Lecture 13 Risk Analysis - Mar 03 09

Lecture 13 Risk Analysis - Mar 03 09 - Risk Analysis...

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1 Risk Analysis Chapter 13
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2 Comparing Investment Returns Nature of alternative Real Estate Investments Other available investments Respective returns of alternatives Differences in risk between investment alternatives
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3 Return T Bills Municipal Bonds Mortgage Backed Securities Corporate Bonds Real Estate Common Stocks Riskless Rate Risk Higher risk should yield higher return. What are source of risks that must be considered in Real Estate?
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4 Risk in Real Estate Investment Are the investment characteristics of real estate riskier than investing in government securities? If so, what are the risk characteristics that differentiate real estate investment from alternative investments such as stocks and bonds?
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5 Summary of Real Estate Investment Risk Business Risk Fluctuations in economic activity affect the levels of income generated by rental property. Differences between Regional and National Business Cycles. Differences across property types and lease structures. Financial Risk Use of financial leverage amplifies business risk Degree of financial leverage depends on cost and structure of debt Liquidity Risk Infrequent transactions often with few buyers and sellers. More difficult liquidation often leads to price concessions. Con’t
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6 Summary of Real Estate Investment Risk (con’t) Inflation Risk 1.Unexpected inflation can reduce investors NPV if the NOI cannot adjust to changes in inflation. 2.Effect of high vacancy rates. Management Risk 1. Investments require management to keep the space leased and maintained to preserve value.
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