Real Estate Finance (CI30903)

General information

Type:	OP	Curs:	1	Period:	S semester
ECTS Credits:	3 ECTS

Teaching Staff:

Group	Teacher	Department	Language
	Jaime Sabal Cárdenas	Economía, Finanzas y Contabilidad	ENG

MSc in Finance students will have preference with regard to enrolling in this course.

Accounting, Corporate Finance, Economics

Real Estate is one of the most important business categories as well as a key resource in the economy. Most individual investors hold a very high proportion of their wealth in property. Besides, institutional investors are allocating increasing proportions of their portfolios to this asset class.
The course helps students to gain an understanding of this important and special business and prepares them to join one of the many professional fields in Real Estate with an emphasis on the economics and finance, such as economic outlook and investment analysis, portfolio management, financing, consulting, appraisal, Real Estate development, and corporate asset management. By the end of the course the participants should be able to analyze, assess and evaluate all types of real estate investment and financing proposals.

Real Estate is one of the most important business categories as well as a key resource in the economy. Most individual investors hold a very high proportion of their wealth in property. Besides, institutional investors are allocating increasing proportions of their portfolios to this asset class.
The course helps students to gain an understanding of this important and special business and prepares them to join one of the many professional fields in Real Estate with an
emphasis on the economics and finance, such as economic outlook and investment analysis, portfolio management, financing, consulting, appraisal, Real Estate development, and
corporate asset management. By the end of the course the participants should be able to analyze, assess and evaluate all types of real estate investment and financing proposals.

1. Real Estate Economics Real Estate is a different asset class Real Estate Products: Residencial, Commercial, Office, Industrial, Other Why Real Estate is unlike other investment assets: The Real Estate business asks for different analytical approaches because of its Heterogeneity and Complexity Demand determinants: geographical considerations, demografics, culture and social psychology, speculative behavior, and the economic and financial environment Supply lags and price dynamics. Specificities by Real Estate Products. The impact of land supply and zoning. The Real Estate Cycle The World Situation: Emphasis in Europe and Spain

2. The Real Estate Business Real Estate can be classified into two major businesses: income properties and project development Income Properties General Characteristics as long-term and low risk investments Income Statements: Terminology and how financial statements are different from standard ones Passive and Active Management. Risks involved in holding versus transforming a property. Vacancy and Expense Management Tenant Strategies Types of Leasing Contracts: Flat Rents. Step-Up Rents. Indexed Rents. Adjusted Rents Surface utilization. Efficiency Ratios Asset Management and Economic Value Added Project Development General Characteristics as a medium term industrial activity Land zoning and its effect on project distinctiveness Development Phases: Land Acquisition. Land Management and Development. Construction. Marketing and Sales. Risks and Value Generation through the process Income Statements: Terminology and how financial statements are different from standard ones Competitive Advantages in Project Development. Conditions for International Diversification of Developers

3. Real Estate Financing Real Estate financing is of the outmost importance. Financing and refinancing decisions are dissimilar to those common in corporations and project financing has its own characteristics Fixed Rate versus Adjustable Rate Mortgage Loans. Impact and Risks on Lender and Borrower Interest Rate Determinants: Real Rates. Expected Inflation. Bankrupcy, Pre-Payment, Illiquidity and Legal Risks Fixed Rate Payment Plans: Constant Amortization. Constant Payment. Partial Amortization. Interest Only. Accrual Loans. Callable Loans. Graduated Payment. Reverse Annuities Adjustable Rate Payment Plans: Price Level Adjusment. Hybrid Loans. Interest Only. Payment Caps Teaser Rates as a marketing tool. Its impact on prices and financing costs Loan Costs: Origination, Discount Points and Penalizations. How they affect Effective Interest Rates Loan Requirements: Coverage Ratios. Guarantees. Solvency. Covenants. Pre-Payment Clauses Special Loans: Equity Participation. Convertibles. Mezzanine Loans. Sale-and-Lease-Back The Financing Decision: How to select among financing proposals. The optimum Capital Structure Pledge Asset Loans. Loan Comparison. Incremental Loans and Second Mortgages. The Refinancing decision. The Pre-Payment decision. Loan transfers. Wraparound Loans as a corporate/personal refinancing mechanism . Home Equity Loans and Structured Sales as retirement funds. The Leasing vs Borrowing decision. Capital structure and the maximum acceptable cost of a loan Real Estate Project Financing Land Development vs Construction: How they differ in their risk-return profiles Development/Construction Loans: Types and Requirements Long-Term Loans: Matching with Development Loans

4. Real Estate Valuation Valuation of Real Estate investment proposals poses difficulties not encountered in common business ventures Real Estate Investment Risks: Business, Management, Financial, Liquidity, Inflation, Interest Rate, Market, Political, Legal, Other Income Statement Valuation Multiples: Sales Prices. Income Potential Replacement Cost Present Value The Discount Rate: Difficulties for the applicability of the CAPM. Practical approaches Terminal Value: Liquidation Value or Perpetuity? Land Valuation: Static and Dynamic methods Internal Rate of Return as the more generalized procedure: Simple and Modified IRR. Advantages and disadvantages Real Estate Investment Risks. Systematic and Unsystematic components. How to quantify them. The role of sensitivity analysis and Monte Carlo simulation Real Options in Real Estate Holding Period: When to Sell Real Estate Firm Valuation Income Property Firms: Net Asset Value as the more common method Development Firms: Multiples. Net Asset Value. Present Value. Advantages and disadvantages of each approach Analyst Reports

5. Indirect Investment and Portfolios Indirect investment in Real Estate is booming worldwide. Hence, investment vehicles and portfolio performance must be understood Investment Vehicles: Real Estate Funds. Real Estate Investment Trusts (REITs). Real Estate Firms. Private Equity Mortgage Secondary Markets: Risks. Mortgage-Backed Bonds. Mortgage Pass-Through Securities. Collateralized Mortgage Obligations Real Estate Derivatives Real Estate as an Asset Class Real Estate Market Efficiency. Price Dynamics Data Sources. Limitations Real Estate Indices: Types Real Estate Comparative Statistics: How Real Estate performs vis-à-vis stocks, bonds and other asset classes. Returns, Volatilities and Correlations. The complications posed by the presence of Higher Moments. Real Estate Diversification: Pros and Cons of Direct and Indirect Investments. Portfolios of Real Estate. Real Estate as part of diversified investment portfolios

Regular classes with many practical examples. Homeworks.One practical case will be worked out in groups.

ASSESSMENT BREAKDOWN

Brueggeman & Fisher, Real Estate Finance & Investments, MCGraw-Hill, 13 Edit.
Brown & Matysiak, 2000, ¿Real Estate Investment: A Capital Market Approach¿, FT Prentice Hall, ISBN 978-0-13-020063-1.

Group	Teacher	Department
	Jaime Sabal Cárdenas	Economía, Finanzas y Contabilidad