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Comm 405 Real Estate Finance

This document provides an overview of real estate finance. It defines finance as the study of transferring money and credit between individuals, businesses, and governments. Real estate finance is a sub-discipline that includes studying the institutions, markets, and instruments used to transfer money and credit for developing or acquiring real property. It also discusses key concepts in real estate finance like transactions, credit vs. future savings, borrowing on income-producing properties, financial markets and intermediaries, interest, the mortgage market, and theories that influence the yield curve.

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89 views10 pages

Comm 405 Real Estate Finance

This document provides an overview of real estate finance. It defines finance as the study of transferring money and credit between individuals, businesses, and governments. Real estate finance is a sub-discipline that includes studying the institutions, markets, and instruments used to transfer money and credit for developing or acquiring real property. It also discusses key concepts in real estate finance like transactions, credit vs. future savings, borrowing on income-producing properties, financial markets and intermediaries, interest, the mortgage market, and theories that influence the yield curve.

Uploaded by

Freelansir
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© Attribution Non-Commercial (BY-NC)
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COMM 405 REAL ESTATE

FINANCE

„ LESSON 1

Instructor: Larry Wosk

WHAT IS FINANCE?
„ FINANCE IS THE STUDY OF THE
PROCESS, INSTITUTIONS, MARKETS,
AND INSTRUMENTS USED TO TRANSFER
MONEY AND CREDIT BETWEEN
INDIVIDUALS, BUSINESSES AND
GOVERNMENTS.

SUB-DISCIPLINES OF FINANCE

„ There are several disciplines such as:


„
„

1
REAL ESTATE FINANCE
„ A VERY BROAD CATEGORY INCLUDING:
„ THE STUDY OF INSTITUTIONS, MARKETS,
AND INSTRUMENTS USED TO TRANSFER
MONEY AND CREDIT FOR THE PURPOSE
OF DEVELOPING OR ACQUIRING REAL
PROPERTY

REAL ESTATE TRANSACTIONS

„ THE TRADING OF OWNERSHIP OF


INTERESTS IN LAND

REAL ESTATE FINANCE


INCLUDES
„ THE STUDY OF:
„
„
„

2
RELATIONSHIP BETWEEN
CREDIT vs. FUTURE SAVINGS
„ CREDIT IS AN ADVANCE OF FUTURE
SAVINGS OR PURCHASING POWER AS IT
SUBSTITUTES FOR CAPITAL YET TO BE
ACCUMULATED

BORROWING ON INCOME
PRODUCING PROPERTIES
„ EVEN IF YOU HAVE THE FINANCIAL
LIQUIDITY TO PURCHASE AN INCOME
PRODUCING PROPERTY OUTRIGHT IT
MAY BE PREFERRABLE TO BORROW
PART OF THE PURCHASE PRICE ANYWAY
„ WHY?

FINANCIAL MARKETS
„ MONEY MARKET

„ CAPITAL MARKET

3
FINANCIAL INTERMEDIARIES
„ FINANCIAL INSTITUTIONS THAT
CHANNEL FUNDS FROM THE SURPLUS
INCOME UNITS TO THE DEFICIT INCOME
UNITS.

10

LARGEST POOLS OF CAPITAL IN CANADA –


FINANCIAL INTERMEDIARIES

„ CHARTERED BANKS

„ LIFE INSURANCE COMPANIES

„ TRUST COMPANIES

11

PRIMARY & SECONDARY


MARKETS

„ PRIMARY MARKETS

„ SECONDARY MARKETS

12

4
INTEREST

„ “RENTAL” PAYMENT FOR THE USE OF


CAPITAL THE LENDER HAS INVESTED

13

INTEREST ON MORTGAGES

„ FROM A LENDER’S VIEWPOINT

14

DETERMINING THE LOAN RATE

THERE A SEVERAL KEY ELEMENTS TO BE


CONSIDERED WHEN SETTING THE RATE

15

5
MORTGAGE MARKET
„ SUPPLY SIDE

„ DEMAND SIDE

16

MOVEMENT OF INTEREST RATES

„ TEND TO MOVE WITH FLUCTUATIONS IN


THE NATIONAL ECONOMY

17

GENERAL LEVEL OF INTEREST


RATES
START OFF WITH A “RISKLESS” BOND
„ ISSUER WILL MEET ALL INTEREST AND
PRINCIPAL PAYMENTS WITH CERTAINTY
„ INSTRUMENT CAN BE SOLD INSTANTLY
FOR CASH AT A STATED PRICE
„ NO EXPECTATION OF INFLATION
(DEFLATION) AT ANY TIME IN THE
FUTURE

18

6
RISK CHARACTERISTICS
„ DEFAULT

„ CALLABILITY

„ MATURITY

„ MARKETABILITY (LIQUIDITY)

19

YIELD CURVE
„ A GRAPHICAL REPRESENTATION
THAT RELATES MATURITY AND
YIELD ON BONDS OF THE SAME
GRADE AT A POINT IN TIME

20

NORMAL YIELD CURVE


7
6
5
4
Yield (%)
3
2
1
0
1 5 10 20

21

7
INVERTED YIELD CURVE

7
6
5
4
YIELD (%)
3
2
1
0
1 5 10 15 20 25

22

HUMPED YIELD CURVE

7
6
5
4
Yield (%)
3
2
1
0
1 5 10 20 30

23

3 PRINCIPAL THEORIES RESPONSIBLE FOR


THE SHAPE OF THE YIELD CURVE

„ LIQUIDITY PREMIUM THEORY

„ MARKET SEGMENTATION THEORY

„ EXPECTATIONS THEORY

24

8
LIQUIDITY THEORY
„ LONG-TERM RATES TEND TO BE HIGHER
THAN SHORT-TERM RATES BECAUSE A
PREMUIM MUST BE PAID TO INVESTORS
WHO ARE RELUCTANT TO TIE UP THEIR
FUNDS FOR LONG PERIODS OF TIME

25

MARKET SEGMENTATON
THEORY
„ THIS GROUP BELIEVES THAT THERE IS
NOT ONE CONTINUOUS BOND MARKET,
BUT SEVERAL DISCRETE SEGMENTS,
WITH DIFFERENT PLAYERS IN EACH
SEGMENT.

26

EXPECTATIONS THEORY

„ THIS APPROACH SUGGESTS THAT THE


YIELD CURVE IS A PICTURE OF WHAT
PEOPLE EXPECT RATES TO BE IN THE
FUTURE.

27

9
SOURCES:
„ Baxter, D., Hamilton,S.W., & Ulinder, D.D. Real Estate Finance
in a Canadian Context (1998) UBC Real Estate Division
„ Clauretie, T.M. & Sirmans,G.S. Real Estate Finance, Theory &
Practice (2003) Mason, Ohio: Thomson Southwestern
„ Croft, R. Yield Curves and what they mean Retrieved Sept 9,
2004 http://www.canada.etrade.com/yieldcurves.shtml

28

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