01 – Introduction What is Real Estate (R.E.)? The term “Real” comes from the term “Realty” which means land and other things permanently attached (e.g., building and other structures). Items not considered “Realty” are referred to as “Personalty”, which includes all intangibles and movable things (e.g., automobile, bank accounts, patents etc.). “Estate” means all that a person owns, including both realty and “Personalty”. Hence “Real Estate” is the portion of a person’s estate that consists of “Realty”. In practice, we generally use the word “Real Estate” rather than “Realty” to mean land and all other things permanently attached. Property Rights When investing in Real Estate, we acquire (rights): 1. Physical assets of land and all things permanently attached 2. Certain rights (e.g., right to control, occupy, develop, lease, dispose etc.) These rights are known as “Property Rights” and lead to terms like “Real Property Rights” or just “Real Property”. For nonreality we have the term “Personal Property”. Types of Real Estate • • • • • • • • Land Retail Properties (Community retail centers, malls etc.) Warehouse and Industrial Properties Office Properties Single Family Homes Multifamily Apartments Hotels Healthcare Properties etc. What is Real Estate Finance Real Estate is a rich subject which blends fields like economics, finance, design, urban planning, geography, law etc. Real estate finance is the study of the institutions, markets, and instruments used to transfer money and credit for the purpose of developing or acquiring real property. Real Estate is a huge part of the economy and the financial system, but more than that, it has tremendous impact on the physical and social environment – it is how cities are built. Why are we interested? Magnitude of RE industry Serious need of strategically managing this huge industry with a touch of flexibility Real Estate assets play a critical role in the context of climate risk; as per the International Energy Agency (IEA) 2022 report, real estate assets are the major consumer of energy in the world and the built environment generates 40% of the annual global CO2 emission. Why does it matter? - 3,000,000,000 people to be “urbanized” by 2050 (=entire world pop in 1960). 300,000,000 to be urbanized in China by 2030 (≈US pop) About USD 11 trillion investment in housing in China until 2020. Scale & pace: Order of magnitude greater than in 20th century Earth under huge stress (climate, energy, resources, social) We’ve made big mistakes in past (e.g., half of U.S. railroad mileage abandoned soon after built, U.S. “Urban Renewal” & public housing high-rise failures…) “We got to do it right” The basic point… Unknowns of 21st century: Technology, Economy, Resources, Climate, Pandemics like COVID-19… Greater uncertainty than ever before. FLEXIBILITY in major capital placement is crucial (HSBC expansion an example). New data and tools allow more rigorous valuation of flexibility in development projects (RE, Infrastructure) The Commercial Property Development Industry Development is a creative, entrepreneurial process characterized by (all the most entertaining features of Capitalism): - - Vision Greed Cooperation o Between public and private sectors o Between developers and financiers Risk o Even an economy in recession needs an existing stock of built space. o New space (need for development) results only from economic growth and/or change. R.E. Development is therefore dealing with the dynamic “cutting edge” of the physical built environment. This makes development the most cyclical branch of the real estate industry… The Real Estate System Major components of Real Estate System: Space Market Asset Market Development Industry The “Real Estate System”: Interaction of the Space Market, Asset Market, & Development Industry Negative Feedback Loops Mechanisms within a system that tend to dampen the changes in the system, helping to keep it in control, preventing it from spiraling out of control. Example: A thermostat puts a negative feedback loop into a heating and cooling (HVAC) system in a building. - When the temperature in the building gets too low, the thermostat triggers the heater. When the temperature in the building gets too high, the thermostat triggers the air conditioning. The result is that the building temperature remains “under control”, within a comfortable temperature range. Positive Feedback Loops Opposite of Negative feedback loops (The Great Recession 2007-2009). The DiPasquale-Wheaton 4-Quadrant Diagram Effect of Demand Growth in Space Market: LR Equilibrium Effect of Demand Growth in Asset Market… Closing Remarks To avoid future disaster, we need to respect two disciplines: - Supply Inelasticity Limited Leverage Because tenants do not always renew their leases, lenders do not always roll out their loans. - Debt is wonderful on the upside, but remorseless on the downside. Therefore, use rigorous tools that science provides us to make real estate investment better, which are more efficient, less prone to booms and busts, and more able to promote a better quality built environment.
