THE PROPERTY ENVIRONMENT 17
Propertymarket in investment is associated with localized properties or ‘realestate’ and differs substantially from other differentiated goodsin that, those property markets are spatial in nature meaning that,unlike other movable goods that transcend boundaries, propertymarkets are neither national nor global as they largely depend ongeographical localization. Therefore, the market in which ‘propertygoods’ operates differs from other goods on the basis ofconstrained spatiality.
Unlikeother differentiated goods, property markets cannot be moved from oneplace to another. This spatiality nature of the property marketensures that the ‘goods’ market does not become inelastic and assuch market clearing prices does not apply to property markets. Inthe property market, limited range and quantity of property isoffered in the business with each property having unique marketfeatures. Another characteristic is that, property prices are high,limited buyers, transactions are confidential and the propertyinformation is limited(Peter, 2013).
Ideally,there are three major types of property ‘goods’ or real estateproperty vacant land, Residential properties and commercialproperties. Vacant land refers to farms or ranches which could belocalized within Cities or in rural areas. Residential properties, onthe other hand, refer to housing rents (rental house units) whichinclude single family homes condominiums, manufactured, mobile ortownhouses, or other residential properties. Commercial properties ofthe other hand could refer to empty land that is destined forcommercial use, business building, parks, retail, multifamilyapartments, offices, industrial or any other property with attachedcommercial use or value (Lake et al. 1998).
Therefore,because of spatiality constraints, the equilibrium of property marketprices remains different depending on specific conditions that governdemand and supply in the locality market. Property market istherefore primarily dependent on property type, social economicattributes of local inhabitants and the location of the property. Themajor feature of real estate property determines the demand andsupply by the market participants. Furthermore, the underlyingtransactions of real estate price and intensity are dependent ondifferent factors.
Fundamentally,real estate are considered on their economic value tangibleinvestments for income generation and therefore, the value of realestate’s is appended on its economic ability to meet different andspecific needs of different people. Real estate market is underpinnedoneconomic environment that represent the commercial areas, regionand neighborhood. Real estate property are fixed and thus theirenvironment has a significant impact on the value attached it. Inaddition, the need for such property is based on the potential andpreference of buyers (Sharpe, 1964).
Propertymarkets and submarkets
Marketin Office space
Inreal property investments, especially for commercial propertiesoffice buildings offers a lucrative market for such property andconstitute the largest segment in this property. In a growing economyand industry the need for office space has seen commercial propertyrise each day. Demand for wide range of office buildings has risenfrom single tenant structures to multitenant structure office demandswhich have lead property owners into redesigning the buildingsstructure to suit the different needs of the lessee. As a result ofthis, commercial buildings are subject to market forces that altersdemand and supply. However, the economic forces of these propertiesvary from other property investments. The rental fee paid for suchbuildings area influenced by not only the employment predictors butalso the area’s economic factors (Michaels and Smith 1990).
Ina broader sense, market for commercial properties are influenced byspecific types of employments such as high profile officesprofessional services such as the Attorneys, engineers accountants,insurance and real estate brokers among other professional workers inthe region. Demand and need for office spaces is thus a strongindicator of property submarket and land use. Business firmsutilizing office space are very sensitive with real property theylease to conduct their business as an important input in theproduction. As such the operating expenses rent, revenues, employeesand space requirements become important aspects in selecting the areafor office space. Office space can be leased for longer periods whilerent varies from location to location (Sonstelie and Portney 1980).
However,while office space forms the largest share of commercial propertymarkets, are profitable property investments, economic downturns orincreased vacancy could affect commercial real estate investment. Inmost cases, multitenant office renting offices commercial investmentswith a level of investment risks due to long-term credit that isattractive to high-end investors. However, despite all, office spaceremains a viable and competitive market for commercial propertyowners and other investors who want to diversify their investmentportfolio.
Marketin Multi Family Housing
Multifamilyhousing forms an important market segment in the property market.According to realtors, the multifamily sector is the most ‘defensive’areas of property investments apartment units are less affected byeconomic downturns as in the case of the commercial business mainlybecause people need place to live. Apartments buildings find marketin almost a quarter percentage of real estate market and vary inunits mix (single bedroom, two bedrooms or more), location (urban andrural) and the structure of the apartments (garden or high riseapartments).
Gardenapartments have adequate building to land ratio more open spaces.These apartments have price elasticity which means that changes inprices affects demand, high-rise apartments, on the other hand, aremore expensive and pricing is not an issue. Apartments may beclassified into quality levels and depending on location forinstance ‘class A’ structures are newer buildings in goodbusiness area, good amenities deluxe lobbies and rents are reflexiveof their features. Class B, are less versatile and old buildings withless amenities while class C apartments, are for the lower end andmiddle income people.
Demandfor apartments is mainly influenced by demographic trends, householdformation, employment growth and home ownership dynamics. Apartmentlessees in this market are short-term which is attractive to renterswho might not wish to make long term commitments. In this respect,multifamily properties are able to adjust to market conditionsquickly depending on the market in the environment short term rentincentives are offered to reduce vacancy rate when demand is low. Inmultifamily apartments, local incomes, availability and costsdetermine the market rents. Just like other investment properties,multi apartments require a great deal of property management in orderto maximize cash flow this requires a high level of regulations anddocumentation (Day, 2001).
Marketin Hotels and Lodging industry
Lodgingsand hotels provide distinct market segments to commercial real estatein areas such as the hospitality sector resorts, motels, hotels andother business accommodation facilities. In this market, ownershipand management is critical due to the dynamic nature of the sector.The market segment in this area started with entrepreneurs whomanaged properties to become a national and international investment.The market sector in this area can be subdivided into smallersubmarket luxury hotels, deluxe, midscale, upscale, economy andextended stay depending on client’s preference and economicwellbeing. Upscale and luxury hotels caters for business travelers,midscale caters for the largest segment of market, economy hotels areideals for few seniors and those travelling on tight budgets. TheExtended stay hotels are service designed and located to cater forprofessionals on assigned projects, as such they are designed inapartment styles (Goodet al. 2007).
Investmentin lodging facilities is tied to national and global economicconditions, in this respect, therefore, investment in this sector hasdynamic markets determined by general economic wellbeing of thecountry. Market elements for this area like tourism are sensitive tounpredictable aspects like terrorism, price competition anddisasters. Great investments are required for this investment ventureand might delay in responding to market demand increase. Despite theeconomic cyclic occasioned in this sector, it has a lucrative marketfor real estate. Due to rising demand and shortfall in supply withupward occupancy rates, hotel and lodging industry make it a greatventure for commercial property.
Marketin self storage facilities
Thegrowing economy and business industry requires storage facilities forgoods in transit in the chain of distribution or people who need tostore excess household items. As such, this area provides animportant market for commercial property. Storage facilities havehigh demand in growing markets and developing communities in general.Increased competition to hoard business goods, auctioned items andmanufactured goods provides easy market for real estate storagefacilities. The location of this property does not affect marketdemand storage facilities could be located in town outskirts, noisyroads or any other unglamorous area.
Themarket for this property storage facilities, is driven by economicfactors (continued consumerism and acquisition of inconsumable itemslike furniture. There is rapid adaptation in the market with thesestorage facilities due to tenant base, owners of the storagefacilities are cautioned against the short term rental nature ofthese facilities. Storage facilities are regularly used by people formany reasons house renovations, relocations and more, these ensurethat owners of the storage facilities get stable cash flow.Furthermore, the management chores required for the facilities arerelatively low no need for much marketing or constant renovation ofbuildings. Investment in this area has seen an upward trend in risingrental rates, high demand for self storage facilities making it alucrative real estate investment (Michaels and Smith 1990).
Marketin Retail Property
Investmentin this area attracts market from single families, small traderetailers, pharmacy, restaurants, fashion stores, outlet malls andshop centers. Consumer market for this property covers more thanquarter of real estate property market. Property location, trafficflow, state of the national economy employment growth rate,population demographics, household and buying patterns greatlyinfluences market for real estate property’s.
Inmost cases, the retail stores centers have a wider range of ‘anchor’tenants who draw other consumers to the property. In this way, theproperty market is enhanced. For example, when retail neighborhoodcenters establish, more consumers and traffic are drawn towards theproperty, this in turn leads the property owners giving the anchortenants incentives. Another advantage to business that retailproperties have is the engagement of brokers who collect rents.Brokers have links with potential tenants and thus useful marketersof property in return for a fee (Michaels and Smith 1990).
Therole of property in Institutional Portfolios
Focuson real estate by investors has tremendously increased in the recentpast as macroeconomic features have evolved creating property value.Due to fluctuations and uncertainty in stock and money markets,institutional investors have shifted their focus to the risingsignificance of real estate assets as a significant player in theirportfolio management despite past sentiments that institutionalinvestors allocated small fractions of their investments in propertymarkets. Many financial critiques argue that there are reasons whyinstitutional investors shy away from real estate investment (Goodet al. 2007).
Notably,they argue that investments in real estate by these investors do notalways pay when the benefits are most needed unlike with the bondsand capital stocks. Secondly, they recognize that, institutionalinvestment in the long term real estate holds despite illiquiditywhile short term investment does not. There are institutional and taxconstraints which reduce the attractiveness of investments in realestate which then accounts for a small investment percentage theseinstitutions have in real estates.
Theoreticalliterature indicates low levels of institutional investments in realestates. However, despite these findings organizations investment inproperty market is an essential way of ensuring high returns inrelation to risks involved unlike the uncertain stock market it iseasier to predict capital returns in the property market given therising demand of property (Sonstelie and Portney 1980).
Inthe same note, investment in real estate is a long term initiativewhich diversifies risks period to short and frequent risks at thecapital market which may be costly to maintain. As a result oftechnological changes in the realm of real estate, have improved flowof information on market trends, leasing, construction and terms oflending all which have stabilized the property market sector. As suchprevious risks associated with business have been moderated makingreal estate investments more viable. Unlike in other asset cases,real estate’s valuations are more attractive (Rubens et al. 1989).
Realproperty is important in creating a hedge against dynamics that arecritical to institutional investors. For example, in the event ofinflation, investment in real estate provides hedging againstinflation compared to investment in the capital and bond markets.Financial advisors advice that, institutional investors should investlarge amounts in real estate’s as a possible caution in the eventof rising inflation (Michaels and Smith 1990).
Therefore,institutional investors should establish which property investmentshave paid well during bad macroeconomic times. Real estates areunique in the essence that they provide hedging benefits toinstitutional investors suspecting fall in revenue. Propertyinvestments assume a recession proof and take longer during economicdownturns than stocks and bonds. In some instances, investment inreal property helps in maximizing lifetime consumption forinstitutional investors rather than targeting portfolio returns(Craft, 2001).
Farmlandis another property that is gaining interest from organizationalinvestors as a way of managing portfolio. Farmers in developednations are using leased farm to increase their finances for managingother farm operations. Investment analyst records that, there havebeen increased investment in farming by institutional investors.There are many befits of investing in rural agricultural property toinstitutions. These property help in portfolio diversificationideally agricultural investments generate returns that are notsynchronized in the stock market (Michaels and Smith 1990). Theseaspects make them more lucrative investment opportunities byinstitutional investors who wish to improve on their portfolio.
Propertyinvestments also facilitates in the capital growth for theinstitutional investors. When funds are invested in water and landassets, with good management, these assets appreciate in value overtime that can boost the capital funds portfolio of the investors, Inmany recent studies it has been proved that investment in ruralproperty provides portfolio benefits when dealing with mixed propertyand mixed asset investments (Hardin & Cheng 2005).
Similarly,organizations that add these property investments in their businessbenefits from overall reduced risks of investments in their portfoliodue to, in part negative and low correlation between returns fromother investments and rural property. In other past studies, researchon investment performance from various organizations indicated that,farmland play critical role in portfolio diversification benefits(Straszheim, 1973).
However,it is not always benefit from rural property in diversifyinginstitutional portfolio benefits in times of uncertainties, thesebenefits reduce and it is, therefore, imperative for investors tounderstand rural property markets because, rural property does notresult in returns of equal measure as other investments such asindustrial and office property.
Conversely,investment researchers recognize that, with good management, ruralproperty could result in diverse and larger holdings compared toother investments. It is evident from several research studies thatdue to volatility in investment markets there have been high interestand importance of real property in diversifying institutional returnsin uncertain times (Lins et al. 1992).
Sourcesof property data critically evaluate and analyze that data
Mostproperty markets are not efficiently organized as other liquidinvestment markets. In the property market, different properties haveunique qualities that are not interchangeable and this presents agreat challenge to investors in evaluating investment opportunitiesand their respective prices. Locating such properties involves greatefforts and competition among other investors in purchasing differentproperties whose information about their availability varies. As aresult of this case, there are information asymmetries in propertymarkets which increase vulnerability to transactional risks (Day,2001).
However,there are benefits accrued from this nature information asymmetrysuch as providing investors with opportunities to bargain forproperty prices which are not as fixed as in the stock market.Appraisal techniques are applied by real estate entrepreneurs inevaluating property markets before engaging in the transactionprocess. There are several sources of property information likemarket listings, real estate agents, banks, government agencies,public auctions, private sales and through private sales (off marketdeals).
Itis a common source of property information from real estate agents,who are involved in capturing key information on propertyutilization, pricing and management. In most cases, the real estateagents act as intermediaries between the sellers and buyers. As such,they are regarded as having a fiduciary relationship with customers.They assist property sellers in the market to sell their propertiesat best prices and terms. In most countries, the practice of realestate agents calls for duality of the agency transaction meaningthat, agents are required to disclose to the buyer information aboutthe seller or client and in similar measure to the seller.
Inthis case, authority requires the agents have a practicing licenseand adhere to fiduciary duties. However, these sources of propertyinformation have a critical point of contention especially due to theconflicting interest on either side brokers rely on commission fromthe seller and the buyers, in such a scenario they are prone togiving false price contrary to the listed property price by theseller or buyer. In a broader sense, the brokers may not be honest ordisclose the exact details of the transaction that might affect theircommission.
MarketListings (commercial information exchanges)
Thisrefers to a web of internet connected commercial property listingwhere professional real estates in association of local markets shareinformation about property sales, market statics, contacts andtransaction details.Assuch, theseservicestend to exist in upscale and larger markets that are more developed,organized for commercial industry. In addition, these companies varyin relation to scope, states, regions and functions breadth anddepth of property data dealt with in the business. For instance, somedeal with commercial sales or leasing while others deal with offmarket properties. The limitation of this source of property data isthat, at times some do not have exclusive rights to lease or sellproperty which poses legal problem in case of a problem during orafter transaction. Another limitation of this source of property datais that, they do not include details of compensation on theparticipating parties.
Inthis case, property data about selling and buying of goods is offeredthrough bidding exchange of property is done to the highest bidder.In some cases, information about price and other relevant detailsconcerning the property to be auctioned is printed in catalogues orpassed through internet. The seller has maximum and minimum pricesetting to allow potential bidders know the range limit of bidding inadvance. This process has advanced to include bidding fee that ischarged on each participant prior the auction time. In some cases ofauction, reserve price is dictated to the participants to encouragemore completion (Michaels and Smith 1990).
Inthis respect, therefore, auction might not be a reliable source ofproperty information at prices, quantities and other relevantinformation is not made available for clients. Although biddingallows for price bargain, there is little room to assess the propertyauctioned, few legal procedures and chances of buying property thatis tied with legalities. In this respect, auctioning may only serveparticular properties whose valuation and authenticity needs fewlegal procedures. Investment in the property market demands a dualdiligence at all costs(Good et al. 2007).
= 2.544(value generated from Excel worksheet)
Mean=$ 280, 598
Range=Highest price value-Lowest price value
Wherex is the sample mean average (number1, number2,) and n is the samplesize
Incalculating the multiple linear regression, where more variables areinvolved (topography, location, soil type and other variables thisformula could be used to estimate prices in the neighborhood.
E(Y|X) = a+B1X1+ · · + BpXp
Where aisthe standarddeviation and B1isthe coefficient, in this case E(Y |X) is the price forecaster. Inthis case, for every lot with attributes X1, in the data, we are ableto estimate the price of property. In this case a hedonic pricingmethod (multi-linear regression) is used to estimate the economicvalue and prices of the neighborhood lots. This method uses basicassumption that the price of the residential lots are related to theneighborhood characteristics like area, frontage, depth, shape, view,topography, aspect and soil condition. In this case, the pricinggiven for residential lots reflect slight deviation of square area tothe lot price. From the calculations, the average price for the lotsis $280, 598 while the standard deviation is stands at a=2.544.
Multi-linearregression is important in this case in illustrating how theresidential lots prices are related to open spaces. In this scenario,it is apparent that proximity to environmental characteristic such asopen space near transportation route, frontage and radius of eachproperty determines the pricing. Multi-linear regression wasperformed using the total values of lot prices against theresidential lot size area. R-squared coefficient was calculated at88.7% indicating that there was a significant effect of area size andlot value.
Amulti-linear regression using other variables like frontage, view,topography and soil would give a regression value at 95%, sinceresidential lots prices are highly influenced by these aspects. Fromthis regression analysis, the variation in pricing of the residentiallots in the area could also be attributed to topography, frontage,view and proximity to roads. When using Multi-linear analysis,changes in property prices could be analyzed through regression.
However,this model may be complicated in a number of ways if therelationship between residential lot prices and the variables(characteristics) is not linear, for example, when there are changesin variable characteristics, this does not result in changes inproperty prices. Nonetheless, Multi-linear regression model isadvantageous in that the regression analysis is used to estimatevalues based on their actual prices, data on property records arereliable and available for analysis. The regression model could alsobe useful when making predictions for tax, estate deals and checkingthe listed price if they fall below the correct range, assessing theoutliers as well as trends in land prices (Michaels and Smith, 1990).
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