Real Estate Investment 2nd

Real Estate – The Global Asset 3

1.1 The Global Property Investment Universe 3

1.2 Market Players 6

1.2.1 Investors 6

1.2.2 Fund Managers 9

1.2.3 Advisors 9

1.3 Property – Its Character as an Asset Class 11

1.3.1 Property Depreciates 12

1.3.2 Lease Contracts Control Cash Flows 13

1.3.3 The Supply Side is Inelastic 13

1.3.4 Valuations Influence Performance 14

1.3.5 Property is Not Liquid 15

1.3.6 Large Lot Sizes Produce Specific Risk 16

1.3.7 Leverage is Commonly Used in Real Estate Investment 18

1.3.8 Property Appears to be an Inflation Hedge 19

1.3.9 Property is a Medium-Risk Asset 21

1.3.10 Real Estate Cycles Control Returns 22

1.3.11 Property Appears to be a Diversifying Asset 24

Specific Risk 27

Leverage 27

Illiquidity 28

Taxes, Currency, and Fees 28

1.4 Conclusion 28

Global Property Markets and Real Estate Cycles, 1950–2020 33

2.1 Introduction and Background 33

2.1.1 The Property Cycle 33

2.2 A Performance History 34

2.2.1 Before 1970: Real Estate Becomes a Medium-Return Asset 34

2.2.2 The 1970s: Inflation, Boom, and Bust 36

The USA 36

The UK 37

2.2.3 The 1980s: New Investors Flood the Real Estate Capital Market 38

The USA 38

The UK 42

2.2.4 The 1990s: The Rise of REITs 43

The USA 43

The UK: Deep Recession, Low Inflation, and Globalization 45

2.2.5 2002–7: A Rising Tide Lifts All Boats 47

The USA 47

The UK 59

2.2.6 The Global Real Estate Credit Crisis Hits 60

The USA 60

The UK 67

2.2.7 The Markets Recover Post-crisis 70

2.3 The Global Market 72

2.3.1 The European Market Develops 72

2.3.2 Asia Emerges 75

2.4 Real Estate Cycles: Conclusion 80

Lesson 1: Too Much Lending to Property is Dangerous 80

Lesson 2: Yields are Mean-Reverting – Unless Real

Risk-Free Rates Change 81

Lesson 3: Look at Yields on Index-Linked 81

CHAPTER 3

Market Fundamentals and Rent 83

3.1 Introduction: The Global Property Cycle and Rent 83

3.2 The Economics of Rent 84

3.2.1 Rent and Operational Profits 84

3.2.2 Theories of Rent 86

Ricardo 86

von Thünen 87

Fisher 89

3.2.3 Rent as the Price of Space 90

3.2.4 Supply 91

3.2.5 Demand 93

The Cyclical Demand for Space 93

The Structural Demand for Space 94

Variations in Locational Demand by Use 95