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Über dieses Buch

This book describes in full the major approaches used to evaluate investment in real estate and shows how theory informs decision-aid methods and tools to support such evaluation. The inclusion of numerous examples makes it also a practical guide to assessing the suitability of an investment property.

The first part of the text is devoted to an analysis of the housing market through the study of micro- and macroeconomic variables influencing supply and demand, with illustration of how these two components of the market interact. Special attention is given to market research and other preparatory activities able to influence the outcome of the investment. In fact, the quality of the parameters used for the evaluation depends on these activities. The final chapters describe the valuation techniques and highlight their essential features, limitations and potential in relation to ability to manage the investment risk.

The book is aimed at graduates who wish to deepen their study of the real estate market and of the methods used to support investment decisions in real estate but also at professionals and managers of companies operating in the real estate market.



Chapter 1. The Real Estate Market

This chapter introduces the basic features of the real estate market. This is an imperfect highly segmented market. The segmentation is derived from the characteristics of traded goods. In order to understand the trend in the different submarkets, the following paragraphs analyse the trend patterns of stakeholders involved in the sale or purchase of property or in the use of a property. A classification of demand and supply is developed, identifying the main macroeconomic factors that affect these two functions and the interpretation about how they interact, is given.
Benedetto Manganelli

Chapter 2. The Market Research

The success of a good investment is based on an adequate market research. The peculiarities of the real estate market and, in particular, the large possibility of differentiation of investment properties, compel to increase efforts in the research market, surely greater than those required in other sectors of the economy. An investment decision is supported by the acquisition, organization and analysis of information that may relate to the general aspects of the real estate market, the particular aspects of the property on which one plans to invest and finally the characteristics of the investor. The chapter lays out the key stages of market research, and identifies the essential parameters, such as the results of market research, on which the final decision is based.
Benedetto Manganelli

Chapter 3. Financing

Given the substantial commitment of capital required by a real estate investment, the use of financial instruments is usually necessary. The loan involves a double cost: the first is explicit and corresponds to interest payable to the creditor, while the second is implicit, because it has to compensate for the higher investment risk arising from the use of borrowed capital. This chapter gives the necessary information in order to understand if there is a limit to the amount of financed capital able to define the advantages and disadvantages of the investment.
Benedetto Manganelli

Chapter 4. The Real Estate Investment

The chapter deals with the characteristics of the investment property. The specific risks associated with the investment property are shown, as well as the advantages and disadvantages compared to other types of investment. The meaning of investment value is explained in general and, with reference to real estate investment, the parameters that affect this value are identified.
Benedetto Manganelli

Chapter 5. Investors and Investment Strategies

There is a close relationship between the risk attitude of the investor and investment choices. This means that the relationship between perceived risk and expected return is just as close. The concept of risk is therefore associated with the particular investor who in any case, regardless of a personal special aptitude, behaves in such a way as to minimize the uncertainty related to the activity to be undertaken. In this sense, the strategy of the investor becomes paramount. For this purpose, this chapter shows the basic steps of decision-making and the analysis activities that should guide the choice of the investor along this path.
Benedetto Manganelli

Chapter 6. Investment Evaluation

The evaluation of the economic efficiency of investment in real estate, involves the appraisal and comparison of costs and revenues generated from its production and management. In the following paragraphs, the possible approaches to the estimation of cash flows are briefly indicated. On the other hand, this estimate does not exhaust the task of the analyst who should support the investor by setting up a hierarchy of choices identified among a large number of alternatives and accompanied by indices, parameters and risk scenarios. Traditional measures of profitability are analysed for this purpose; however, these have an important limitation: they ignore the effects of the timing of cash flows. Lastly, the discounted cash flow analysis is introduced, and the text describes and explains the main profitability indicators that can be derived from this analysis, highlighting their limitations and strengths.
Benedetto Manganelli

Chapter 7. The Risk Analysis

The topic of risk management is one of the main problems that investors have to deal with. There are many variables that identify the risk of an investment, many are also subjective in nature. This makes the task of the analyst who wants to incorporate the risk factor in the assessment of convenience, a difficult one. The analyst will have to study and investigate the correlations between the specific objectives of the investment and the probability estimates of returns. In the analyst’s help section, the traditional methods for the treatment of risk are explained, based on the subjective perception of the risk itself, as well as the more complex approaches that make use of the probabilistic analysis, instead.
Benedetto Manganelli

Chapter 8. The Theory of Real Options in Real Estate

The limits of discounted cash flow analysis in its static version, even when using a probabilistic approach to risk analysis, are given by the impossibility to incorporate strategic assessments, that is, to take into account the interaction between current investment alternatives and future decisions. The theory of real options outlined in this chapter, is an attempt to overcome this limitation. It discards the static approach and allows to manage the uncertainty related to possible changes of scenario. It is used to determine a final investment value in which the values of future opportunities that may arise for the real estate investor are included, such as expansion, contraction, abandonment or postponement of the project.
Benedetto Manganelli
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