Lectorial 1 SM 1 2021

Property and Capital Markets
BUIL1228
Tony McGough
Senior Lecturer, Property Investment
RMIT University, Melbourne
Module 1 Introduction to Property
and Investment
Course outline, Overview of assessments. Property

Characteristics. Three market principle: space,
property and capital markets.
RMIT Classification: Trusted
Introduction
– Introduction
– About me
– Expectations for how the course runs
– About the course
– Assessment
RMIT University 2021 BUIL 1228 Property and Capital Markets, RMIT Property and Valuation Discipline, PCPM 3
How the course runs.

• Lecture notes and tutorial questions will be put up the weekend before lectures start
• Tutorial answers will be put up with a delay, a few weeks will come out every 3- 4
weeks
• Please read announcements
• If you email me a question which has been answered in announcements / the
lecture, I shall reply read the course notes
• I aim to answer emails in less than 48 hours, usually less than 24 hours – nudge me
if you get no response
• Keep on top of the course – do not start reading the notes in week 11
• Those people on-line during the live teaching class are expected to contribute to
tutorials we will see how this works
About the Course

Aims of this course:
– To understand the reasons for investing in property and the role
of property in the wider economy from an investment perspective.
– To appraise the different property sectors and investment

products which comprise the property investment market.
– To evaluate the impact of equity and debt on the property

investment market (financing of property).
– To evaluate and analyse the roles and responsibilities of various

property stakeholders.
– To understand the capital markets (investment and finance

sectors of the economy).
Assessment
– 2 x Multichoice tests in Canvas worth 20% in total
– Written Assignment on a REIT worth 30% in total
– Final exam worth 50% in total
Week Module/Content Assessments
Module 1 Introduction to Property as an Investment
Course outline; Understand the different types of property. Detail the importance of diversification across the property sector. Identify the
characteristics of property as an investment class.
1
Explain the three market principle: space, property and capital markets.
Module 2 Property and Capital Markets
2 Detail the fundementals of investing and the importance of income in real estate. Identify property stakeholders.
Identify competing asset classes, detail why property offers unique opportunities.
3 Detail the property investment universe, local and international property.
Detail strategy to invest offshore and highlight benefits and issues with global property investment.
Module 4 Understanding the Property Investment Markets
Real Estate Investment Trusts – Understand the REIT structure and the difference between internal and external managed trusts. Examine TEST 1; REITs allocated for
4
REIT performance measures and discuss the role of property securitised funds. your assignment
Module 3 Introduction to Property Finance

Understand the various types of finance and when and why they are used. Identify the key factors and considerations in financing property
5
investments and developments.
Mid Semester Break
Hand in Part A of your
6 Property Financing, Examine of private and public debt structures and lending practices.
assignment
Analysis the impact of debt on property performance. Understand the concept of leverage on investor property returns.
Module 4 Understanding the Property Investment Markets - contd.

Wholesale Unlisted Property Trusts – Discuss structure and market participants. Examine performance benchmarks and compare to
7
alternative property asset classes.
Property Syndication – Investigate the structure and market participants. Analysis the features of a property syndicate prospectus.
8 Discuss the decision making process for investing in commercial property. Detail the various property investment vehicles.
Identify investor types and their portfolios strategies.

Module 5 Introduction to the Capital Markets
9 Explain investment concepts and associated process. Detail risk and return performance measures.
Discuss the Australian capital market structure and identify market participants. Understand key capital market determinants.
Understand the operation of the equity markets and the role of Australian Stock Exchange. Understand the operation of the bonds and cash TEST 2; Hand in Part B of
10
markets. your Assignment
Superannuation – Explain the concept of superannuation, Detail the structure of the Australian superannuation industry
11 Superannuation – Analysis the difference superannuation options. Consider superannuation allocation across investment classes
Superannuation – Discuss superannuation funds allocation to property. Understand the property investment framework.
12 Course review and exam revision.

Vac (week 13): Final Exam: TBC
What is Property?
Property has 3 components:
– Property is an important part of society as property provides

shelter and a place for an economy to operate from.
– Property development is a key part of economy activity and

governments understand the importance of the property and
construction industry to employment and economic growth.
– Property forms a key investment asset class and competes

with alternative asset classes on performance and for funding.
Types of Property
Residential Property Sector

Types
– Houses: Planned community living
with defined building styles
– Management logistics, relatively low income
returns
– Apartments: Multi-storey and High

rise developments offering facilities
(retail and entertainment) and public
infrastructure
– Major property companies are involved in
high rise apartments
908/60 Lorimer Steet, Docklands
Residential
Affordability becoming strained. Risks if interest rates rise. Price outlook more subdued in the next twelve months.
Types of Property
Core Property Sector
Property definitions are broadly related

to employment categories
Types
– Office: traditionally located in the

Central Business Districts and near
public infrastructure
(Source: Savills 2015)
Offices
Offices
Source: Gartner
Types of Property
Core Property Sector -

continued
– Retail: Shopping centres with strong
catchments areas and good public
infrastructure
– Different shopping centre

categories:
– regional to neighbourhood
– New categories
– factory outlets How the new Chadstone will look after $580m expansion. (Herald Sun 2015)
– homemaker centres
Types of Property
Case Study: Melbourne Central,
360 Elizabeth Street
The complex includes:
Retail precinct (160 specialty retail
outlets)
–46 floors of premium office space
–Carpark (1,600 vehicles)
–Access to underground railway station
Retail
Retail
Types of Property
Core Property Sector -

continued
– Industrial:
Manufacturing,
Warehousing
HI-Tech supported by good
transport infrastructure
– Commonly developed for a
specific occupier
Source: Goodman Group

Industrial
Industrial
Types of Property
Non Core Property
– Sector specific
- Community facilities: hospitals, prisons, retirement villages,
childcare centres
- Entertainment facilities: amusement parks, marinas, ten pin
bowling centres
- Hotels: Services the tourism industry. Location and hotel
management critical
- Sport facilities: golf courses, sport stadiums
– Asset pricing challenges

– Limited comparisons
Types of Property
• Retail
–Shopping Centres
–High Street
• Office - usually CBD
• Industrial
• Secondary
–St Kilda in Melbourne
–Adelaide
• Tertiary
–Sunshine in Melbourne
–Hobart
• Non-core/Alternatives
–Retirement homes, student accommodation, prisons etc.
Summary
– Property stakeholders can diversify across locations, and

property types
– Core property investment types have recently been

complemented by new non core property opportunities
– Property features unique characteristics which sets it apart

from alternative investment classes
First Tutorial Break
Property Market Structure
Historical Perspective
– Property market was viewed as a single entity

– not related to other markets
– Buildings formed part of an organisations
operation requirements
– Characterised by ongoing influences from different

aspects of the economy
– Up to the late 1990s the favorite approach was a two

market model – space market (demand) and the asset
market (supply)
An Economic Interruption
The Law of Demand
• First Law of Demand

–What Does Law Of Demand Mean?
–all other factors being equal, as the
price of a good or service increases,
consumer demand for the good will
decrease and vice versa.
–http://www.investopedia.com/terms/l/la
wofdemand.asp
Changes in Demand
The Law of Supply
Changes in Supply
Equilibrium
Markets NOT in Equilibrium
<Insert Figure 4.9 from Gans 5/e pg 82>
© 2011 Cengage Learning Australia Pty Ltd.
The Cobweb Theorem
Price
(£)
S
11
D1
D
8 9 15 17 Quantity Bought and Sold
(millions)
The Cobweb Theorem
• http://www.bized.co.uk/current/mind/2004_5/251004.ppt
• Hungarian-born economist Nicholas Kaldor (1908-1986)
• Simple dynamic model of cyclical demand with time lags
between the response of production and a change in price
(most often seen in agricultural sectors).
• Cobweb theory is the process of adjustment in markets
• Traces the path of prices and outputs in different equilibrium
situations. Path resembles a cobweb with the equilibrium point
at the center of the cobweb.
• Sometimes referred to as the hog-cycle (after the phenomenon
observed in American pig prices during the 1930s).
Useful Websites
– Understanding differences between factors that cause shifts in demand or supply

– http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.html
– Basics of demand and supply
– http://www.investopedia.com/university/economics/economics3.asp
– Cobweb theorem
– http://www.bized.co.uk/current/mind/2004_5/251004.ppt
Back to
Space market Property market Capital market
Demand Property Market

Economic markets conditions Financial
influences performance factors
Supply
Government
Central, Regional and Local
Adapted:Adapted:
Archer & Ling
Archer 1997
and Ling 2010
Space Market
– Demand for space by occupiers
Property Market
– Supply and performance
Capital Market
– Investment platform (competes with alternative asset

classes)
Space Market
– Space demand can be unpredictable and complex
– Relates to particular activities, locality and timeframe
– Space demand in varying degrees and forms mirrors

economic activity

Government Controls and Policies
Space market (Demand)
– Population policies (quotas on overseas migration)

– Incentives
- First time home buyers
- Manufacturing tax incentives
– Opportunities for overseas owners to purchase properties

- Foreign Investment Review Board (FIRB)
Property Market
– External parameter linked to space and capital markets
– Internal momentum
- as the supply of property can not adjust instantaneously
to changes in demand
– Income returns linked to lease structure (i.e. lease terms

and rent review process)
Property market (property market conditions and supply)
– Release/rezoning of land
– Changes in planning policies (for example: housing

density)
– Building regulations (sustainability agenda)

Source: Higgins and Reddy 2010
Capital Market (serve a variety of related functions)
– Allocating scarce capital amongst competing uses
– Establish required returns on investments
– Assess the risk of investments

Capital market (Finance)
– Monetary policies (money supply, government bonds)
– Changes in property taxes (negative gearing, transaction

tax - stamp duty)
– Regulations that impact on alternative asset classes
– Changes in superannuation policies (in an indirect way)
Summary
– Property stakeholders can diversify across locations, property

types, property investment structures and property tasks
– The market structure include: space market, property market

and capital market
– Property competes with alternative asset class for funding
Readings
Key References
Archer W and Ling D. 1997, The Three Dimensions of Real

Estate Markets: Linking Space, Capital and Property Markets,
Journal of Real Estate Finance, Vol.3, No.2, pp. 7-14
Higgins, D 2001 “The Determinants of Commercial Property

Market Performance”, PhD Thesis, pp. 1-6.
Recommended
Geltner D and Miller N, 2007, Commercial real estate analysis and investments, 2nd edit,
Prentice Hall, New Jersey, p180-203
Higgins, D and Reddy, W 2010, 'The impact of political risk on Australian house prices',
Australian and New Zealand Property Journal, vol. 2, no. 7, pp. 413-422.
Second Tutorial Break

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Property and Capital Markets

Course outline, Overview of assessments. Property

– Expectations for how the course runs

– About the course

How the course runs.

About the Course

– To appraise the different property sectors and investment

– To evaluate the impact of equity and debt on the property

– To evaluate and analyse the roles and responsibilities of various

– To understand the capital markets (investment and finance

– 2 x Multichoice tests in Canvas worth 20% in total

– Written Assignment on a REIT worth 30% in total

– Final exam worth 50% in total

Module 3 Introduction to Property Finance

Module 4 Understanding the Property Investment Markets - contd.

Identify investor types and their portfolios strategies.

12 Course review and exam revision.

Property has 3 components:

– Property is an important part of society as property provides

– Property development is a key part of economy activity and

– Property forms a key investment asset class and competes

Residential Property Sector

– Apartments: Multi-storey and High

908/60 Lorimer Steet, Docklands

Core Property Sector

Property definitions are broadly related

– Office: traditionally located in the

(Source: Savills 2015)

Core Property Sector -

– Different shopping centre

–46 floors of premium office space

–Carpark (1,600 vehicles)

–Access to underground railway station

Core Property Sector -

Source: Goodman Group

– Asset pricing challenges

– Property stakeholders can diversify across locations, and

– Core property investment types have recently been

– Property features unique characteristics which sets it apart

First Tutorial Break

Property Market Structure

Property Market Structure

– Property market was viewed as a single entity

– Characterised by ongoing influences from different

– Up to the late 1990s the favorite approach was a two

The Law of Demand

• First Law of Demand

The Law of Supply

Markets NOT in Equilibrium

<Insert Figure 4.9 from Gans 5/e pg 82>

© 2011 Cengage Learning Australia Pty Ltd.

The Cobweb Theorem

The Cobweb Theorem

– Understanding differences between factors that cause shifts in demand or supply

Property Market Structure

Space market Property market Capital market

Demand Property Market

Property Market Structure

– Demand for space by occupiers

– Supply and performance

– Investment platform (competes with alternative asset

Property Market Structure

– Space demand can be unpredictable and complex