UNIVERSITY OF DAR ES SALAAM

COLLEGE OF ENGINEERING AND TECHNOLOGY

DEPARTMENT OF STRUCTURAL AND CONSTRUCTION ENGINEERING

PROGRAMME: BACHELOR OF SCIENCE IN QUANTITY SURVEYING

QS 368: REAL ESTATE MARKET ANALYSIS

GROUP TUTORIAL ASSIGNMENT N0. 01

MEMBERS.

No. NAME REGISTRATION

NUMBER
1. KAPINGA, ABAS . 2018-04-07813
2. CLEMENCE, CLEMENCE 2018-04-04248
SYPRIAN
3. KILABURI MARCOS 2018-04-07441
4. NTUYEKO SIGVARD 2018-04-04264

The Quantity Surveying program, Department of Structural and construction engineering,

College of engineering and technology, University of Dar es salaam

MARCH, 2022.
QUESTION

Discuss the nature of real estate and objective of real estate market Analysis
CONTENTS

⚫ NATURE OF REAL ESTATE (RE)

⚫ OBJECTIVE OF REAL ESTATE MARKET ANALYSIS

NATURE OF REAL ESTATE (RE)

REAL ESTATE

➢ RE is property

➢ Property refers to anything that can be owned or possessed.

➢ Property can be 1. a tangible asset eg a building

2. an intangible asset eg a lease agreement

RE

We use the term “ real estate” in 3 ways: (1) We use it to refer tangible assets eg Lands and
buildings (2) We use it to denote the bundle of rights that give the owner of the rights to use
tangible assets, and (3) we use it to the real estate industry or business activities.

RE as tangible assets

➢ RE can be defined as the land and its permanent improvements

➢ Land may include (a) the surface of the earth (b) right to air space above the land up to a
certain height ( c) rights to the surface down to the center of the earth and the minerals
contained therein, and (b) the improvements to the land eg walkways and water drainage
systems

➢ The improvements on the land eg buildings fences, and decks are also parts of real estate

RE as a bundle of rights

➢ The bundle of rights is the services (benefits) that RE provides its users. For example RE
provides owners with the rights to shelter, security, privacy,doing business, etc

RE as an industry: career
The industry has a variety of professions: (1) brokerage (2) leasing and property management (3)
appraisal (4) consulting and advising (5) property development (6) construction (7) financing,
mortgage and securitization (8) investment and (9) governmental planning, taxation, and
regulation

HETEROGENEITY

⚫ Real estate is a heterogeneous product. This means, every property is unique and no two
properties can be identical in all respects. Heterogeneity factors or factors that tend to make
each property unique include location of the property, use of the property size of plot, size of
the building(s), age, construction, and condition the property and type of tenant(s) occupying
the property. (quality of the covenant).

While property is heterogeneous, the shares of a company or government stocks of a particular

issue are identical or homogeneous

IMPLICATIONS ON REAL ESTATE INVESTMENT ANALYSES

⚫ Every property needs to be studied individually. This calls for expertise in building
construction, land law, investment analysis and so on.

⚫ It is not possible to construct to identical real estate portfolios.

⚫ Note however, the incidence of heterogeneity should not be overstated. In some cases,
properties may be comparable in their key features such as size, location, use etc. to a large
degree.

⚫ Also, Similar properties are affected by the same systematic risk factors. For instance, all
shops in a given location would be affected by changes in consumer spending.

FIXITY IN LOCATION

⚫ The location of real estate is fixed. Once a property has been constructed on a particular site,
it remains fixed onto the particular site. It can, therefore, be said property is an immobile asset.
A house or any other building, once it has been constructed, cannot be moved to a different
location, except for mobile homes. Since property is fixed in location, its value tends to be
affected by its surroundings or local factors. Accessibility of the property, proximity to the
 city centre, airport or harbour, and quality of the neighbourhood would be likely to affect the
value of the property. The environmental quality of the neighbourhood is increasingly gaining
currency in modern times.

The importance of location on property values varies depending on the nature of property. Retail
properties tend to be highly sensitive to location. High street shops can vary radically in value even
when they are located on the same street. This depends on the pedestrian count, the precise location
of the shop on the street, whether middle or one end of the high street; frontage of the property,
availability of return frontages; adjoining land uses and so on. Offices located within the same
business park or industrial properties located in the same industrial park would be likely to show
less dramatic sensitivity to location.

IMPLICATIONS

⚫ It is often stated in a rather jocular but factual form that the value of property is affected by
three factors: location and location and location! Hence the first implication of the locational
factor on the analyses of property investments is recognition of the fact that location is a key
determinant of property value.

⚫ Second, it is important to not that property is a local product. Since property tends to be very
much influenced by local factors, it must be studied at its given location and in the context of
the neighbourhood surrounding the property. The relevant neighbourhood for a given property
varies depending on the type of property and its extent. Some properties may hold only local
appeal, others regional appeal and some international appeal.

MANAGEMENT

⚫ Property ownership imposes an extra burden of property management on the property owner.
Property management functions include maintenance and repair, lease renegotiation,
maintaining good public relations with the government and the general public etc. Property
management entails incurring management costs by the property owner. These costs may
include maintenance and repair costs, refurbishment costs, payment of rates, municipal
charges and so on.
 While property ownership entails carrying out property management by the property owner
or authorised property managers and incurring management costs by the property owners, the
ownership of ordinary shares and government stocks does not entail any costs on the part of
the investor.

IMPLICATION

⚫ Property presents active management opportunities to the investor through refurbishment,

redevelopment, creation of ‘marriage value’ etc. Marriage value is the additional value that is
created through either the physical merger of contiguous land parcel or through the
legal merger of interest in land.

⚫ Existence of management costs tends to water down property returns.

⚫ Management costs must be accounted for in the analysis of the performance of property
investments.

MARKET EFFICIENCY/PRICE DETERMINATION

⚫ Market Efficiency
• Market efficiency is the ability of markets to process information relating to an asset and
compound it into price. Three forms of market efficiency are distinguishable.
• Strong Form of Market Efficiency
• Semi-Strong Form of Market Efficiency
• Weak Form of Market Efficiency.
• Actively traded shares on major stock exchanges are taken to conform to the strong form of
market efficiency. Property, in general, tends to conform at most to the weak form of market
efficiency.

⚫ Price Determination
• One key feature of property investment is that of lack of a central market.
• While shares trade through stock exchanges and screen prices are readily available dating
back from 1920’s in USA, there is no such market for real estate.
• Obtaining data on prices at which properties trade is, therefore, often difficult.
 • Properties often exchange hands following private negotiations and information of actual
prices at which properties traded is held in the privy of the seller and buyer only.
• In most countries, this information is confidential and cannot be disclosed to third parties.

IMPLICATION

⚫ Property’s heterogeneity also means that even if information is obtainable on properties that
traded recently in the market, it is difficult to replicate this information to other properties.
Relative to other investment investments, property trades in the market less frequently. This
further compounds the problem of obtaining real estate market information.

⚫ The combined problems of absence of a central market, limited property transactions, limited
number of buyers and sellers and limited market information on property prices has had the
effect of landowners/investors relying on property appraisals and valuation as proxies for
property market prices.

⚫ Therefore, real estate investment analyses must recognize the level of efficiency of property
markets and data constraints in the property market

DEPRECIATION

⚫ Depreciation is the loss in the value of a property due to the effect of physical depreciation
and/or obsolescence (obsolete/outdated). Physical depreciation is the wear and tear on a
property due to action of the elements (rain, wind, snow-storm etc.), chemical action,
vandalism, insect attack or simply the effluxion of time. Obsolescence is of two types:
functional obsolescence and economic obsolescence. Functional obsolescence, in relation to
buildings, is the loss in the
value of a building due to poor design which tends to make the property outdated relative to
recently constructed properties of contemporary design. Functional obsolescence is
sometimes known as technical or technological obsolescence.

⚫ Economic obsolescence is the loss in the value of a property due to factors which are
extraneous the property, and about which the property owner can do little or nothing to prevent
them. These would often be factors with a global effect afflicting whole towns,
 neighbourhoods, etc. Causes of economic obsolescence include blight (wide decay of an area),
changes in the planning for an area (re-zoning), the diversion of major roads etc. While direct
property is affected by depreciation, financial investments, on the other hand, are virtually not
affected by depreciation.

IMPLICATION

⚫ Depreciation tends to water down property returns, however, it does present opportunities for
active property management through the carrying out of refurbishment of property
redevelopment with a view to releasing the latent/hidden value of the proper

OBJECTIVE OF REAL ESTATE MARKET ANALYSIS

What Is Real Estate Market Analysis?

Real estate market analysis is the identification and study of demand and supply. On the demand
side are the end users—the buyers or renters of real estate (homebuyers, apartment tenants, retail
stores, businesses seeking office or warehouse space, visitors needing hotel accommodations).
On the supply side are competitors—both existing properties and those at various stages in the
development pipeline.

Why Do a Market Analysis?

Just as there are many types of market studies, there are many reasons for doing
them, from researching the potential of a site to refocusing a marketing effort.

⚫ Provide input for preliminary project planning. Developers will often commission a
market overview when deciding whether to exercise an option on a parcel or to proceed with
land planning for a project. This type of market study is often a brief memo or report with
supporting data. It analyzes the location’s advantages and drawbacks, suggests the types of
uses that would be appropriate, and provides general guidelines on the range of rents or prices
that could be achieved given current market conditions. The developer can then decide
whether it makes sense to hire a land planner to further examine how many units or buildings
 the site could accommodate, what traffic issues must be considered, and whether detailed
environmental studies will be needed.

⚫ Generate inputs for financial feasibility analysis. The results of the market analysis lead to
the core assumptions that developers use in analyzing the financial feasibility of a project. The
market study’s conclusions regarding achievable rents and prices, the potential for additional
income from project amenities or upgrades, and absorption and vacancy rate forecasts are
important in determining projected cash flows and returns on investment. Developers can also
predict what the impact on the bottom line will be if market conditions change.

⚫ Demonstrate the potential for a new product or an unproven location. As the

demographics of an area change, existing real estate products may not meet current demands.
For example, an upscale retail center may be appropriate for an evolving neighborhood, even
though highend retail is untested in that area. Sometimes a developer can create a market for
a new product type. A new style of rental apartment community can quickly render existing
apartments obsolete in the minds of renters, thus creating an instant market for new, more
stylish units. Today, “green” features enhance marketability; 20 years ago, environmentally
sensitive construction techniques and materials might have been viewed as unnecessary or too
costly. The notion of what constitutes the most desirable office space, shopping center, or
housing can change overnight, forcing owners and managers to upgrade older buildings or
lower their price points.
Locations once considered remote, unsafe, or inaccessible can become desirable. Expanding
transit service, creating usable open space, providing a new highway interchange or improving
the perceived quality of public schools can change the attractiveness of available parcels,
offering opportunities to savvy, pioneering developers.

⚫ Attract equity investors, debt financing, or government funds. Partners, lenders, and other
parties that are providing capital for a project need evidence that the developer’s expectations
are well founded, and that the proposed project can generate an attractive return, carry its debt
load, and justify participation by government agencies. Investors and lenders will often
commission their own market studies (separate from those submitted by the developer) as part
of their due diligence requirements. These market studies may be conducted by staff members
or by consultants.
⚫ Create a better, more marketable product. Market studies can help fine-tune the product
by revealing the characteristics and demands of the market. For large projects, the market
analyst should be an active member of the developer’s preconstruction team, which will also
include land planners, civil engineers, architects, traffic consultants, financial analysts, public
relations specialists, and attorneys. Give-and-take among these development professionals is
likely to result in a more successful project.

⚫ Build community support for private development.

Few projects are able to proceed without some type of approval or assistance from a
government agency, be it a variance in site planning standards, a change in permitted uses, or
help in assembling land for a redevelopment project. When evaluating development proposals,
local staff, elected officials, and consultants usually focus on issues of density, design, and
traffic. However, developers who are requesting public subsidy for a project may be required
to submit a market study and financial projections that demonstrate the need for government
funding and conclude that the development has the potential to succeed.

⚫ Produce input for public sector housing or economic development planning. Government
agencies also monitor real estate markets. At a minimum, local governments have a vested
interest in keeping abreast of trends that affect property tax collections. And they may
aggressively seek to attract development, hoping to diversify their tax base, revitalize a
sagging business district, or provide needed workforce housing. State housing finance and
economic development agencies often require that market studies be done before they will
issue revenue bonds or allocate tax credits.

REFERENCE
www.rent.com
www.apartments.com
www.forrent.com
www.apartmentguide.com