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What is Real Estate Finance?

Paper 15 Lent term - Lecture 1

Overview of Topics
Why study Real Estate Finance? What is involved? How does Paper 15 cover these topics?

Paper 15 - Shaun Bond, Department of Land Economy

Industry Based Presentations


Mr Tom Napier, Managing Director, Real Estate Finance, Bank of America. Will be speaking on Real Estate Financing - 13 Feb, 12pm. Mr Chris Bartram, Chairman, Haslemere NV. Presentation on Property Portfolio Management, 7 March, 12pm (to be confirmed).
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Why Study Real Estate Finance?


From a finance perspective how does real estate differ from a steel plant, work of art or a share listed on the stock exchange?

Paper 15 - Shaun Bond, Department of Land Economy

Why Study Real Estate Finance?


Some answers (Williams 1999, Ball et al. 1998):

Real assets are heterogeneous


shares or gilts standardised, unlike property. minor locational differences can be important. construction, design, use, tenant & lease terms. lot size often much larger than other investment vehicles. Implications - difficult to hold identical portfolio (eg market portfolio), ability to diversify is limited (eg 100 million may not be sufficient).
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Real assets are traded in loosely organised and decentralised markets Costly search procedure, need for brokers, time, checking of physical structure/legals. Shares are traded in tightly organised, centralised markets, property traded regionally, importance of comparable sales, trading costs approx 5.5%. Implications : measuring investment performance, management costs.

Why Study Real Estate Finance?

Paper Specific spacial dimension to property. 15 - Shaun Bond, Department of Land Economy

Areas of Study in R.E. Finance


Finance theory covers:
portfolio choice asset pricing market microstructure contingent claims international finance asymmetric information corporate finance
Paper 15 - Shaun Bond, Department of Land Economy 7

Matching Real Estate Topics


Finance Topic
Portfolio choice Asset prices, returns Market microstructure Contingent claims International finance Asymmetric information Corporate finance
Paper 15 - Shaun Bond, Department of Land Economy

Real Estate Finance


Choosing properties in a portfolio Real estate indices, hedonic models, return distributions Market microstructure Mortgages and real options International portfolio management Currency risk management Mortgage backed securities Bankruptcy (optimal leverage)
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Topics covered Paper 15


Corporate Finance
Mortgages & Financing (2-4, 6-7) Leverage (5) Securitisation (8-9) Contingent claims (10)

Portfolio Choice & Asset Pricing


Portfolio theory (11-12, 15-16) Returns & risk (13) International finance (14)

Paper 15 - Shaun Bond, Department of Land Economy