Introduction to Real Estate Markets MSc Real Estate, MSc Real Estate Investment Tony Key, Professor Real Estate Economics Room 5087, Bunhill Row [email protected] m: 07801 213371 The world of real estate (or property if you like) http://visibleearth.nasa.gov/view_rec.php?id=1438 The industrial economics of property • Generally − who will you be working for and with − what they do and what they worry about • The world of property − what is “real estate” − the size of the industry • Owners and investors − the sources of money − investment vehicles • Service providers − agents − banks − legal & others Cass careers fair …. you lucky people Accuracy Financial Conduct Authority Mazars Allsop Fitch Ratings* McGraw Hill Financial AON Freight Investor Services Macquarie Aviva* Generali Mercer AXA Gerald Eve Mitsubishi UFJ Securities Bloomberg Glencore Montagu Evans Bloomberg Institute Grisons Peak LLP Munich Re BNP Pariabas‐ Real Estate Hymans Robertson Noble Cambridge Associates ICAP Nomura Capco IHS Economics & Country Risk PwC Capita Real Estate Inside Careers RWE npower Carter Jonas J.P. Morgan Asset Management Savills CBRE JLL Scor Colliers Knight Frank Segro Cushman & Wakefield Lambert Smith Hampton SunGard* Deloitte Real Estate London Stock Exchange Group Towers Watson DTZ LPC Consulting Trafigura Eni ManagementSolutions Tricon Energy Euromoney Institutional Investor Markit T.K.Maxx EY Marr Procurement UniCredit FactSet Marsh Veson Nautical http://www.willis.com/Client_Solutions/Industries/Real_Estate/ http://www.property.nhs.uk/ http://www.tesco‐careers.com/home/you/property‐acquisition 1.1 The world’s biggest industry? • Real estate definition: “land and structures attached to it” − amounts around 50% of total world wealth (so they say) • In the UK (similar figures for other developed economies) − annual GDP = £1,500 billion − value of residential £4,500 bn, commercial & industrial buildings £800 bn o 70% of the total stock of physical capital assets o 2 x total market capitalisation of UK FTSE • 12-15% of annual GDP is construction & property, 3-5% commercial − 50% of total annual investment (25% each resi & commercial) • Commercial property 5% total assets of insurance & pension funds, 10% bank lending, 40% of lending to non-financial companies • Property companies 2% market cap of FTSE, 15% Australian SE see IPF Size & Structure of UK Market, BPF Property Data Report in Moodle Sources: ONS UK National Accounts, Bank of England, FTSE 1.2 Property and politics (all you will get of this stuff) • The rule of private property begins with property in land, which is its basis. Karl Marx • And that this Civil Propriety is the Curse, is manifest thus, Those that Buy and Sell Land, and are landlords, have got it either by Oppression, or Murder, or Theft . Winstanley et al, 1649 • Landowners, like all other men, love to reap where they never sowed, and demand a rent even for the natural product of the land. Adam Smith • You cannot have a free society without private property. Milton Friedman • If you take a walk through the countryside, from Indonesia to Peru, and you walk by field after field, in each field a different dog is going to bark at you. Even dogs know what private property is all about. The only one who does not know it is the government. Hernando de Soto 1.3 How much land have we got? • UK: 70% of all land agricultural, only 8% “urbanised” (any kind of structure) – London 81% urban, South East 14%, Scotland 6% • England: 4.3% land gardens, 2.2% roads, 1.1% residential, 0.7% other buildings • globally less than 5% of total “usable” land is built up Inland Revenue Rateable Values, 1.4 What is commercial property? England & Wales Rental # Props 000 Value £m • All types of property have to be Offices 296 11,034 Shops 500 10,775 Warehouses & stores 205 7,184 managed / valued Factories, mills & workshops 242 5,735 Pubs & wine bars 65 1,652 Local authority schools & colleges 25 1,325 Electricity companies - 1,077 Garages & petrol stations 46 1,068 Other properties 39 1,054 • Property investments range across Hotels etc. 41 1,029 Other utilities 6 1,027 Medical facilities 28 980 farms, forests, residential, prisons, Other commercial 25 855 Restaurants & cafes 34 847 hospitals, pubs … Telecommunications - 604 Water companies - 525 Community centres & halls 35 458 Car parks 49 457 Quarries, mines etc. 6 437 Other industrial 4 403 Other leisure 29 395 • But large investment portfolios are Universities 1 375 Police stations & courts 3 331 mostly shops, offices, sheds … Private schools & colleges 3 284 Cinemas, theatres etc. 3 264 Sports grounds, golf courses etc 11 240 – retail, office, industrial account Local government offices 3 233 Other educational, training and cultural 11 219 Libraries and museums 5 208 for 66% of total rental value Railways - 188 Holiday sites 7 178 Docks - 138 – and those types account for 95% Sports centres & stadia 1 126 British Gas - Transco - 81 Advertising rights 40 66 of value of UK investment Markets 2 54 Bus stations, moorings etc. 2 27 portfolios Cemeteries and crematoria 3 26 Hostels & homes 2 22 1.5 Sector weights in investment portfolios • Most of the course deals with South Korea Belgium “investment property” – Sweden Denmark Norway buildings leased to tenants, Czech Italy owned by large-scale Spain Japan professional investors Ireland France Hungary Germany Austria Globally investment property is Australia • New Zealand GLOBAL AVG mostly retail and office, but Poland Canada with large exposure to USA Finland residential in come countries, Switzerland UK plus small exposures to “other” Portugal South Africa alternative sectors – hotels, Netherlands leisure, student housing, 0% 20% 40% 60% 80% 100% health care, agricultural, forests etc etc Office Retail Residential Industrial Other Source: Investment Property Databank 1.6 Whereis“investible”property?US$ billion 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 0 United States Japan China Germany France UK Italy Canada Brazil Russia Australia Spain top 20= 82% of global total. + Japan = 34% ofglobaltotal, USA countries likeItaly. Indonesia,India islessthansmallerrich Turkey, Russia, So the valueof property inbigpoorercountrieslike Property valuesarelargestin biggerandrichercountries. owner occupied)usuallyestimated at$12-15trillion. trillion). Propertyactuallyowned byinvestors(asagainst around $27trillion(cf global equitymarketsaround$64 Suggests a global totalof capita. per GDP and GDP formula estimatespropertyvalues asa function of EPRA Korea Mexico Netherlands India Saudi Arabia Switzerland Turkey Source: European PublicReal Estate Asso Sweden Belgium Norway Argentina Indonesia Taiwan Austria Poland UAE Denmark “investment grade”property Singapore Israel Finland Hong Kong Iran Greece ciation method from World Data, Bank 2014 South Africa Colombia Ireland Nigeria Malaysia Chile Thailand Portugal Venezuela Congo Qatar DRC Czech Rep New Zealand Kuwait 1.7 … the growth of “emergent” markets 160,000 G6 growth at 2% pa 70% 140,000 60% BRICs growth at 7% pa 120,000 50% BRICS % Total 100,000 40% 80,000 30% 60,000 20% 40,000 BRICS as % total 20,000 10% total value of property stock $bn 0 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 BRICS: Brazil, Russia, India, China. G6: US, Japan, Germany, UK, France, Italy Based on Goldman Sachs’ projection of total GDP, commercial property stock total value based on 0.40 x GDP plus adjustment for GDP per cap from EPRA formula. 1.8 Summary: the world of property • The world’s largest store of wealth • A major element of the economy • Agriculture the dominant land use, <5% built up • Residential the largest built up land use • Retail, office + industrial the largest investment markets • Global total of “investable” property app $14 tn • Currently 70-80% of global property value in developed economies, falling to 30-40% by 2050 2.1 The real estate industry: owners & occupiers OWNERS (HOUSEHOLDS) SERVICE SUPPLIERS Property Professional OWNER D (Surveyors) – broking, OCCUPIERS I valuation, management etc R Households E Banking & Finance – C mortgages, property lending, Companies T financial structuring etc Government P INVESTMENT INTERMEDIARIES R Legal – lease contracts, UK 70% I Planned Savings (Insurance & Pension Funds) transactions, documentation, housing owner- V fund structures etc. occupied. A Collective Investment Vehicles (Open & Closed T Ended Property Funds) Consultants – rating agencies, Germany 41%, E Hungary 92%. management, economic, I Listed Property Companies, Private Property planning etc UK app 50% N Companies commercial V E owner-occupied, S USA roughly T GOVERNMENT 25%, Europe O 70% R Planning Controls S Tax Regulation LAND & BUILDINGS (OCCUPIERS) Economic Development & Infrastructure note: boxes are not to scale 2.2 Owner-occupiers • Property has a double role − households part consumption good, part investment − companies part factor of production, part asset on balance sheet • Residential owner occupation − not taken as part of real estate economics / investment − housing economics mainly concerned with prices & tenure choice − housing finance mainly concerned with supply & cost of mortgages • Company owner-occupation − about the only choice for companies with highly specialist buildings because there is only 1 “user”, high risk & unpopular with investors − companies in standard shops, offices, sheds have option of renting 2.2 Owner-occupiers – who & what • Property critical to the operation of businesses − usually the second biggest operating cost after labour − and the biggest asset