MMP212 Property Investment Week 2: Property Market Analysis

MMP212 Property Investment Week 2: Property Market Analysis

Instructor Information

  • Instructor: Dr. Yang SHI
  • Department: Finance (Property and Real Estate)
  • Institution: Deakin University
  • Provider Code: CRICOS Provider Code: 00113B

Property Investment Process

  1. Identify the objectives, goals, and constraints of the investor (Investor analysis)
  2. Analyze investment climate & market conditions (Market analysis)
  3. Cash flow forecasting
  4. Apply decision-making criteria
  5. Investment decision
  6. Six Steps

1. Investor Analysis

Goals and Objectives
  • Financial Objectives:
    • Periodic income generation
    • Capital appreciation
  • Non-Financial Objectives:
    • Occupying tangible assets (e.g., buildings)
    • Securing projects meeting specific criteria
    • Minimization of certain costs (e.g., minimizing tax liability)
Constraints
  • Financial Constraints: Expenditure limits, budget considerations
  • Legal Constraints: Zoning laws, compliance requirements
  • Environmental Constraints: Sustainability regulations
  • Tax Constraints: Tax liabilities impacting investment returns
Property Strategic Focus
  • Market Sector: Types of properties (residential, commercial, industrial)
  • Activity Focus: Investment, development, or both
  • Property Quality: Low-end vs. high-end properties
  • Locality: Geographic area of focus
  • Project Size: Scope of investment projects
  • Investment Horizon: Long-term vs. short-term considerations
  • Risk Preference: Individual's risk tolerance level

2. Market Analysis

Step 1: Property Productivity Analysis
Purpose:
  • Identify the attributes of the subject property offered to the market.
Characteristics:
  • (a) Physical Attributes of the Building:
    • Functional for current users with adaptability for future changes
    • Quality of construction, design, building grade, size, obsolescence, sustainability elements, etc.
  • (b) Physical Attributes of the Site/Land:
    • Size, frontage, connection to amenities and facilities
  • (c) Locational Attributes:
    • Broad to specific location analysis (State/City to Street)
    • Critical value driver as an element of competitive advantage
    • E.g., locational advantages, proximity to services, traffic conditions, demographic movement
  • (d) Legal and Planning Attributes:
    • Zoning, planning, and legal restrictions affecting land use
  • (e) Financial and Tenant Attributes:
    • Lease terms (length, type, rent reviews)
    • Tenant financial strength and growth potential
Step 2: Market Delineation
Purpose:
  • Identify the boundaries of potential users (demand) and competing supply of the subject property.
Characteristics:
  • Defined geographically and varies in scales (international, national, regional, local)
  • Differentiate between space market and capital market:
    • Space Market: End users (owners, tenants, customers)
    • Capital Market: Investors regarding property as an investment
Step 3: Demand Analysis & Forecast
Purpose:
  • Estimate the short-term demand by analyzing user growth.
Method:
  • Assume the property is vacant and check the potential leasing duration.
Example (Office Property-Space Market):
  • Forecast employment growth for a specific period (e.g., 3 years).
  • Calculate demand based on the workforce size.
Example Calculation:
  • Number of increased office workers: 12,500
  • Area per office worker: 15 square meters
  • Total demand for new space:
    extTotalDemand=12,500imes15=187,500extsquaremetersext{Total Demand} = 12,500 imes 15 = 187,500 ext{ square meters}
Step 4: Supply Analysis & Forecast
Purpose:
  • Analyze existing and anticipated supply of the property type.
Estimation Method:
  • Calculate total vacancies in competitive office space:
    • Estimate current vacancies + buildings under construction - space anticipated for demolitions, renovations
Example (Melbourne CBD Q2 2023):
  • Net absorption recorded at 6,800 sqm.
  • Total expected new supply by mid-2026: 286,600 sqm across 10 construction projects.
Financial Transactions Example:
  • Total sales over the quarter: AUD 37.7 million, largest transaction of AUD 27.5 million (99 Queen Street).
Step 5.1: Market Volume
Purpose:
  • Investigate the interaction of supply and demand to determine market volume.
Formula:
  • Forecast Demand – Forecast Supply
Example:
  • Forecast supply: 30,000 square meters
  • Forecast demand: 40,000 square meters
  • Market volume calculation:
    extMarketVolume=40,000−30,000=10,000extsquaremetersext{Market Volume} = 40,000 - 30,000 = 10,000 ext{ square meters}
  • Decision Rule:
    • Positive Market Volume: analyze investment opportunity
    • Negative Market Volume: reconsider investment
Step 5.2: Market Share Capture Estimation
Purpose:
  • Estimate the market share the subject property should achieve over the forecast period based on supply conditions.
Formula:

extMarketShare=extSubjectPropertyAreainSquareMetersextTotalNewMarketSupplyinSquareMetersimes100ext{Market Share} = \frac{ ext{Subject Property Area in Square Meters}}{ ext{Total New Market Supply in Square Meters}} imes 100

Example Calculation:
  • Subject property size: 15,000 square meters
  • Forecast supply: 60,000 square meters
    ext{Market Share} = rac{15,000}{60,000} imes 100 = 25 ext{%}
Step 5.3: Absorption Rate
Purpose:
  • Estimate time for rentable space to become occupied in the market based on supply and demand trends.
Formula:

extAbsorptionRate=extLettableFloorAreaofBuildingextAverageSizeofSpaceLeasedperMonthimesextMarketShareext{Absorption Rate} = \frac{ ext{Lettable Floor Area of Building}}{ ext{Average Size of Space Leased per Month}} imes ext{Market Share}

Example Calculation:
  • Lettable area: 15,000 square meters
  • Average leased area per month: 5,000 square meters
  • Market share: 50%
    ext{Absorption Rate} = rac{15,000}{5,000} imes 50 ext{%} = 6 ext{ months}
Step 6: Market Movement
Understanding Property Pricing:
  • Demand Curve: Relationship between property price and amount consumers can purchase.
  • Supply Curve: Relationship between property price and quantity suppliers provide.
  • Equilibrium: Long-term balance between supply and demand.
  • Disequilibrium: Short-term imbalance in the property market.
Influential Factors in Market Movement:
  • Demand Analysis Factors: Employment rate, demographic changes, rent prices.
  • Supply Analysis Factors: Construction costs, market availability, local policies.
DiPasquale-Wheaton “4-Quadrant” Model
Concept:
  • Illustrates relationships between space market, asset market, and the development industry.
  • Equilibrium Status: Represents stable balance in the real estate market.
Quadrant Analysis:
  1. Quadrant 1: Short-Run Space Market Demand
  2. Quadrant 2: Short-Run Asset Market Analysis
  3. Quadrant 3: Long-Run Asset Market Dynamics
  4. Quadrant 4: Long-Run Space Market Analysis
Conclusion of 4-Quadrant Model:
  • Demonstrates interaction and cumulative effects of market dynamics leading to price and rent equilibrium.
  • Explains boom-bust cycles in the market and mechanisms for stabilization.

Reflections on Market Dynamics

  • Cap Rate Reaction to Interest Rates: Increasing interest rates will lead to higher cap rates in residential properties.
  • Consideration of Market Shocks: Analyze how different economic events (e.g., interest rate increases) affect market equilibrium.