Forecasting Real Estate Returns | cfa level 3 notes
LOS-explain how economic and competitive factors can affect expectations for real estate investment markets and sector returns
Economic factors that can affect real estate investment markets and sector returns include:
Overall health of the economy:
Real estate is a cyclical asset class, meaning that its prices tend to rise and fall with the overall health of the economy. When the economy is doing well, people have more money to spend, which can lead to higher demand for real estate. This can drive up prices and boost returns for real estate investors.
Interest rates:
Interest rates also have a significant impact on real estate prices. When interest rates are low, it is cheaper to borrow money, which can lead to more demand for real estate. This can drive up prices and boost returns for real estate investors. However, when interest rates rise, it becomes more expensive to borrow money, which can lead to a decline in demand for real estate. This can drive down prices and hurt returns for real estate investors.
Inflation:
Inflation can also affect real estate prices. When inflation is high, it erodes the purchasing power of money, which can make it more difficult for people to afford real estate. This can lead to a decline in demand for real estate and lower prices. However, when inflation is low, it can make real estate more affordable, which can lead to higher demand and higher prices.
Competitive factors that can affect real estate investment markets and sector returns include:
Supply and demand:
The supply and demand for real estate can also have a significant impact on prices and returns. When the supply of real estate is low relative to demand, prices can rise and returns can improve. However, when the supply of real estate is high relative to demand, prices can fall and returns can suffer.
Quality of the property:
The quality of the property can also affect its price and return potential. A high-quality property in a desirable location is likely to be more valuable and generate higher returns than a low-quality property in a less desirable location.
Location:
The location of the property can also be a major factor affecting its price and return potential. Properties in desirable locations, such as near major cities or transportation hubs, are likely to be more valuable and generate higher returns than properties in less desirable locations.
By considering these economic and competitive factors, investors can better understand the forces that are likely to affect real estate investment markets and sector returns. This can help them make more informed investment decisions.
The long-run, steady-state NOI growth rate for commercial real estate as a whole should be reasonably close to the growth rate of GDP.
E(Rre) = Cap rate + NOI growth rate.
Over finite horizons, it is appropriate to adjust this equation to reflect the anticipated rate of change in the cap rate.
E(Rre) = Cap rate + NOI growth rate − %ΔCap rate.
18 Jul 2023 - Original by toptradeready.com