supply) of each Market segmentations are determined by a hierarchy of factors, the most important of which are generally location and destination 29 Features of Real Estate market Segmentation “The main factors of the Real Estate Market segmentation”. Source: Manganelli 2015 30 Features of Real Estate market Segmentation by product Features of Real Estate market Segmentation by location The territory has been divided into 10 macro-areas of varying size. The macro- areas, which aggregate a variable number of OMI zones, present similar characteristics in terms of urbanisation density, socio-economic situations, services, infrastructures and geographical location. (OMI, Statistiche regionali, il mercato residenziale 2023) https://www.agenziaentrate.gov.it/portale/Schede/FabbricatiTerreni/o mi/Pubblicazioni/Statistiche+regionali/ The real estate market Typologies of real estate ▪ Land ▪ Residential ▪ Retail ▪ Offices ▪ Industry/Logistic ▪ Rural ▪ Special ▪ Public  Features of Real Estate market Cyclical trend Four phases. In the first prices are stable but the number of transactions grows. Namely, in this phase the price is lower compared to a hypothetical equilibrium condition. Demand The “Honeycomb” model of Real Estate Market has perception of this condition. The growth in demand is also the consequence of a supply, which leaves the prices cyclical trend. Source:Di Pasquale D. and Wheaton W. (1995) unchanged. In the second part, the supply, taking into account the rigidity that characterizes it, reacts to the increase in demand and prices begin to rise. The increase in prices and high profits that are generated, attract new investors. New constructions are started, in an attempt to capture the accumulated demand. A peak condition is rapidly approaching in which the property is overvalued. Prices In the third phase of the property cycle, a slow decline in the value of property begins. The supply, which was very high due to the high demand that was present on the market, is at its maximum and tries to resist a sharp decrease in the number of transactions. It is the most risky phase of the market cycle. Demand is no longer able to match the amount of new properties which have entered the market, and not at the high prices they were originally quoted at. In the fourth stage, the value of property drops at a very fast rate and demand for property begins to drop significantly. People involved in the property market— namely buyers, sellers, investors etc.—become aware of the overvaluation of real estate prices. The fear of the decline in the property market leads to many people backing out of investment in property. The few buyers who are still involved in property Number of sales transactions can choose between numerous alternatives to buying property. The prices remain low until the excess supply is exhausted and at this point, the market begins to grow to the next peak. Supply (S) is rigid and less reactive with respect to Demand (D). Thus S is 41 subordinated to D -> no market equilibrium Features of Real Estate market A perfect market is characterised by 1) strong competition in which a large number of buyers and sellers undertake free negotiation (they can freely set market price); 2) traded goods are homogenous, and 3) each economic actor, costumers or sellers, has fully knowledge of the traded good characteristics and market exchange (transactions) dynamics. On the contrary, the Real Estate Market is an imperfect market due to some specific characteristics: Close monopolistic market structure (oligopoly1 or monopoly2) Price-searching behaviour of market actors* Heterogeneity of properties Lack of transparency in market transactions High fragmentation (submarkets) of market supply demand Cyclical trend 1oligopoly: a market in which a few firms produce a particular good and compete with each other. A small number of producers who have weight in the market and strong barriers to entry into the market. 2monopoly: a market model where entry is possible only by meeting certain conditions (capital). The products are extremely different. *) Between the two extreme categories of price-takers and price-makers, there are markets where participants cannot fully control the prices, but they realize that their decisions affect them. The operators of such a market are therefore price-searchers. 42 The Real Estate Operators Mainly, the subjects involved in economic activities are the investor and the consumer, depending on the behavioural model they assume in economic activities. Any property is involved in a series of economic activities along its lifecycle: Construction/processing Property management Administration Selling Brokering Promoting etc; All these activities acquire role and meaning in relation to the nature of the real estate as investment property or consumer good and with respect to the subject role that performs this activity (i.e. the investor or the consumer). 43 The Real Estate Operators “Economic operators in the Real Estate Market”. Source: Manganelli 2015 44 Emerging trends in European real estate market (PWC, emerging trends in real estate market 2024)  Emerging trends in European real estate market 2024 New energy infrastructure is identified as the sector offering the greatest overall potential for the third year running, also securing the highest score in all three categories — investment, development, and rents. For many, the combination of decarbonisation and soaring energy prices makes it a no-brainer as a thematic play. ECOLOGICAL TRANSICTION (PWC, emerging trends in real estate market 2024)c Emerging trends in European real estate market Countries transaction volume 2023 2024 (PWC, emerging trends in real estate market 2023) (PWC, emerging trends in real estate market 2024) Emerging trends in European real estate market (PWC, emerging trends in real estate market 2024) Emerging trends in European real estate market (PWC, emerging trends in real estate market 2024)  half of 2024, characterized by numerous substantial 0 large-scale positive outlook for the Italian real estate market in the remaining transactions. 2017 period of 2024. 2018 2019 2020 2021 2022 2023 H1 2024 Emerging trends in Italian real estate market These sectors emerged as the predominant asset classes during this quarter, showcasing a resurging interest amongst Investors, Investments particularly after enduring a period of relative neglect inby theasset class in H1 2024 and H1 2023 aftermath of the pandemic. 3% estate market 2017 Trend of total investment volume in Italian real H1 2024 5% 17% 14,000 26% 12,000 9% 39% H1 2024 43% H1 2023 10,000 8,000 16% 26% 6,000 15% 4,000 2,000 0 Source: PwC analysis 2017 2018 2019 2020 2021 2022 2023 H1 2024 Investments by asset class in H1 2024 and H1 2023 3.1bn 2.2bn + 40% Total investments Total investments Investments H1 2024 3% in H1 2024 in H1 2023 vs H1 2023 5% 17% 26% PwC Italy | Real Estate Market Overview 9% 39% H1 2024 43% H1 2023 16% 26% 15% Source: PwC analysis (PWC,3.1bn 2024) 2.2bn + 40% Total investments Total investments Investments H1 2 024 in H1 2024 in H1 2023 vs H1 2023 Sources of information Direct sources Specific survey. On site. Indirect sources Institutional and Private Database; Reports, Websites etc Italian Sources of information Institutional bodies ▪ Osservatorio dell’Agenzia del territorio ▪ Osservatorio del Ministero dell’Economia e delle Finanze ▪ Borse immobiliari ▪ Osmi Tecnoborsa Research centres ▪ Osservatorio Nazionale Fiap ▪ Monitor Immobiliare-Censis ▪ Osservatorio Nomisma, Inea ▪ Cresme Private developers ▪ Il Consulente immobiliare ▪ Pirelli Real Estate, Gabetti ed altri  OMI https://www1.agenziaentrate.gov.it/servizi/Consultazione/ricerca.htm 58  GEOPOI https://www1.agenziaentrate.gov.it/servizi/geopoi_omi/index.php 59  Useful source for Market Analysis CBRE https://www.cbre.it/ https://www.bancaditalia.it/media/notizia/italian-housing-market-survey- Banca di Italia short-term-outlook-2023-q1/?com.dotmarketing.htmlpage.language=1 https://www.pwc.com/gx/en/industries/financial-services/real- PWC estate/emerging-trends-real-estate/europe-2023.html DILS https://dils.com/ https://www.agenziaentrate.gov.it/portale/schede/fabbricatiterren OMI i/omi/banche-dati/quotazioni-immobiliari Immobiliare.it https://www.immobiliare.it/