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WEEK 1 Space & Asset Market - Coggle Diagram
WEEK 1 Space & Asset Market
Space Market/ Rental Market
For the usage (or right to use) 'Real" Property
Tenants and Landlords exchange money for leases
Demand Side
Tenants require specific types of space
An accountant can't use a warehouse
A trucking firm can't use a high-rise office bldg
Tenants require specific locations
Trucking firm's trucks would open all their time stuck in traffic if warehouses were located in the CBD
An account won't get much business in industral suburbs
Supply Side
Building are of specific physical types
Building are in specific locations
landlords supply space/ the owners of property
LR supply is kinked
Kink is where supply starts to grow
The Replacement Cost of Rent
kink point moves out with increase in current stock of supply
LR Supply function
= LR marginal cost function (LRMC)
MC= Howmych does it cost to make on extra of somthing
Rising LRMC= common due to living in a world of inflation
SR Supply
Vertical
Vertical, b/c, it is perfectly inelastic due to supply cannot meet the demand, it is fixed
Physical Capital = Real Phyiscal assets that produce real g&s over a period of time
Asset Market/ Property Market
Owning 'Real' Property
Pension Fund exchanges my super money for an office bldg
part of the capital market
Real Estate Assets= Future Cash Flows
3 Major determinants of Cap rates
The Opportunity Cost of Capital (OCC)
Growth Expectation
Risk
Financial Capital = Money, V= E+D
Segmentation
Space Market
Market is segmented if it break up into sub-markets or market segments
within each segment, the same good may have a different equilibrium price
highly segmented due to being a real asset
2 Major dimensions
Georgraphic Location
Basic Unit
Metropolitan area
Sub-markets
CBD
Suburban neighborhoods
Property type
Residential
House/Apartment
Commercial
Office
Industrial
Factory/Warehouse
Retail
Other
Hotels, health-care, etc
Borad acre/Rural
Asset Market
not segmented but integrated
Cap Rate
Formula
NOI / Market Price
NOI= Net Operating Income
Yield measure
Yield Formula
Income / Asset Value
Property Value
Simple EG
You earn $10 Rent, you need to earn a return of 10% income, what price will you pay for property? A: $100
Property Price= Current Annual Net Income / Cap rate
Cap Rate captures the driving relationship between income and prices
Cap Rate provide the break-even price
Property price=Devlopment Cost
Replacement Cost of Rent
Rent below Replacement Cost
no new development
due to property price < development costs
Rent < Replacement Cost
Stock of space fall in LR
part of stock will depreciate due to wear and tear
Rent above Replacement Cost
New development can occur
due to property prices > development cost
Rent > Replacement Cost
Stock of space rising in LR
Building a Maintenance Fund
Formula
n = [ In (FV X r / PMT +1)] / In(1+r)