Analytical view of real estate market
Empirical study of Nelamangala region and Kolar
Definitions of key terms
Real estate market
1. According to Cambridge English dictionary
“The buying and selling of land and buildings” is known as real estate market.
2. According to legal dictionary
“Land, buildings, and things permanently attached to land and buildings. It is also called realty and real property.
Real estate is the modern term for land and anything that is permanently affixed to it. Fixtures include buildings, fences, and things attached to buildings, such as plumbing, heating, and light fixtures. Property that is not affixed is regarded as Personal Property. For example, furniture and draperies are items of personal property”
Real estate is “property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more generally) buildings or housing in general. It is also the business of real estate; the profession of buying, selling, or renting land, buildings, or housing.”
It is a legal term used in jurisdictions whose legal system is derived from English common law, such as India, the United Kingdom, United States, Canada, Pakistan, Australia, and New Zealand.
Real Estate Markets
“Markets are the means by which buyers and sellers meet to exchange/trade goods and services or even information. The real estate market can be broken down into space markets and asset markets.
Space Markets – the mechanism for trading the rights to use land and buildings
1. Demand for space is created by those who are willing to pay for the use of space
2. Supply for space is provided by those willing to sell the rights that they own to the users
Space markets can be categorized by type of use:
1. Office Space
The A class are of superior quality and in posh location with all amenities that command the highest rents. B class is highly desirable but lack some amenities/attributes due to which they don’t command the top dollar. C class is buildings with few amenities but in good condition and moderately/modestly priced. D class buildings with very few amenities are generally in poor condition and poorer locations.
2. Retail Space
• Freestanding retail is small single tenant buildings with minimal amenities.
• Neighborhood centers serve a relatively small population within a 1½ mile radius which is often anchored by a supermarket with other stores providing convenience goods and personal services.
• Community centers serve a larger trading area of about 3-5 mile radius with a wider variety of stores often anchored by a department store.
• Regional centers serve an area of 7-12 mile radius often in the form of enclosed malls and anchored by two or more department stores.
• Superregional centers serve areas up to 50 miles in radius with a tremendous range of products and services.
3. Industrial Space usually consist of ¬¬¬¬¬¬¬¬¬¬¬¬¬- Warehouse and distribution (infrastructure) Manufacturing and production (factory), Materials processing (auxiliary/ancillary).
4. Agricultural Space- Annual and perennial cropland (farm land); Livestock facilities and grazing (pastures/grassland)
5. Lodging Space – Highway motels; Convention/business hotels (have convention space) Luxury hotels; Extended stay hotels/motels (apartments); Resort or destination hotels.
6. Residential Space- Single family detached homes; Single family attached homes (condos, co-ops and townhouses); Manufactured homes; Multi-family apartments.
Asset Markets – the market for cash flow rights to real estate ownership (value)
Capital Markets – the market for long-term (more than one year) assets. This includes stocks and bonds as well as real estate.
Public markets are publicly traded stocks (equity), bonds and money market (less than one year) instruments. REITs (real estate investment trusts) invest in real property and Mutual Funds invest in stocks and bonds (and other financial assets).
Private markets consists of Real property, Privately-held companies, Partnerships (oil and gas, leasing) Bank loans, Individual mortgages (as opposed to mortgage backed securities, which are publicly traded securities backed, or “securitized”, by mortgages) Private (venture) debt
Like all assets, both real and financial, market prices are determined by
1. Cost of capital (an opportunity cost) – this refers to the fact that investors have alternative investment opportunities in which to earn a rate of return on their invested capital. Thus, investors look at the rates of return that can be earned elsewhere before making an investment in a specific asset.
2. Expectations of future cash flows (which reflect growth opportunities) – how much an investor is willing to pay for an asset is a function of the future cash flows that they can anticipate realizing from the investment. This includes both increases (growth) as well as decreases (decline) in cash flows.
3. Risk – the risk related to the investment is an important consideration in order to compare apples to apples. Clearly, an investment in a government bond has no risk associated with the payments by the government, whereas investment in mortgages has default risk and investment in stocks or real property has uncertainty of cash flows in general due to the residual nature of the ownership claim. As will be seen later, the higher the risk of an investment, everything else the same, the lower price that investors are willing to pay since investors are risk-averse.
The definition of “fair market value” can be described as
the price at which an asset trades between a willing buyer and a willing seller, neither of whom is under compulsion to buy or sell, and both of whom are knowledgeable of the risks and future prospects of the asset
The relationship between the Space Market and the Asset Market in real estate is tied together through the cash flows. The price at which the use of real estate space is sold is a function of supply and demand which determines rent.
In addition, economic circumstances beyond the supply and demand for space determine the costs of providing space. The difference between rents and costs represent the cash flows available to investors which are valued in the asset market. Economic circumstances in other markets also impact the opportunity cost of capital and, hence, the value of real estate assets and the allocation of capital to providing additional space (supply) in the space market.
Real Estate Market Analysis – study of the supply and demand sides of a real estate space market
o Rents – what can be charged to tenants (competitors’ rents)
o Vacancy rate
o Amount of competing space currently and anticipated
o Rate of absorption of space
o Number of units/floor space on the property
o Type of building
o Growth prospects
All of these factors are interrelated. The term “month’s supply” of property refers to how long it will take before demand fills a given supply of real estate space. It can be defined as
Analytical view of real estate market