Real Estate Markets and Finance - Assignment Example

Real E Markets and Finance QUESTION Affordable Housing The main forms of public and private support available forthe delivery of affordable housing include: The provision of high quality homes in mixed sustainable communities for those in need of adequate housing. There should be continuity in the identification of suitable sites and areas where affordable housing can be provided, and the amount of housing provision sought after. The widening of home ownership opportunities Offering greater quality, flexibility and choice of affordable housing Defining what the authorities consider as affordable in the local plan area in terms of the relationship between local income levels and house prices or rents for different types of household. There should also be an indication of the number of affordable homes that have to be provided in a plan area, including the different types of affordable housing needed by households of different characteristics, taking account of both rural and urban needs. Concentrating most additional housing development within urban areas; Making more efficient use of land by maximizing The reuse of previously developed land. The conversion and reuse of existing buildings. Assessing the capacity of urban areas to accommodate more housing; Adopting a sequential approach to the allocation of land for housing development; Managing the release of housing land; Reviewing existing allocations of housing land in plans and planning permissions when they come up for renewal. As outlined in the DCLG report, the role of the organizations involved in the delivery of affordable housing, decisions about the amount and types of affordable housing to be provided in individual proposals should reflect local housing need and individual site suitability, and be a matter for agreement between the parties. Local planning authorities and developers should be reasonably flexible in deciding the types of affordable housing most appropriate to a particular site. The objective should be to ensure that the affordable housing secured will contribute to satisfying local housing needs as demonstrated by a rigorous assessment. The policy on planning and affordable housing is set out in more detail in DETR Circular 6/98: Planning and Affordable Housing. Where a local planning authority has decided that an element of affordable housing should be provided in development of a site, there is a presumption that such housing should be provided as part of the proposed development of the site. Failure to apply this policy could justify the refusal of planning permission. A recent report commissioned by the Department for Communities and Local Government stated that: 'It is not hard to make a strong argument for social housing at sub-market rents' (LSE report, 'Ends and Means', 2007). Affordable Housing means housing that has a sales price or rental amount that is within the means of a household that may occupy, middle-, moderate-, or low income housing. In simple words it is "decent quality" housing that low-income households (those whose income is below the poverty level or below 50 percent of the median income for their area) can afford to occupy without spending more than 30 percent of their income or those households with slightly higher incomes (50 to 80 percent of the median income) can similarly afford (Jeffrey & William, 2005). In the case for dwelling units for sale, housing that is affordable means housing in which mortgage, amortization, taxes, insurance and condominium or association fees, if any, constitute no more than [28] percent of such gross annual household income for a household of the size which may occupy the unit in question. In the case of dwelling units for rent, housing that is affordable means housing for which the rents and utilities constitute no more than [30] percent of such gross annual household income for a household of the size which may occupy the unit in question. The Commercial Office Market Market efficiency is measured by the extent and quality of information available to buyers and sellers. If the latter are in possession of all information, past and present, whether it is in the public domain or not, which affects the price of the product, then the market is said to be strong form efficient. If certain parties have current information which is not in the public domain the market is semi-strong form efficient. Markets where the participants have only past price data to guide them are weak form efficient. Businesses' demand for office space is an example of a derived demand. Since the demand for these resources depends upon the demand for the goods and services which they are employed to produce, we say that the demand for a factor is a derived demand. Thus, input demand is derived from output demand. Real property can be classified by its general use as residential, commercial, industrial, agricultural or special purpose. The term commercial property includes business property (e.g. office buildings), industrial property, medical centers, hotels, malls, retail stores. In many states residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes. Commercial property is intended to be operated at a profit, either from capital gain or rental income. Commercial property usually must be zoned for business purposes. In commercial office markets, the demands for consumption might come from a firm deciding whether or not to lease new space for its business operations; a production decision might be a developer deciding whether or not to build a property for sale. Price, in the former case, is the rent payable under the lease contract; in the latter, it is the sale price achieved or anticipated for the completed scheme. The growth of an active commercial office market has an important influence on property's acceptability as collateral for corporate borrowing, by facilitating the valuation of property assets and increasing their marketability and liquidity. This link between the commercial property market and corporate investment has a long lineage, property having formed an important source of collateral for industrial and commercial finance since past few years. Office Rents For many businesses office space rental is a major commitment that might involve leases that run five years or longer. Office space rental decisions are based on location, desirability of an area and closeness to potential clientele and customers. Many businesses renting office space may be in a location for its entire business life and its services become part of the local community. Office rental includes the cost of renting office for all the work related activities. In many cases, renting can be a reasonable alternative to buying a commercial property. Renting an office or commercial space may be the only route for small business to get started. Having a good understanding of the landlord-tenant relationship and resources available can be beneficial to both the prospective tenant and landlord. There is a significant amount of overhead costs involved with renting an office space (Jeffrey, 2005). Most of the expenses involved in renting an office space are tax deductible. Financial Reports The controller is relied on to prepare complete and accurate financial statements that fairly present the financial position, results of operations, and cash flows of the company. The financial statements must include adequate and informative disclosures. The controller must keep in mind that the year-end financial statements must be audited by an independent certified public accountant. Accordingly, the year-end financial statements may have to include information that might not have been required had the controller prepared financial statements which were to be used solely by management. Financial reports may also be prepared to describe operating results of individual divisions of the entity. These reports may not take the form of complete financial statements. As a result, the statements might include information that is normally needed or used by individuals outside of the company. Unusual or infrequently occurring items Provision for income taxes Discounted operations or extraordinary items Income from continuing operations Net Income. Primary and fully diluted earnings per share Significant changes in financial position Summary of significant assumptions and Summary of significant accounting policies. The Weight of Money Changes in the 'weight of money' affect value in the real estate industry. According to the DTZ report, the main sources of finance for real estate in 2006 include seeking additional finance from the owners of the real estate, generating finance internally by retaining profits, and borrowing from a bank, the capital market, the client, or a partner. Equity and debt: Finance that comes from seeking additional finance from the owners of a real estate, or by generating and retaining profits internally is called equity. In the case of a company it is also known as shareholders' funds or share capital. Debt is Institutional finance, public equity, public debt and private debt: Domestic and overseas finance: Domestic finance means financing that comes from investors that are resident in the UK, while overseas finance is financing that originates from investors outside the UK, who often prefer joint venture arrangements, so as to limit risk. Direct and indirect finance: Financial market fluctuations have been instrumental in bringing about cyclical movements in property market. There are various sources and instruments employed in the financing property development. Funding for investment in property has been discussed only where the financing packages have linked the two areas. Development finance by its very nature is subject to higher risks than finance rose to fund the purchase of completed properties, where tenants are already paying rents or the buyer has completed the purchase. Money, as a generic term for the common means of payment, the medium of exchange, the common denominator or measure of value, the expression of price, the sum of ponderable symbols, the mechanism in the numerical fractions of which either law or custom makes taxes, fines, debts, services, or exchanges, payable, was first used - that is, the word was first used - towards the middle of the third century. If value is a numerical relation it evidently cannot be measured with quantity, nor with weight, nor with bulk, nor with area; but only with numbers. Money is at present constituted in the laws of the several States of the world, differed from all other measures in the respect that its dimensions were not specifically or precisely limited defined nor fixed in the law; whilst the measures of length, weight, volume, area etc., are actually thus limited, defined and fixed. Owing to this lack of limitation and fixity, the whole sum of money, which serves for the measure of value, is liable to be altered from time to time by various uncontrollable and uncertain events; thus exposing the important relation of Price to sudden and violent fluctuations. QUESTION 2 A. Read the case study, 'Relocating'; Identify and analyze the issues that Richard Barton must take into account in deciding whether to move and, if he decides to, where. Summarize your conclusions on these issues in a statement of 500-600 words. The installation or relocation of a business, or any for-profit or not-for-profit organization is a complex task. It is made so by the wide diversity of elements that makes up the process and by a tradition-bound industry which, along with its principal protagonists, has only recently and reluctantly entered the twentieth century. Office relocation is about change, change in one's co-workers, change in the office environment, change in relationships to other groups, change in the job and change in the location. Considering the activities and complexities involved, the decision to relocate an office should be a well planned and a firm one. The four different factors which need to be considered in deciding whether Richard Barton should buy or rent office space are categorized as: The cash outlay factor The fixed/variable cost factor The growth factor and The tax factor. The cash outlay factor: A thorough analysis of the current situation and the possibilities and the issues and difficulties involved in this case study, makes one to land up on the conclusion that the best practice which needs to be adopted by Richard Barton is to renew the existing lease rather than moving out or buying a new property. Although this decision has its own impacts on both monetary and non monetary sides of the business, yet it is most advisable among the other alternatives. Generally, one need not shell out as much money upfront when they lease as they do when they buy. A quick example: A real-estate agent is looking to sell a 500,000 commercial property. Someone leasing the space might pay around 4,000 monthly in rent. Someone looking to buy the building would have to put about 150,000 down, and also would have had to pay for an appraisal, building inspections, loan fees and other costs. The fixed/variable cost factor: The movement of a workplace impacts not only the monetary sides of the business but also the non monetary aspects. As in this case, Barton Recruitment Agency is well located and is doing a good business serving central London clients, the first and the foremost issue which would arise if he considers moving out of the place is the risk of losing clients. Another major problem would be risking the workforce. Besides Richard, there are 13 more members working in the firm, and it is to be noted that the major influence of relocating the workplace is on the workforce. Although it may seem that this may not affect Richard in monetary terms, yet the cost incurred in hiring new employees and training them would be high. The growth factor: The firm's office premises have proved satisfactory up to the present, in terms of both location and space requirements, but we need to analyze the changes which might occur in the near future - say down the line five to six years. Looking at the technological advances and the rapid changes in the market trends, it is quite evident that there lies no stability in the market economy. Thus, it would be difficult rather impossible to estimate or forecast whether the market would show an upward or downward trend down the line five years. Infact, estimating the market trend for the next year would also be difficult considering the current market stability. The tax factor: Besides, when we look and analyze the other influencing factors as in tax, balance sheet effects and profitability, it looks more advisable for Richard to stay back and negotiate with the owner on the leasing rent rather than relocating to some other place as the cost involved in relocating would be much higher and the risk involved is huge as well. Considering the tax option, with a lease the annual lease is an expense that is fully tax deductible. Thus after considering the different alternatives it would be highly advisable and justifiable for Richard Barton to continue working in the same place. Negotiating with the land lord on the rent would be a good option, however, it should be kept in mind relocating to a new place would prove to be much more costly when compared to the 8% increase in the rent as demanded by the landlord. Also the former case does not involve risk factor however the later case involves a high risk factor. B. Draft a report to Richard in response to his request for an analysis of his financial position. He particularly wants to know whether his finances are strong enough to support the purchase of office space of similar size to the one he presently occupies. Analyzing the accurate financial figures of the firm Barton Recruitment Agency is difficult when considering the limited data provided in the case. Presently, one of the major expenses involved or rather the expense being carried out for the past five year is the rental fees which is 175,000 pa which when paid on a monthly basis gets on to 14,583. The other basic expenditure involved could be termed as salary in the balance sheet. Although no amount is mentioned or as well hinted as salary in the case, yet looking at the number of employees involved, it could be well decided that a good sum of money needs to be deducted as salary to the employees on a monthly basis. Besides, other cost involved is the cost incurred in running the business, the amount could not be derived because of the limited information provided in the case study. If it is to be assumed that the firm is doing a positive - profitable business, well it could be concluded that Richard's financial position is strong enough to buy a new property provided it is located in and around the area of central London where he is currently located as the price varies and increases in the remaining areas. References Fisher, Jeffrey & Brueggeman, William (2005): Real Estate Finance and Investments. McGraw-Hill Professional Publications. Pagano, Marco & Biais, Bruno (2004): New Research in Financial Markets. Oxford University Press. Read More