RealEstate-TheUniversityofVermont.pptVIP

Chapter 14: Real estate value Real Estate Principles: A Value Approach Ling and Archer Outline Investment risk Time-value-of-money Internal rate of return Determining the discount rate Appraisal Investment and risk; a classical view Investment is about involving costs (cash outflows) now for the sake of future benefits (cash inflows). Investment risk is about uncertainty. This uncertainty comes from two possible sources: (1) costs can be uncertain, and (2) benefits can be uncertain. Examples of uncertain costs: (1) renovating an aged house frequently leads to cost overrun, and (2) developing a subdivision may be surprised by soil contamination. Question: should high costs, in equilibrium, lead to high benefits (returns)? The spectrum of risk (Exhibit 14-10) Calpers loses big on land deal “Calpers, a $244 billion fund, did its first undeveloped land deal in 1994 and today has 7 partners for such deals and investments in more than 12 states.” Some deals filed for bankruptcy. “Land can loss value quickly because there are fewer other ways to generate income form it.” Source: WSJ, May 01, 2008. Developer sells land dirt cheap to reap tax benefits “ Home builder D.R. Horton Inc. is unloading land across California at big discounts…partly to reap the tax benefits from selling property at a loss.” “Horton sold a 4 acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005.” “Tax law allows companies to apply losses from land and other asset sales to past profits and reap a tax refund…as far back as 2 years.” Source: WSJ, Oct. 03, 2008. The spectrum of cost uncertainty The spectrum of CF uncertainty Risky hotels “Heading into an economic downturn, hotels are often among the first industries to suffer as travel slows and room rates weaken.” “Lodging analyst Smedes Rose estimates Marriott is trading at 17 times its expected earnings per share this year. It traded as high as 30 times a year ago.” Source: WSJ, Apr. 30, 2008