2211AFE:Real Estate Finance - Forecasting Property Performance - Accounting and Finance Assignment Help

Assignment Task:

Task:

Critical Thinking #1

How long do you think RBA will hold the cash rate at 0.25%?

Do you expect the rate to fall further? Let’s forecast?

Are such low interest rates good for the property market?

The economy?

Introduction [8.10]

Limited power to forecast

Economy, environment, society changes may not be anticipated

Even if direction of change predictable, extent of change difficult

Why?

Then, why forecast?

Future income?

What variables need to be forecasted?

• No easy ways of predicting but following to keep in mind
• Dynamics of property markets (DPM)
• Trends in space markets (TSM)
• Construction and business cycles (CBC)
• Capital markets
• Inflation
• Components of cash flow forecasts (CF)
• Rental income (RI)
• Capital expenditure
• Resale value
• Forecasting techniques

FI = f (DPM + TSM + CBC + CF + RI + …)

The Nature of Risks for Property Investments

Defining risk [9.20]

Recap: Inability to accurately forecast outcomes (topic 5)

Acquiring real estate is ‘buying’ a set of assumptions e. g house prices will increase, cash rates will fall, economy will improve

• Risk = potential variation between actual cash flows and those based on assumptions e.g. investor expects ROE of 5% but realises only 2%; business expects profits of $20,000 but realises only $15,000
• Without careful analysis, ignorance, uncertainty prevails…
• Risk is the chance that the objective(s) of ownership will not be met; or that the outcome(s) will be unfavourable

Introduction

• For many individuals and investment institutions, holding securities in property funds has become a substitute for or a supplement to owning income properties
• Securities are financial instruments (paper or electronic contracts) that give the holder the right to returns form the asset [more on next slide]
• In case of property funds, securities are mainly units in property trusts but include shares in property companies and mortgage-backed securities