MMP212 PROPERTY INVESTMENT

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1 MMP212 PROPERTY INVESTMENT Week 1 - Investment Principles and Key Concepts What is an Investment? Key Terms Sacrificing of certain present benefits for uncertain future benefits A choice between consumption in the present and consumption at a future time In finance and real estate: Any activity focused on the creation of more money through the utilisation of capital. Asset o A possession that has value in exchange Real Assets o Physical or identifiable assets such as gold, land or equipment Financial Assets o An asset that derives value because of a contractual claim. For example, Stocks Bonds Bank Deposits o They represent paper claims by one person against another i.e. Piece of paper evidencing a claim on the issuer Institutional Investors o Large investing entities including REITs, superannuation/pension funds and insurance companies Asset Class o Refers to a category of investment media There are four major assets classes Shares Property Cash Fixed Assets All assets classes have different risk/return characteristics Capital Markets o Public Markets Trade smaller homogeneous units (Stock Market) and exhibit a high degree of liquidity o Private Markets Are private transactions traded behind closed doors, generally less liquid (Property Market) Market Value o Probabilistic estimate of the price at which a future transactions will occur Investment Value o Value of a property as an investment to a present or prospective owner Investments unlikely to arrive at same investment value conclusions as they differ on o Perceived levels of returns o Perceived levels of risks o Willingness to defer immediate consumption in interest of future benefits o Economies of scale

2 Types of Investment Returns Return o Amount of net cash flow generated by an investment every year Regular, Periodical Return o Savings account at bank Capital Value Change o Gold, Undeveloped Land Combination of Periodic Return and Capital Value Change o Shares and Property Investment Risks and Return Risk The variability of returns or the chance that an investment s actual return will be different than expected Risk-return trade off o When one asset is riskier than another, it requires that the expected return increase to compensate investors for the additional risk o Low potential returns are associated with low risks o High potential returns are associated with high risks Risk and Return A 100% sure, return 10% B 20% probability, return 100% or 80% probability, return -12.5% Asset Classes Defensive Assets o Offer lower risk and lower returns. o May suit short term investors or those wanting to reduce the risk of market volatility. Eg: Cash and fixed interest investments Growth assets o Provide the potential for longer term capital gains, but have a higher level of risk over defensive assets. o May suit investors seeking capital gains over the longer term and who are willing to accept an increased risk of volatility over the short to medium term. Eg: Property, Australian shares, international shares Common Investment Cash Investments in financial institutions which have a short investment time frame (e.g. bank accounts, term deposits) o Advantages Provide a stable (low) return, higher security o Disadvantages Provide very little income and no capital growth Can be risky over the long-term as inflation might eat away the value of investment Common Investment Bonds An interest-bearing certificate, issued by either government or listed companies to raise debt Pays a fixed amount of interest on specified dates, usually every six months, until maturity Types o Treasury bonds - bonds issued by the Treasury and backed by the full faith of the federal government o Corporate bonds bonds issued by listed companies

3 Common Investment Shares and Stocks A type of investment that gives you partial ownership of a listed company Return from investing in stock o Returns come through dividends and price appreciation Common vs. Preferred stocks o Preferred carry the right to receive a dividend (fixed percentage ) which must be paid before any dividend payment o Common no fixed percentage dividends, will only receive a dividend after other shares Common Investment Property Why property is different from other common investment options? o Investment size o Holding period o Complexity of transfer system o No formal market structure for real estate o Absence of standardized performance information o Uniqueness of each parcel of real estate Why Invest in Property? Three forms of value and return to investing in property: o Periodic cash flow o Equity build o Tax shields Property Investment Options Direct / active investors o Acquire direct title to real property o Either oversee property themselves or hire management firms Indirect / passive investors o Investing/placing savings in funds which buy and control income-producing properties such as Property trusts (REITs) Institutional funds Direct Property Investment Options Office Retail Industrial Agricultural Residential Other (leisure, business parks, education)

4 Benefits of Direct Property Investments Rental income (mostly fixed) Potential for capital gain Leveraging Control of the investment Tax shields Security Diversification of investor objectives Less volatile values Rents are paid in advance Pride of ownership Direct Property Investment Risks Slow trading capability Low liquidity No centralized market Imperfect information Changes in technology, design or working & living practices affect the value Impact of external influences (legal, tax, economic) Frequent government interventions Reliance on valuation for pricing and possibilities for mispricing Indirect Property Investments REITS o An REIT owns a portfolio of large properties o These large investments are broken up into units of smaller value that can be purchased by private investors o Westfield Group, Westfield Retail, Stockland, GPT Group, Goodman Group Institutional funds o Pool the money of many investors which is then invested and managed by professional fund managers o Eg. AMP Limited Advantages of Indirect Investments Access to large scale, expensive properties Lower capital required Higher liquidity Diversification benefits Free of property administration Economies of scale Access to management expertise Investors are able to respond quickly to market changes

5 Disadvantages of Indirect Investments Loss of control of the investment Reliance on the management company to manage the portfolio to maximize the return High management expenses can erode the benefits of the investment Difficulty in obtaining full information on the property assets and the development schemes of the fund Property stock prices are more volatile Management may have different investment objectives