Tutorial 1

Asset class

• Grouping of investments that exhibit similar characteristics and
• Are subject to the same laws and regulations
• Instruments that often behave similarly to one another in the marketplace
  • when it comes to marking - maybe 0.5 points per point

types of asset classes

• Bonds (fixed interest) – defensive asset
• Cash - defensive asset
• Commodities (Gold, silver etc) - defensive asset
• Futures – defensive asset
• Financial derivatives – defensive asset
• Property – growth asset (although also a wasting asset)
• Equities (stocks and shares) – growth asset
• Crypto currencies (very speculative but still possibly an asset class)

Introduction to property - similarities and differences to other asset classes

Defensive assets

• Easily convert into cash - more liquid
• Less risky

Growth assets

• Long term commitment, grows over longer time horizon

Difference between a defensive and a growth asset

• "Growth assets" – usually used to describe assets which were primarily invested in to provide potential capital growth, and
• "Defensive assets" – usually used to describe assets which broadly held their capital value and were invested in for access to reliable income streams.

List seven ways that real estate is similar to other asset classes

• Potential for appreciation: Like other asset classes, real estate has the potential to appreciate in value over time.
• Income generation: Real estate, like stocks and bonds, can generate income through rental or lease payments.
• Liquidity: Real estate, like other asset classes, can be bought and sold, though it may not be as liquid as some other investments.
• Risk and volatility: Real estate, like other asset classes, can be subject to market fluctuations and volatility, which can affect its value.
• Diversification: Real estate can be used as a means of diversifying an investment portfolio, similar to how stocks and bonds can be used for diversification.
• Use of leverage: Investors can use leverage to purchase real estate, similar to how margin can be used to purchase stocks.
• Demand and supply: Real estate, like other asset classes, is influenced by demand and supply dynamics, which can affect its price and value over time.

Why are decisions about property generally more complex and time consuming compared to decisions about other asset classes?

• Size – large capital requirements (big barrier to entry)
• Regulatory environment – high degree of regulatory control and compliance (lots of direct obligations arising from ownership)
• Uniqueness (no two properties are exactly the same) Time line – long time from inception to use/monetisation
• Property is a wasting asset – depreciation and obsolescence (built form)
• Limited liquidity (slow to sell)
• Quality of management impacts value (active management required as it is a wasting asset. Bad management destroys value, good management creates and retains value)

List seven ways real estate is different to other asset classes

• Tangibility: physical assets
• High transaction costs: typically involve higher transaction costs than other asset classes
• Illiquidity: real estate investments are typically less liquid than other asset classes, meaning it may take longer to buy or sell a property compared to stocks or bonds
• Localised markets: real estate markets are often localised
• Management intensive, require active management, such as property management, tenant management, and regulatory compliance.
• High capital requirements.: Investing in real estate typically requires a significant amount of capital, which may not be the case for other asset classes
• Sensitivity to interest rate: can be sensitive to changes in interest rates which may not be the case for other asset classes

Other factors:

• Intangible factors related to real estate- property rights, legal fees, legalities related to the property

Other decisions

• Size: large capital requirement (Big barrier to entry)
• Regulatory environment - high degree of regulatory control
• Uniqueness
• Timeline
• Property is a wasting asset
• Limited liquidity
• Quality of management impacts value. (Active management required as it is a wasting asset. Bad management destroys value, good management creates and retains value)